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China's economic bounceback can be a model for world economies

While West unleashes massive stimulus, Beijing looks to structural policies

| China

Hao Zhou is Unigroup Chair Professor and associate dean of the PBC School of Finance at Tsinghua University in Beijing and vice chair of the National Institute of Financial Research at Tsinghua.

For those used to seeing China's economy grow faster than virtually any other in the world, its 6.8% contraction in the first quarter may have come as a shock.

The country's economy has not looked so bad since Chairman Mao Zedong died in 1976. Yet even amid the gloom of the coronavirus pandemic, there are already some signs of momentum returning.

Assuming the authorities can keep COVID-19 under control, a focus on appropriate fiscal and social policies should help China avoid recession and even enable a strong economic recovery for the balance of 2020. But it will not be easy.

Although the global financial crisis that begin in 2007 started elsewhere, China's economy took a severe blow then. In response, the government engineered a giant economic stimulus plan that ended up swelling China's annual gross domestic product to become the world's second largest and helped the U.S. and other economies to climb out of recession.

Timing is on China's side in recovering this time from COVID-19. The first to face the pandemic in January, China's forceful lockdown and strict quarantines swiftly brought the contagion under control within its borders.

As a result, most provinces began reopening for business in March. Consequently, indicators including retail and property sales and purchasing managers' indexes improved markedly that month from February's dismal readings. With social and transport controls continuing to loosen, this momentum should continue across the April-June quarter.

The sharp contractions facing economies around the world triggered by COVID-19 are different from typical business-cycle recessions, which are usually caused by a gradual drying up of demand.

As result, the conventional policy tools suitable for addressing such demand shortfalls are less appropriate here. In recessions triggered by pandemic or war, both supply and demand can quickly fracture simultaneously, and inflation and deflation can often be seen in different sectors at the same time.

While the U.S. and many other major economies are loosening fiscal and monetary policy to an extraordinary degree in response to the coronavirus-driven slowdown, China is relying more on so-called structural policy this time.

So far, this approach has involved authorizing local governments to issue trillions of yuan worth of special-purpose bonds for infrastructure development, expanding the supply of business loans, cutting corporate taxes and fees and intervening directly with companies to stabilize employment.

The financial markets, which should be forward-looking indicators of the outlook for the real economy, imply China is on the right track, though one should always be cautious about reading too much into stock movements, especially here.

Shanghai's benchmark stock index fell around 13% between January and March 23 as the coronavirus spread from China to the world. This was a much smaller tumble than China experienced in 2008 or even 2015 ahead of economic slowdowns in those years.

Since March 23, as the authorities have moved to open the country's economy back up, the Shanghai index has risen around 7.5%.

China's rebound, however, is still uncertain.

The downside of having gone through the worst of the pandemic first is that China's exports are now suffering a second wave effect as other major economies freeze up with their own lockdowns. China's experience with restarting activity though offers some hope that the U.S. and other major economies can be reactivated relatively quickly too once the spread of coronavirus cases is contained.

Wuhan Yangtze River Tunnel, pictured on Jan. 25, is blocked with a barrier following the outbreak: China's forceful lockdown brought the contagion under control.   © Reuters

Another issue is China's strong state. By making it possible to enforce a drastic lockdown and strict quarantine measures, government power helped China immeasurably in quickly bringing the pandemic under control within its borders. As a result, the country experienced fewer illnesses and deaths than countries with lower populations including the U.S., Italy and Spain.

But the state's strength could also get in the way of stimulating economic recovery. Momentum will depend on awakening the animal spirits of individual consumers and businesses. Such spirits usually welcome a helping hand from the state, but not its interference. The slow loosening of the Chinese state's enhanced control over everyday activity could become a hindrance.

Another potential obstacle to economic recovery is the push for U.S.-China decoupling in trade and the repositioning of corporate supply chains.

Sound economic reasoning alone would argue for the continued efficient positioning of global production and maintenance of trade links. Unfortunately, the COVID-19 pandemic has led to a higher focus on political priorities in the decoupling debate. Hopefully cooler heads can still prevail.

Barring a large scale, second wave COVID-19 outbreak in China, as seen recently in Singapore, the authorities in Beijing should be able to put the nation back on a growth path in the second quarter without resorting to the kind of massive stimulus deployed in 2008. If so, China can be a model for other countries for getting business moving again as they get through the pandemic too.

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