It has been three months since China began fighting the spread of the coronavirus. On April 8, in Wuhan (武汉), the epicenter of the epidemic, the 76-day isolation ended: residents were again able to move freely around the city and leave it. New cases of the disease are still being registered in China, but most of them are brought from other countries, including Russia.

Now a new stage in the fight against coronavirus has come for China: on the one hand, it is necessary to avoid new outbreaks among those who do not have immunity to Covid-19; on the other, to mitigate the economic consequences of quarantine. China has again faced these problems before other countries, so the methods that it will use will become an example for others how to act. Or, on the contrary – – as it is not necessary.

Economic disaster
The uniqueness of the current crisis is that there is no physical destruction from it, economic activity has simply been put on pause. The return to normal life depends only on whether the epidemic has passed.

It is too early to talk about China’s return to normal growth rates and the complete end of the epidemic. First, you can’t completely trust Chinese statistics. Until April 1, the authorities refused to publish data on those who carry the disease without symptoms or are in the incubation period. In addition, the authorities have changed the methods of calculating data several times: after the last time, the number of deaths from Covid-19 in Wuhan increased by 50% in a day.

Secondly, the burden on the Chinese healthcare system is still high. The new region of the spread of the virus has become the province of Heilongjiang, bordering Russia. Before the border was closed, border guards reported that 10-20% of those who came from Russia had Covid-19 detected.

In other provinces, cases of human-to-human transmission of the coronavirus are also found. And the total number of people who are ill without symptoms has reached 6764. A large workload leads to medical errors and problems with false positive test results, which led to rumors of re-infection.

The temporary pause in the economy – primarily the closure of enterprises due to quarantine – has seriously slowed economic growth in China.

Chinese GDP, which remained in the black even after the crackdown on the Tiananmen Square protests in 1989, the SARS epidemic in 2003 and the 2008 financial crisis, showed negative growth for the first time. According to the results of the first quarter of 2020, it decreased by 6.8% compared to the same indicator of 2019. Moreover, even this estimate can be underestimated with the help of statistical manipulations – official data on a drop in retail sales by 19% and investments in fixed assets by 16% make us think about it.

Different indexes are hitting anti-records one after another. Industrial production in January – February 2020 fell by 13.5% compared to the same period in 2019. This is the first recorded drop in this index in the history of the People’s Republic of China. Foreign direct investment in the Chinese economy also shrank by 10.8%.

Before the outbreak of the epidemic, it was assumed that China’s economic growth in 2020 would be about 6%. Now it is clear that this figure will be lower, especially if the epidemic in other countries also slows down economic activity there.

Forecasts of annual GDP growth in China after the epidemic, which were given in late March and early April, are different: Fitch calculated 3.7%, Bloomberg-3.4%, Goldman Sachs and China Renaissance – 3%, The Economist Intelligence Unit – 2.1%, Nomura – 1.3%. Probably, as the year progresses, many of these figures may be revised downwards.

The decline in growth rates is alarming news for the Chinese economy, because the economic crisis may spread to the financial system. This is evidenced by the data of last year’s stress test of banks, which was conducted by the People’s Bank of China (China). More than half of the banks selected by the regulator for inspection in 2019 failed this test with a hypothetical decline in GDP growth to 4.15%.

Small and medium-sized enterprises are particularly affected by the decline in economic activity: there are no final figures for bankruptcies yet, but a survey conducted in February showed that about 60% of them were able to pay their fixed expenses only for one or two months. In general, Chinese medium and small firms lost 70% of their income in March.

The social consequences here can be very serious: more than 80% of Chinese workers work at small and medium-sized enterprises. The unemployment rate in cities rose from 5.2% to 6.2% in February.

However, some economic indicators indicate a gradual recovery of the Chinese economy. According to official data, as of March 27, the load factor of large industrial enterprises in China was 98.6%. The same indicator for small and medium-sized enterprises exceeded 80% by April 10. The PMI business activity index, after falling to 35.7 points in March, actually returned to the pre-crisis level of 52 points, which exceeded the expectations of analysts who predicted growth to only 45 points (indicators below 50 mean a recession).

However, here it is necessary to take into account the methodology for calculating the PMI – when interviewing purchasing managers, the National Statistical Committee asks them to compare the situation in the estimated month with the previous one. Thus, the high indicators of the March PMI only indicate that Chinese industrialists estimate March better than the disastrous February, when the country was actually quarantined. As the National Statistical Committee itself warns, in order to speak with confidence about the economic recovery, it will take three months when the PMI values will be above 50.

China may face significant difficulties due to a reduction in exports: as more and more countries in the world impose strict quarantine measures, and enterprises close, demand for Chinese goods is declining. In the first two months of 2020, exports fell by 17.2%, imports-by 4%. Despite the fact that the share of exports in China’s GDP has been declining over the past 15 years, in 2018 it was 19.5% – higher than in the United States (12.2%), although significantly lower than in Germany (47.4%) or France (31.3%).

The problem of falling exports for China has not only an economic, but also a socio-political dimension: many affected enterprises are concentrated in the coastal provinces in the east of the country, and factories working for export are located in urban agglomerations such as Shantou (汕头). The share of workers employed in exports is high – in the 104-million-strong Guangdong Province, it is about 20%. Accordingly, in order to prevent social unrest, Beijing must take urgent measures.

Targeted support

Looking at the disastrous figures of January – February, some argue that the measures of the Chinese government are not enough. However, a significant reduction in economic activity was inevitable and even necessary to combat the epidemic.

The economic downturn turned out to be more serious than expected, but this does not make Beijing’s measures ineffective. It’s just that they were primarily aimed at saving the most vulnerable sectors of the economy – small private enterprises, and not at stimulating growth in general. According to the head of the State Council of the People’s Republic of China Li Keqiang, a slight decrease in the growth rate of the economy is not such a significant problem.

The first measures to stabilize the situation, which the small working group on combating the virus and its consequences (headed by Premier Li Keqiang) announced at the end of January, were aimed at preventing the bankruptcy of firms and the dismissal of employees.

Already on January 24 (the day after the introduction of quarantine in Wuhan) The Ministry of Labor Resources and Social Security of the People’s Republic of China (PRC) has published a notice on the settlement of labor issues for the duration of the quarantine. After that, they adopted changes in tax collection (companies in Hubei were allowed to delay tax reports), and a number of ministries proposed monetary measures to support the economy.

In February, the government focused on supporting small and medium-sized enterprises, as they were most affected by the disappearance of demand in the market. Such enterprises were allowed to delay the repayment of loans until June 30 without penalties. Small and medium-sized businesses in Hubei Province were exempted from VAT for three months (for other provinces it was reduced from 3% to 1%), their insurance premiums were reduced, low-cost loans were issued, electricity tariffs were reduced by 5% and land use tax was reduced. According to some estimates, employers will save about 600 billion yuan ($86 billion) thanks to these measures.

On February twenty-ninth, the Chinese authorities announced that they had issued more than three thousand permits to Chinese companies for non-fulfillment of contractual obligations totaling $38.5 billion. Certificates were issued to metallurgical plants, construction companies, car manufacturers, and so on. It was also announced that the rate of mandatory reserves for banks was reduced by 0.5-1 percentage points. This will free up about 500 million yuan ($78.8 billion), which can be used for additional lending to enterprises.

The economic problems from Covid-19 are mainly related to the lack of demand, so Beijing prefers fiscal measures rather than monetary ones.

Many countries (the United States, Canada and Australia) have lowered key rates to stimulate economic growth. Having slightly lowered the rate in February from 4.15% to 4.05%, the People’s Bank of China said that the level of liquidity in the banking system is at a sufficient level, and refused to further reduce it. Local governments were allowed to increase budget spending through bonds worth 848 billion yuan ($122 billion).

Most likely, the Chinese authorities will announce the entire package of measures at the “two sessions” postponed from March to an unknown date (a parallel meeting of the National People’s Congress, the highest legislative body, and the People’s Political Consultative Council of China), when the State Council will have to report on the work done in 2019 and set goals for the next year.

Step forward, step on the spot

In general, Chinese anti-crisis measures turned out to be less ambitious than those that Western countries have already launched: according to CSIS estimates, China spent about 1.3% of GDP for these purposes, while the costs of the UK amounted to 17.7%, Germany – 15.2%, and the US – 10.5%. Russia, for comparison, rather chose the Chinese model.

Interestingly, during the crisis of 2008-2009, China spent 12.7% of its GDP on fiscal incentives, including $585 billion on investments, which significantly exceeded the spending of any other country in the world. However, it should be borne in mind that measures to restore the economy continue to be taken, although we should not expect grandiose support – the government’s assistance will remain targeted.

China will spend the coming months trying to find a balance between the need to start the economy in order to avoid social unrest and bankruptcy and at the same time prevent a new outbreak of the epidemic. The regime is still developing these mechanisms and does not yet fully control either economic growth or the epidemiological situation. China is the first in the world to face such a choice, and other countries have the opportunity to observe Beijing’s behavior and take into account its experience.

Author: Temur Umarov

The material is posted with the permission of the Carnegie Moscow Center and the author of the publication 

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