China's Economy at Risk From Epidemic Recovery Cures

An analysis by Michael Lelyveld
china-finance-minister-liu-kun-sept24-2019.jpg Chinese Finance Minister Liu Kun, who also serves as president of the People's Bank of China, answers a question during a press conference on promoting the stable and sustainable development of the Chinese economy in Beijing, Sept. 24, 2019.

As China's economy struggles to recover from the damage of the coronavirus, it may be in more danger from excessive stimulus measures than from the epidemic itself, some experts say.

China's regulators have been trying to budge the stalled economy from its standstill with a barrage of liquidity measures, relying more heavily on stimulus steps than at any time since the global financial crisis of 2008-2009.

Since January, the People's Bank of China (PBOC) has been pumping funds into state banks through a variety of streams, including reverse repurchase operations, which allow temporary sales of securities with buyback commitments, and medium-term lending facilities with reduced rates for loans.

So far in February, the PBOC has channeled 1.7 trillion yuan (U.S. $243 billion) through the reverse "repo" agreements alone.

At the same time, the government has pledged to extend more tax and fee cuts, which totaled 2.3 trillion yuan (U.S. $329.5 billion) last year, as well as 537 billion yuan (U.S. $76.9 billion) in targeted loan programs for small and medium-sized enterprises.

On Feb. 9, the PBOC pledged 300 billion (U.S. $43 billion) in loans to banks to support epidemic control. On Thursday, the PBOC lowered its one-year loan prime rate from 4.15 percent to 4.05 percent.

Last week, the Ministry of Finance said it had also accelerated the issuance of 1.85 trillion yuan (U.S. $265 billion) in local government bonds.

In January, new yuan-denominated loans rose by a relatively restrained 3.4 percent from a year before to 3.34 trillion yuan (U.S. $475.5 billion), but the M2 measure of broad money supply jumped 8.4 percent.

It is difficult and perhaps pointless to tally the total of all these liquidity moves, since the estimate seems likely to change before the ink is dry.

Regulators are said to be planning another cut in the reserve requirement ratio (RRR) for banks among other stimulus solutions.

"The central government will continually launch new supportive measures, in terms of fiscal and tax policies," said Finance Minister Liu Kun, according to state media.

The same appears to be the case for central bank policies.

Pumping up the economy

But the mounting mass of stimulus measures has raised concerns about the rising cost of an economic recovery, particularly since the Communist Party of China (CPC) is still sticking by its longstanding pledge to double the gross domestic product of 2010 by the end of this year.

How seriously does the government take the promise to double China's GDP? On Feb. 17, the official English-language China Daily left little room for doubt.

"Achieving this year's economic growth related goals has become as important as containing the spread of the novel coronavirus pneumonia outbreak," the paper's website said.

But pumping up the economy with more credit could raise financial risk and create further damage over a longer period.

"The fear is worsening a debt burden that [President Xi Jinping] has spent the past two years campaigning to whittle down," The Wall Street Journal said.

Some economists warn that the cost of pumping up a recovery to meet the doubling-of-GDP goal is too high.

"The Real Economic Damage Won't Come From the Coronavirus, But the Stimulus That Follows," read a headline from China-based financial news outlet Caixin on a commentary by Alicia Garcia-Herrero, chief Asia-Pacific economist for the French investment bank Natixis.

"It seems clear to me that no effort will be spared to achieve a high enough growth target to achieve this goal," Garcia-Herrero wrote on the website "The bigger the shock now, the larger the policy expansion will be needed to achieve the growth target."

The result may be an extension of China's economic crisis.

"More debt for a highly indebted country like China can only mean lower potential growth (down) the road," Garcia-Herrero said.

President Xi signaled his determination to meet economic targets despite the epidemic, which is likely to decimate first-quarter growth.

"Xi demanded resolute efforts from Party committees and governments at all levels to win the people's war against the epidemic and urged them to strive to achieve this year's economic and social development goals and tasks," the official Xinhua news agency quoted him as saying at a meeting of the CPC Politburo Standing Committee on Feb. 12.

A man wearing a protective mask walks in front of an electronic display board in the lobby of the Shanghai Stock Exchange building in Shanghai, China, Feb. 14, 2020.
A man wearing a protective mask walks in front of an electronic display board in the lobby of the Shanghai Stock Exchange building in Shanghai, China, Feb. 14, 2020.
Credit: Associated Press
More stimulus needed

But economists say that more stimulus will be needed to stage a recovery from the current crisis than was the case with the SARS virus in 2002-2003 because economic growth has weakened significantly since then.

"If only people would grasp this point," said Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington.

Even before the spread of the coronavirus contagion, China's economic growth in 2019 recorded a 29-year low of 6.1 percent, dropping sharply from 6.6 percent in 2018.

The decline raised the stakes for stimulus measures to keep this year's growth from falling below 6 percent, the minimum that was previously thought to be needed to reach the doubling-GDP goal.

The government has already cut itself some statistical slack with an estimate that the goal can be reached with GDP growth of "no less than 5.5 percent," China Daily said this week.

The lower estimate suggests that the National Bureau of Statistics (NBS) has found a way to declare that the decade-of-doubling requirement will be met despite the economic damage from the epidemic.

"Doubling GDP is just manipulating numbers. Policy's the thing," Scissors said.

But even the minimum growth of 5.5 percent this year may be beyond reach without rapid recovery and enormous stimulus.

This week, Moody's Investors Service slashed its forecast for 2020 growth from 5.8 percent to 5.2 percent. According to a Bloomberg Economics estimate on Monday, China's economy was running at 40 to 50 percent of capacity during the previous week.

While the impact of the epidemic has only added to the challenge, the threat of inflation may limit how far the stimulus can go.

January readings of the consumer price index (CPI), taken largely before the epidemic was widely reported, rose 5.4 percent year-on-year, topping the government's 3-percent target for 2019 for the fourth month in a row.

Food prices soared 20.6 percent, driven largely by pork, which climbed 116 percent from a year before.

The report came as a reminder that the government was still grappling with its previous health crisis of African swine fever before the coronavirus became the focus of concern.

The government has been releasing supplies of frozen pork from its reserves to keep inflation in check, but since the extent of the reserves has not been disclosed, only the government knows how long this can go on.

Unpredictable results

The outcome for the economy may depend on whether decreased demand exceeds depressed production.

The results are unpredictable, but the January CPI in virus stricken Hubei province may provide a clue.

The province reported a 5.5-percent increase in consumer inflation, slightly higher than the national figure, despite government efforts to increase supplies.

Scissors suggests that the recovery and its costs will be shaped by longer-term policies.

"The core Chinese economic problem is sustained oversupply," Scissors said. "Debt accumulation results from this, as does labor and land misallocation and unnecessarily weak innovation."

"The virus outbreak has depressed both consumption and production. It's not clear if it will worsen oversupply, but production-oriented stimulus is China's standard response to shocks," he said.

China's problem with food prices may be a temporary exception.

"The price spike is a tentative sign of demand outpacing supply, at least in a few areas. Shortages are certainly a problem, but they are a short term problem. The long-term problem remains deflationary pressure," Scissors said.


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