By Yilin Wang
March 2, 2020
WASHINGTON, D.C. – As the economy has stagnated amidst the coronavirus epidemic, the Chinese government has stepped up its economic stimulus efforts in an attempt to prevent further downturn. Following its initial economic stimulus package announced on January 1 that promised a $174 billion liquidity injection into the market, on February 17, the People’s Bank of China announced a new round of economic stimulus. This second package would lower the interest rates of medium-term lending facilities (MLF), inject 200 billion yuan (approximately $28.66 billion) into the economy through MLF, and 100 billion yuan through reverse repurchase agreements.
The idea behind these money injections is to grant more credits to companies that are in dire need for working capital, trade credits, and so on. The new economic stimulus package has had a large impact on the Chinese stock market, with stock turnovers in the Shanghai and Shenzhen stock exchanges hitting over 1 trillion yuan for nine consecutive trading days as of March 2.
As stocks surge and traders cheer, what is actually happening to the Chinese economy? Is the stimulus package really working? While credit expansion looks promising on the surface, its efficacy hinges on the extent to which the most heavily impacted entities, small and medium-sized enterprises, can actually receive the money. What’s more, the decreasing marginal return of investment as well as price inflation caused by the stimulus are both concerning. “In the last four or five years, China has been using credits to support economic performance, so much so that more and more credits are now needed to achieve GDP growth,” Professor Shahid Yusuf of the SAIS China Studies program said “Capital investment is just not generating much of a return – China is in an overinvesting situation. At this current conjuncture, given the state of the economy and the shock of the virus, increasing credits and reducing interest rate will probably not going to have much of an effect. I think this stimulus will be credits wasted.”
Meanwhile, Hong Kong (HK) is pursuing a more unconventional approach to revitalize its economy: helicopter money. Last week, the HK government unveiled a budget that included cash giveaways of HKD 10,000 (around $1,284) to every adult resident. Professor Yusuf explained that the goal of the cash giveaways is to boost consumption immediately in order to offset missing wages for workers (especially those doing piecework) who have had to stop working due to the virus. However, an asterisk should be put on this “immediate” effect expectation, as it relies on the assumption that people will spend, rather than save this so called helicopter money.
Speaking at the SAIS China Forum on February 12, Dr. Jiming Ha, the former Chief Investment Strategist of the investment management division for China at Goldman Sachs Asia, shared his analysis on China’s economic recovery. Dr. Ha pointed out that the coronavirus poses a more serious challenge to the Chinese economy compared to SARS. In the early 2000s, China’s demographic distribution featured an abundant working-age population. High savings, cheap labor costs, and the public’s growing appetite for larger residences following the SARS crisis all contributed to a smooth, post-SARS economic recovery. As China’s demographic dividend retreats, China will need to seek new measures to put the economy back on track. While analysts have trimmed their forecast on China’s GDP growth in Q1 to around 3%, Dr. Ha believed that the growth rate would likely plunge to 0%.
However, while there is little reason for optimism over China’s economic performance this quarter, Dr. Ha believes the country can keep its economy manageable even in the face of a severe economic challenge, as a result of high domestic savings and capital control that preserves deep pockets at home.