Huang Yiping: Are We on the Eve of Recession?
Mar 11-2020
That the coronavirus has spread to so many countries so fast over the last two weeks has astonished Prof. Huang Yiping, Deputy Dean of the NSD. He now feels that the biggest economic damages might not be inflicted on China, but on developing countries in South Asia, Middle East, and Africa. Many developed countries might not be exonerated either.
Panic has gripped capital markets worldwide, yet what worries Prof. Huang the most is whether the spread of the epidemic and downward adjustments of asset prices might trigger a larger crisis. The central bankers in the US, EU and Japan remain hooked on quantitative easing, believing in the apparent decoupling of monetary quantity and price levels. Still, Professor Huang points to the lesson of the subprime crisis that a free lunch doesn’t exist. He professes that he’s not a big fan of the so-called ‘modern monetary theories’.
Some American experts believe that no factors are yet in sight to provoke a new recession in the short term, but if it did materialize, there would not be the same fiscal and monetary leeway as in 2008. Will the epidemic constitute the fuse to trigger a recession? Prof. Huang asks. A downward adjustment of 10% for asset prices will surely aggravate currently mild risks such as capital mismatching.
Whether a recession will strike the world economy in 2020 is still up for discussion, but the odds have certainly been on the rise over the last two weeks. The OECD has trimmed the growth rate of the global economy from 2.9% to 2.4% in 2020. On March 3rd, the Fed drastically slashed the interest rate by half a percentage point, “unfortunately a fruitless effort,” deplores Prof. Huang.
China has entered an unusual period that calls for unusual measures. The external environment will lack the punch to fuel a V-turn seen in 2003; therefore, economic decision-making will be hard. The head winds also include the high leveraging ratio due to the Four-Trillion-Yuan stimulus package and the pressures on international payment to be brought on by the trade deals with the US, if implementation goes ahead.
The question to ask is: can the economy hold on in the next quarter? The best will be that China adopts macro-economic controls while trying not to allow some structural issues to worsen. Meanwhile, the dogma that ‘fiscal deficit must not exceed 3% of GDP’ should not be rigidly followed. The health of government balance sheets should be factored in.
Fiscal policies should be rolled out to proactively stabilize growth. In implementation, three tendencies are to be avoided: fiscal resources are guarded like pensions and not expended in such a needy time; high-level governments provide only polices but no money, forcing local governments and companies to scrape by on their own; stimuli are restricted to old ways exemplified by railways, roads and airports – innovation is needed.
Prof. Huang applauds the decisions recently made to increase investments in public health services, speed up new infrastructure construction such as 5G networks and data centers, as well as mobilize private investments. He also praises the proposal by Prof. Xu Jianguo, which calls for an annual investment of RMB10 trillion on social housing – 10 million units at 50 square meters each. The proposal will not only spur short-term growth but also lay a solid foundation for long-term development by turning farmers into urbanites, he says.
