A significant portion of the Chinese economy relies on exports. During the Covid-19 crisis and global demand contraction, how can China stimulate and reinvigorate domestic consumption and other economic activities? What fiscal and monetary policies will work when the government is cautious about the problems of debt and high leverage?
China’s exports declined by 17 percent in January and February. Meanwhile, most of the key economic variables such as retail sales, industrial value-added, etc., declined by about 20 percent. The March data were a little bit better, but still negative compared to the year before. The export data in March looked OK, but we will probably see decline in places like the U.S. and Europe somewhat later than China, so I would expect China to take a pretty big hit in its exports later in 2020. Some good news here is that exports still maintained a level that’s better than that of ten years ago, when the global financial crisis hit. China was much more dependent on exports at that time, but exports’ share in the Chinese economy has been decreasing in recent years because other parts are growing faster.
What China needs to do now is to accelerate the trend that is already going on. Consumption had already become an important part of demand in China. There are many different components to consumption. When looking for stimulus, I would tell every country to provide stimulus during this downturn by spending money on health. That seems to be a really good use of resources. China can also afford to spend a lot more resource to support the migrant population in different ways, providing housing, schooling for migrant children, and making the pension and health system truly national. There are plenty of needs; if you can target stimulus at the needs, then you will make people’s life better, and you will come out of the crisis with more resiliency. I do think exports will continue to be somewhat important to China, but this crisis is going to accelerate the trend for China to move away from exports and focus on servicing domestic needs.
Most countries including China had built up their debts over the last ten years. High debt levels put China in a weaker position when dealing with such a crisis. But even if China is in a somewhat weaker position, it’s still important that the government step in and provide demand, because private demand can decrease dramatically if the government doesn’t step in, borrow and create demand, then the economy could really collapse. China is approaching this cautiously. It is conservative compared to what the US and some other countries are doing. China may need to add more stimulus. Right now, the government is walking a fine line between stimulating the economy but not raising debt so much that they have a financial crisis.
The Chinese government’s economic response to Covid-19 is relaxing standards for companies to borrow and equity-finance while slashing corporate tax rates and eliminating utilities for small and medium-sized firms. But so far, the government hasn’t released relief packages directly to workers. Do you think the latter measure is also necessary?
I think in the U.S. giving cash directly to workers is not just a good policy but also technically easy to implement. In the case of the US, the tax authorities have the bank account of (a large fraction of the population), so a lot of the money is immediately transferred into their bank accounts. On the other hand, supporting small and medium enterprises (SME) is important, and so far, the US is doing a poor job.
I look at this kind of question from a pragmatic point of view: I’m not sure it would be easy to transfer money to workers in China. The urban registered population probably do not need that much help, and I worry more about the migrant population as many of them do not have bank accounts. On the other hand, many SMEs seem to be operating at only one-third of their capacity, so measures that try to lend money to these SMEs might work better and would be a good substitute for providing cash to workers. We would probably need to experiment with several different approaches, helping people secure basic resources just to get through a few difficult months, that’s really the critical role of the government.
Among the several industries that were hit hard by the pandemic, which ones will take longer to recover? Will the drastic increase in urban unemployment reverse the trend of rural-urban migration? How are migrant workers disproportionately affected?
It is hard to get good labor market data on China. I keep asking friends in China about this. People I trust said that 80-90 percent of migrant workers came back to work from their villages to the cities that they work in. But I have the impression that for a lot of these employers, people are sitting around and doing nothing. It’s good in a sense that people retain their jobs and are getting paid, but these small enterprises are not generating lots of economic activity.
If we look at the February data, everything seems to be hurting. Manufacturing, service sectors, retail sales were all down. But when we get to March, manufacturing and exports have started bouncing back to some extent, but retail sales in March were almost as negative as it was in February. Therefore, from the production point of view, it’s easier for manufacturing to bounce back. We have already seen many big manufacturers reopened in China, and the ones that are export-oriented are getting back to work. I worry about the consumer service sectors: restaurants, hotels, firms that deal with travel, hair salons and movie theaters. Most of the Chinese economy, at this point, consists of services, and an overwhelming proportion of employment is in service sectors. Yet the service sectors are populated by SMEs, which are more vulnerable.
I don’t think people are going to quickly bounce back to their old habits. China seems to have the virus under control, but I think people are still nervous, and we will see some permanent changes in people’s lifestyles. It will be a little painful for the economy to adjust to that. Sectors like travel will probably need to adjust to quite a few closures. We are also going to have fewer resources in the airline industry. The leisure industry is almost certainly going to shrink even after everyone is back at work. Although there are distinctions between SMEs and the big enterprises, size is not going to protect you if you are producing goods and services for which demand is going down permanently.
People would normally expect that this kind of shock is primarily a shock to the urban economy. So, perhaps some of the migrant workers who went back to their villages during the Spring Festival may have decided to stay there because the economic opportunities look better there. Imagine someone who is two or three years from retirement, they might get back to their villages and decide to retire early. But I would also argue that the situation is largely dependent on policies. China really needs to make more effort to integrate migrant families into the urban population. There has been some movement in this direction, but mostly in smaller cities. If the government had more policies to support migrants in terms of low-cost housing, integrating their children into school systems and making urban life more attractive for them in general, then China will see a counteracting flow which would actually be in its interest.
China has a central position in the global supply chains. What are the ripple effects for countries that are reliant on China-centered global supply chains? Will the pandemic permanently reshape the global supply chains?
The pandemic is likely to have some permanent impact on the supply chains, but I don’t think we should exaggerate the likely impact. Indeed, there are medical-related goods where countries will regard them as national security issues. We have already seen more nationalism around supply chains for national security-related products, but that is a small share of production. The vast majority of goods and services are unlikely to be affected by nationalist rhetoric.
On the other hand, if you think about supply chains for ordinary consumer products, there won’t be much national security concerns. But I do think that multinational companies, amid the crisis, would realize that they don’t have enough resiliency in their value chains. It makes sense for them to have more diversified suppliers, but that doesn’t necessarily mean shifting their supply chains out of China because China is a big, diverse country.
The one thing we will not see is re-shoring, which means bringing manufacturers back to the US. I don’t think this is realistic at all except for those national security items. For most manufacturing goods, the activities that are done in the US are totally different from those that are done in China, Vietnam or Indonesia. The wage differentials are really large, and it’s not economic for the US to take over a lot of those activities that are currently done in China.
China-US phase one trade deal done before the outbreak of Covid-19 includes China’s commitment to make large purchases of American products. Amid Covid-19, China’s promise may fall through and hostile rhetoric over the pandemic has arisen from both sides. What are likely to happen to US-China economic relations soon?
The phase one trade deal includes some structural measures from China’s side, such as opening financial sectors and services, but the big headlines were really around these purchases. I wrote at the time that this was very unrealistic because it required the US to increase exports to China by more than 40 percent this year, and an additional 40 percent next year, but normally we do not see macroeconomic variables growing at this rate. Such a promise was very unlikely to be fulfilled even before the coronavirus, and now it just seems impossible. The price of energy has turned negative, and China’s demand for energy also plummeted, so it’s unlikely that the plan for the US to sell 50 billion USD of energy to China will be carried out. Chinese students and tourists, who make significant contributions to the US economy, have also dried up due to cancelled flights and border restriction.
I don’t see the Trump administration showing any sympathy, but instead it’s blaming the coronavirus and this economic crisis on China. So, it’s very likely that US-China relations will get worse and worse in 2020.
What needs to happen for China to fully rebound from Covid-19? What might the rebound look like?
The virus seems to be under control in China, but it has started ravaging other parts of the world. Consumers won’t be comfortable going out until there is vaccine against the virus, and that’s why I think a full rebound may take a few years. Hopefully we will see some recovery, but I don’t think we will get back to normality any time soon. Frankly, even if we had vaccine, we wouldn’t go back to exactly the same pattern of production and consumption we had before because we will rationally decide that we want to invest more in public health, social services and safety net programs as the pandemic serves as a wakeup call. It is possible that the Chinese economy will reach an equilibrium where it has fewer resources in certain industries but has a lot more in healthcare, and in government-provided safety nets. The point of economics is human welfare, so this will be a good equilibrium if it can protect people and make them happy.
China News Service／中国新闻网 / CC BY (https://creativecommons.org/licenses/by/3.0)