Author: Justin Yifu Lin, Peking University
In order to realise its goals to double 2010 GDP and per capita GDP by 2020, China needs to achieve at least 5.6 per cent growth this year. This growth target would not have been difficult to achieve if not for the unexpected outbreak of COVID-19 in January.
China took effective measures to suppress the pandemic. The whole country was under lockdown in February. In March, control measures were relaxed and production and business started to resume. But many export-oriented enterprises encountered a sudden drop or cancellation of orders due to the impact of COVID-19 in Europe, the United States and other parts of the world. China’s GDP fell 6.8 per cent year-on-year in the first quarter of 2020.
The risk of a possible second wave of COVID-19 infections means prevention measures need to be instilled and normalised as China embarks on the long road to economic recovery. In the second quarter, China’s economic growth is likely to experience a slow recovery. China’s growth in 2020 will depend on a rebound in the third and fourth quarters.
The World Trade Organization predicts that global merchandise trade will decline by between 13 per cent and 32 per cent this year. China’s growth will thus depend mainly on the increase of its domestic investment and consumption demands. If the growth rate can reach 10 per cent in the third and fourth quarters, the annual growth rate will be between 3 per cent and 4 per cent.
From the perspective of China’s fiscal and monetary policy space, and bearing in mind the government’s implementation capacity, it is not impossible to achieve a growth rate of 5 per cent or higher for the year by stimulating domestic investment and consumption. But to achieve this, year-on-year growth in the third and fourth quarters will need to reach about 15 per cent.
Considering the need to normalise epidemic prevention and control measures as well as the uncertainties facing the global economy, China should preserve some room for policy leeway over the coming years. According to the IMF’s released in April, the global economy will contract by 3 per cent in 2020. If China can grow 3 to 4 per cent this year, it will be a great achievement.
As long as it maintains 3 to 4 per cent growth next year, the goals of doubling its 2010 GDP and per capita GDP will be achieved by 2021. In this once-in-a-century global pandemic and economic recession, it is entirely understandable and reasonable to postpone a target set 10 years ago by one year.
In the past, the impact of financial and economic crises on the economy were generally felt on the demand side. COVID-19, on the other hand, has shocked both the demand and supply side at the same time. Previously the Chinese government mainly relied on monetary and fiscal policies to support infrastructure investment that created jobs and stabilised economic growth. This time, in addition to new infrastructure projects, China needs to support household consumption and help small- and medium-sized enterprises weather this difficult storm.
To increase consumption, China can issue vouchers to the urban poor, middle and low-income families and the unemployed, and raise the standard of minimum living insurance and assistance to low-income families in the countryside.
According to a Tsinghua University survey, 85 per cent of private enterprises in March will struggle to survive over the next three months. Bankruptcy of enterprises will lead to an increase in unemployment. Additionally, once the pandemic is over, bankrupt enterprises will face numerous difficulties as they rebuild. The protection of enterprises is therefore critical as it protects jobs and maintains the foundation of the Chinese economy. In terms of supporting enterprises, China can delay loan repayments, increase loans to enterprises and reduce their taxes and rental expenses.
Overall, the Chinese government should take advantage of its favourable fiscal and monetary policy space to stabilise the financial system, increase credits to help enterprises, invest in new infrastructure and provide necessary support for families adversely affected by the pandemic. These measures will help to expand domestic demand, maintain social stability and eliminate the bottleneck of future economic growth. China has the ability to maintain a reasonable growth rate in 2020. Like it has since 2008, China will drive the world’s economic growth and recovery as it emerges from the coronavirus crisis.
Justin Yifu Lin is Dean of the Institute of New Structural Economics and Professor of the School of National Development at Peking University.
This article is part of an EAF special feature series on the novel coronavirus crisis and its impact.