China's economic recovery strategy faces challenges
China has broken the back of the coronavirus spread, and policy is shifting strongly to supporting economic growth. The challenge is huge, reflected in declines of 13.5 percent and 20.5 percent in industrial output and retail sales, respectively, in the first two months of 2020. And in February the unemployment rate jumped to 6.2 percent, an all-time high. These data points suggest that a sharp contraction in China’s first quarter GDP is inevitable.
But even before the spread of the virus was brought under control, the government adopted multiple highly targeted policies to mitigate the adverse economic effects of locking down a large share of the country’s population. Among the most important were the following.
- In early February the central bank announced an RMB300 billion (US$42.47 billion) relending fund to support loans to firms producing and distributing medical supplies. Later the same month the government launched an additional relending fund of RMB500 billion (US$70.79 billion), with RMB100 billion (US$14.16 billion) earmarked to support agriculture and RMB300 billion to support micro and small firms.
- On February 20 the government cut, and in some cases exempted, enterprise contributions to social insurance funds (including pensions, unemployment, and workers’ compensation) at least through June.
- In March the government announced that small firms that maintained their employment levels would receive a refund on all the unemployment insurance premiums that they had paid in 2019.
- In early March the government instructed banks to suspend collection of interest and principal payments on loans extended to struggling micro, small, and medium-sized firms, until at least the end of June.
- In mid-March many provincial governments began to distribute vouchers to households to cover expenditures on specific items. Vouchers are better than helicopter money, since they can’t be saved.
- Also in mid-March, the central bank cut the required reserve ratio for certain banks, freeing up RMB500 billion in liquidity, which banks were directed to use to increase loans to micro and small firms.
There is some evidence that these policies are working. Coal consumption of major electric power producers, which was running almost 40 percent below normal seven weeks ago, is down only about 10 percent as of mid-March. And most of China’s 290 million migrant workers have now made their way back to cities where they are employed. Steel demand, which had fallen sharply, is now reportedly running at about the average pace of 2017–19 at seven weeks after the lunar new year.
Nonetheless, to date China’s central bank, unlike the US Federal Reserve and many other central banks, has avoided a large monetary stimulus, cutting its central rate (the so-called loan prime rate) by only 10 basis points back in February. Moreover, the cumulative fiscal stimulus announced to date is estimated to be only 1.2 percent of GDP.
China’s economic challenge is intensifying as the coronavirus pandemic spreads globally, probably pushing many countries into recession and cutting into demand for China’s exports. The open question now is whether the Chinese government’s modest targeted interventions will have to give way to a broader stimulus program to support economic growth.
1. The exchange rate used to convert renminbi to US dollars in this post is as of March 24, 2020.