【Zhang Ming】No reason for undue pessimism

While one should not overlook the potential shock to economic growth caused by the outbreak of the novel coronavirus, it would not be wise to predict doom and gloom either. What we need instead is a comprehensive view of the extent of the impact on growth. We must not turn a blind eye to the structural changes that have taken place at home and abroad between then and now. The Chinese government has robust governance capacity, and ample policy space to respond to the adverse impacts of the epidemic on economic growth. Growth in China this year is unlikely to fall off a cliff even in the face of the adverse impacts of the novel coronavirus.

There is ample policy space to respond to the adverse impacts of the novel coronavirus outbreak on economic growth.

While one should not overlook the potential shock to economic growth caused by the outbreak of the novel coronavirus, it would not be wise to predict doom and gloom either. What we need instead is a comprehensive view of the extent of the impact on growth.

A first takeaway of the coronavirus epidemic is that the most heavily affected sector over the short term is the service sector, especially transportation, tourism, hospitality, catering and the entertainment industries, given the fact that the outbreak took place during the Spring Festival holiday.

A second takeaway is that the Spring Festival holiday has been extended on a national basis because of the outbreak, which will dampen investment and export growth in February. Manufacturing, real estate and infrastructure construction will see slower investment growth as a result, which will hold back export-oriented industries as well.

A third takeaway is that the consumer price index may continue to grow at an accelerated rate on a year-on-year basis for longer than the year before, or take longer to fall back to its normal level as a result of the outbreak, which has impacted more than just economic growth. Additionally, the labor market may also suffer as a result of the outbreak, something that we must also take into account.

Undeniably, there are many similarities between this current outbreak and the severe acute respiratory syndrome (SARS) outbreak in 2002-03. This is the reason why many analysts have cautioned against excessive pessimism regarding the current situation given what happened in 2003. However, we must not turn a blind eye to the structural changes that have taken place at home and abroad between then and now.

The first change has been in the most important variable underlying China's long-term economic growth: its demography, which has undergone significant changes. For China, the demographic turning point happened around 2010, before which the labor force had been growing as a share of the population, generating demographic dividends. After 2010, the trend has reversed as the population has aged rapidly, and the potential growth rate has continued to decline as a result of shrinking demographic dividends.

The second change has been in external demand, which has become much more ineffective at driving growth at home. The high export growth in China we saw between 2002 and 2003 was the result of the rapid recovery as the global economy after the busting of the internet bubble, from which China was able to benefit as a member of the World Trade Organization, which it joined in late 2001.Exports currently contribute a much smaller share of growth as the Chinese economy has grown significantly in size since then. China's exports are also growing at a much slower pace than before as the global economy declines and the China-US trade conflict escalates. There is yet another factor worth mentioning: China can expect to see its trade surplus playing a reduced role in driving overall growth over the short term, as China commits to increasing its imports of US goods by $200 billion between 2020 and 2021 in light of the signing of the recent trade deal.

Third, the Chinese economy now faces completely different systemic financial risks. When the Chinese banking sector struggled with bad loans around 1998, the government was able to shore up the balance sheets of the commercial banks and bring systemic financial risks under control by 2003 by issuing special government bonds, injecting capital into asset management companies in charge of non-performing assets, and taking over bad loans from commercial banks at book value, which were possible because the government entities were not highly leveraged back then. Currently, the country is still wrestling with systemic financial risks, as local governments are now highly indebted, small- and medium-sized commercial banks are struggling with potentially significant default risks, and the real estate sector is going through a critical period on its path toward stabilization.

In other words, given the current state of the economy, we are currently facing higher downward pressures in growth as well as risk control and prevention compared to the SARS outbreak. This is the reason why we cannot simply copy and paste the lessons from 17 years ago, and we must steer clear of excessive optimism on the impacts of the coronavirus outbreak on the Chinese economy.

Having said that, there is no reason to go to the other extreme either. The Chinese government has robust governance capacity, and ample policy space to respond to the adverse impacts of the epidemic on economic growth.

First, with the SARS lessons in mind, the government took timely and correct measures this time around, a fact recognized globally. This means that the negative impact of the outbreak will be limited as the government will bring the outbreak under control.

Second, there is high likelihood that the Chinese government will respond with even more expansive countercyclical macroeconomic policies. On the fiscal front, the central government still has ample policy space and can be expected to counter downward pressures on the economy by committing more fiscal resources to public health, worker reskilling and easing the tax burden on companies.

Additionally, there is little risk of the Chinese government overreacting, as it must keep systemic financial risks under control. For example, it is extremely unlikely that the measures aimed at financial institutions such as deleveraging, risk management, and robust regulatory measures will be dialed back completely, nor are there likely to be major reversals in the adjustment measures in the real estate sector (especially those undertaken in major cities). When it comes to macro policies, another enormous stimulus package is also unlikely.

In conclusion, growth in China this year is unlikely to fall off a cliff even in the face of the adverse impacts of the novel coronavirus.

(本文发表于 China Daily 2020年2月6日。)

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