East Asia Watch

The hope in China's uphill task to reboot its stricken economy

First the trade war, now the pandemic - China's leaders face multiple challenges in getting the economy back on its feet

Following his trip to Wuhan last month that signalled a turning point in China's fight against Covid-19, Chinese President Xi Jinping travelled last week to the coastal province of Zhejiang in another symbolic tour.

As the coronavirus outbreak in China abates and the number of locally transmitted daily cases falls to near zero, it is restarting its economy which came to a near standstill from late January because of drastic measures taken to contain the spread. These included locking down Hubei province - the epicentre of the outbreak with a population of more than 50 million people - and restricting travel and various activities in other parts of the country.

Since the end of the extended Chinese New Year holidays in late February, economic activity has gradually resumed. Apart from Hubei province and in particular its capital Wuhan, where the outbreak began, many factories around the country have reopened and many migrant workers have returned to work from their hometowns.

Last week, Mr Xi made a four-day inspection tour of one of the country's industrial dynamos, Zhejiang province. If his visit to Wuhan on March 10 was to signal that China had the outbreak under control, the Zhejiang visit was to let the world know that China is back in business again.

Restarting the economy is important as the measures China took to rein in the coronavirus outbreak have been costly economically, with some analysts estimating that gross domestic product (GDP) contraction could be as much as 7 per cent to 10 per cent in the first quarter.

The World Bank forecasts that China's growth for 2020 will be 2.3 per cent, which if borne out would be its worst performance since the country rolled out reforms and opened up its economy in 1976. The figure would be far below last year's 6.1 per cent, which was already the lowest in 29 years as the world's second-largest economy took a hit from the effects of a trade war with the United States.

In this context, Mr Xi's choice of Zhejiang and the places he visited there have symbolic meaning, economics and trade-wise. (There is a political dimension as well, Zhejiang being a power base for Mr Xi, who served there in leadership roles from 2002-2007.)

Zhejiang is home to both Yiwu and Alibaba - one being the world's largest small commodities wholesale market and the other a tech titan. The province is an important export base with its industries running the gamut of China's manufacturing and service sectors, from small and mid-sized firms to high-tech giants. It also boasts the world's fourth-largest container port.

One of the first places Mr Xi visited, on the first day of his trip on Sunday last week, was the Ningbo-Zhoushan Port, where he said the port's quick resumption of work was important to the restoration of the country's logistics chain and the global industrial chain.

China's factory closures have led to major disruption to the global supply chains, forcing car manufacturers in Japan and South Korea, among other companies, to stop production for lack of components from China.

On the same day in Ningbo, Mr Xi visited an industrial park making car parts and moulds, where he promised help for small and medium-sized enterprises (SMEs) which are more susceptible to cash flow disruptions and have found it more difficult to get back on their feet.

 
 
 

SMEs are a critical part of China's recovery process as bigger companies cannot resume full operations if they do not get the components that come from the smaller suppliers.

Mr Greg Gilligan, chairman of the American Chamber of Commerce in China, has warned that some SMEs may not survive long enough to avail themselves of government support, particularly the longer-term policy measures. The chamber has asked its members to directly support their SME suppliers and customers.

There are many other challenges to China's economic recovery but its leaders are likely to take a different tack from the blunderbuss approach during the 2008-2009 global financial crisis. At the time, they unleashed a massive US$600 billion stimulus package, amounting to close to 13 per cent of China's GDP. It left the country with a huge debt overhang and an industrial overcapacity. This time, if the measures China's leaders took to cushion the economic impact of the trade war with the US are anything to go by, the stimulus actions should be more targeted and calibrated and less profligate.

CHALLENGES TO RECOVERY

Next year marks the 100th anniversary of the founding of the Chinese Communist Party in 1921. China had wanted to celebrate it by making a push to double its GDP this year from 2010 that would signify achievement of the centenary goal of attaining a moderately wealthy society. To do so, the economy would have to grow by 5.6 per cent this year. Analysts don't think China will aim for it as the cost would be too high. Mr Xi had, on his Zhejiang tour, exhorted the Chinese people to "spare no effort" to achieve this year's economic and social development goals but also to balance the resumption of economic activity with disease control and prevention.

The message, said Mr Chen Long, a partner at independent research firm Plenum China Research, is "let's not give up but it is not something we must reach".

ST ILLUSTRATION -MANNY FRANCISCO

China's annual March parliamentary sessions, where growth targets are usually set, have been postponed and no new dates have been set for them yet although there is speculation that they could be held late this month or in May.

In the meantime, a debate is on among economists and government advisers over whether a growth target should be set this year.

Some, like Dr Yu Yongding of the Chinese Academy of Social Sciences, believe that there should be a target, even if it is a low one, as it helps companies, especially large corporations, to make their business plans. Others think a target should be dropped altogether as it is unfeasible to set a number given the uncertainty over how the pandemic is going to play out and the headwinds that China is facing.

Mr Julian Evans-Pritchard, senior China economist at research firm Capital Economics, told Chinese magazine Caixin that any target that is politically acceptable, that is, anything that is above 4 per cent, will be very difficult to achieve.

Dr Ma Jun of Tsinghua University, in a speech last week, warned that pursuing an artificially high rate of growth would "kidnap macroeconomic policies" and eventually force the use of an all-out stimulus.

If the government were to set a target, 4.5 per cent would be a reasonable one to keep jobs and maintain socio-economic stability, said Mr Tommy Xie, head of greater China research at OCBC Bank.

But as has been pointed out, it's a tall order to achieve such growth.

Already, businesses that have resumed operations are facing cancelled orders from overseas. Foreign demand is set to weaken further as the virus ravages economies around the world. This in turn would hit domestic consumption as workers lose their jobs and manufacturing investment falls.

Urban unemployment hit 6.2 per cent in the first two months of this year, from 5.2 per cent in December, representing a loss of 5.5 million jobs. But Plenum in its latest report cautioned that this is just the beginning and estimated that the total job losses could come to 24 million - 15 million from the service sector and nine million from the manufacturing sector.

 
 

The government has encouraged domestic consumption to boost the economy, with some local governments giving discount coupons to households to encourage spending, but the outcome may be less than desired. Besides rising unemployment, there are 150 million self-employed people in the urban workforce of 530 million who work mainly in the badly hit service sector and have fewer benefits. They are under economic stress and therefore not likely to increase their spending. Chinese households also have high debts, a total of 55 trillion yuan (S$11.3 trillion), with mortgage interest and credit card debts to pay.

Another dampener on the economy is concern over the possibility of a second wave of infections as economic and social activities are ramped up. The country has seen a rise in imported cases and there are sporadic cases of local transmissions.

To prevent an increase in coronavirus cases, cinemas, after being reopened last month, were shut again and some tourist attractions in Shanghai, such as the Oriental Pearl Tower and Shanghai Ocean Aquarium, were closed not too long after reopening. In Henan province, entertainment venues and Internet cafes were ordered shut late last month after a cleaner in a library tested positive.

STIMULATING THE ECONOMY

Some measures the government has taken to cushion the impact of the outbreak include tax cuts and social security fee cuts worth a total of 1 trillion yuan or 1 per cent of GDP.

It has also cut the amount of cash banks need to hold in reserve three times this year. The most recent move, announced last week for small and mid-sized banks, would release US$56 billion (S$80 billion) in liquidity for loans that would benefit, in particular, struggling small firms. The move follows similar reserve requirement ratio cuts last month that freed up US$79 billion in funds, and in January that increased liquidity by 800 billion yuan.

The government is also set to issue special central government bonds - called for at last month's meeting of the Politburo, a top decision-making body - and increase the quota of special purpose local government bonds.

The money raised through the government bonds will be spent on infrastructure building, including traditional projects such as roads and railways. But, crucially, new infrastructure projects will also be in the high-tech area, including 5G networks and data centres, as articulated by Mr Xi during his Zhejiang trip.

The International Energy Agency has urged governments to include investment in clean power, battery storage and carbon capture technology in their stimulus efforts.

 
 

While Mr Xi did not talk specifically about climate-related projects during his Zhejiang tour, he did flag the need to protect the environment. Interestingly, the government has decided to extend by another two years subsidies for the new energy vehicle market that were scheduled to be largely withdrawn this year. It gives hope that the Chinese government might take this opportunity to boost its green economy.

Another area that some, particularly healthcare experts, would like the government to spend money on is healthcare infrastructure, especially primary care and public health, which had been found wanting during the virus outbreak.

They may find Mr Xi's exhortations - that the country's disease prevention and control system and the public health emergency administration system should be improved - something to cheer about if not quite what they hope for.

Analysts don't expect life in China to get back to normal before the end of the year or even early next year.

And it will be a rough ride towards economic recovery given the range and scale of challenges the country faces.

But if done right, the actions taken to reboot the economy could lead it towards the high-quality growth that the country and its leaders aspire to.

 
A version of this article appeared in the print edition of The Straits Times on April 08, 2020, with the headline 'The hope in China's uphill task to reboot its stricken economy'. Print Edition | Subscribe