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Key to Growth: Domestic Market, Demand, and Investment

Apr 10-2020   



The China Development Forum held a video conference on March 31 to scrutinize and analyze global economic situations under the pandemic. Prof. Justin Yifu Lin made the first speech in the meeting. He’s the Honorary Dean of the NSD and the Dean of the New-Structural Economics Institute at Peking University.

He began with an overall assessment of the pandemic and its fallout on the economy. For China to achieve its first centenary goal in 2020, the target growth rate had been set at 5.6% and above, more or less in line with the 6.1% recorded in 2019. However, the pandemic has wreaked unexpected disruptions. Though 90% of listed firms have resumed work, the fear of a second round of epidemic had led some regions to implement stricter-than-necessary measures. In the manufacturing sector, only 30% of firms are likely to have got back to work. The pace is even slower in catering and entertainment and other industries that depend on customer traffic.

The global spread of the virus has resulted in lockdowns in many countries and the tumbling down in US and European stock markets. China’s export orders have plummeted in due time.

The most severe impact of the pandemic is its concurrent blow to demand and supply while strewing immense uncertainties. According to a recent survey by Tsinghua University, around 85% of private firms cannot survive three more months of such ordeals. Urban unemployment rate has risen from 5.2% t0 6.2%; in comparison, it went up from 4.0% t0 4.2% during the 2008 financial crisis. Employment situations in the countryside are surely worse.

China must rely on its domestic market and demand to stimulate growth. In the past, the government mainly used the pull of investment to cope with economic crisis. This time round, it should focus on protecting households, ensuring consumption, and assisting the companies to tide over the difficult times.

The government can provide consumption coupons – a more effective way of stimulating consumption than cash allowance - to low-income families, the unemployed and people yet to get back to work due to the pandemic. In rural areas, the social security net must be strengthened. Enterprises, especially SMEs, should be supported with lower taxation, deferred social security payment, and increased liquidity. Their survival holds key to China’s position in the global manufacturing chains in post-pandemic era. Such measures are either in discussion or already in implementation. The total stimulation package might be up to RMB1 trillion (USD150 billion).

Another driving force is investment. The government can deploy active fiscal policy and flexible monetary policy to spur investment. Given that private investment is languishing under the export slump, the government should play an active role in driving investment. The government has already worked on new infrastructure projects such as 5G, cloud computing, AI. In addition, investment can be made in conventional infrastructure projects such as high-speed rail and inter-city rail network to build more city clusters with higher efficiency. On the fiscal side, the government should allow fiscal deficit to rise above 3%, even by 2-3%.

The growth rate might be -6 to -10% in the first quarter and around 1% in the second quarter. If it reaches 10% in the third and fourth quarters, the annual growth rate can get to 3-4%, which will be a stellar achievement under current situations worldwide where negative growth seems inevitable, said Prof. Lin.

Key to Growth: Domestic Market, Demand, and Investment

Apr 10-2020   



The China Development Forum held a video conference on March 31 to scrutinize and analyze global economic situations under the pandemic. Prof. Justin Yifu Lin made the first speech in the meeting. He’s the Honorary Dean of the NSD and the Dean of the New-Structural Economics Institute at Peking University.

He began with an overall assessment of the pandemic and its fallout on the economy. For China to achieve its first centenary goal in 2020, the target growth rate had been set at 5.6% and above, more or less in line with the 6.1% recorded in 2019. However, the pandemic has wreaked unexpected disruptions. Though 90% of listed firms have resumed work, the fear of a second round of epidemic had led some regions to implement stricter-than-necessary measures. In the manufacturing sector, only 30% of firms are likely to have got back to work. The pace is even slower in catering and entertainment and other industries that depend on customer traffic.

The global spread of the virus has resulted in lockdowns in many countries and the tumbling down in US and European stock markets. China’s export orders have plummeted in due time.

The most severe impact of the pandemic is its concurrent blow to demand and supply while strewing immense uncertainties. According to a recent survey by Tsinghua University, around 85% of private firms cannot survive three more months of such ordeals. Urban unemployment rate has risen from 5.2% t0 6.2%; in comparison, it went up from 4.0% t0 4.2% during the 2008 financial crisis. Employment situations in the countryside are surely worse.

China must rely on its domestic market and demand to stimulate growth. In the past, the government mainly used the pull of investment to cope with economic crisis. This time round, it should focus on protecting households, ensuring consumption, and assisting the companies to tide over the difficult times.

The government can provide consumption coupons – a more effective way of stimulating consumption than cash allowance - to low-income families, the unemployed and people yet to get back to work due to the pandemic. In rural areas, the social security net must be strengthened. Enterprises, especially SMEs, should be supported with lower taxation, deferred social security payment, and increased liquidity. Their survival holds key to China’s position in the global manufacturing chains in post-pandemic era. Such measures are either in discussion or already in implementation. The total stimulation package might be up to RMB1 trillion (USD150 billion).

Another driving force is investment. The government can deploy active fiscal policy and flexible monetary policy to spur investment. Given that private investment is languishing under the export slump, the government should play an active role in driving investment. The government has already worked on new infrastructure projects such as 5G, cloud computing, AI. In addition, investment can be made in conventional infrastructure projects such as high-speed rail and inter-city rail network to build more city clusters with higher efficiency. On the fiscal side, the government should allow fiscal deficit to rise above 3%, even by 2-3%.

The growth rate might be -6 to -10% in the first quarter and around 1% in the second quarter. If it reaches 10% in the third and fourth quarters, the annual growth rate can get to 3-4%, which will be a stellar achievement under current situations worldwide where negative growth seems inevitable, said Prof. Lin.