If there is any good news related to the spread of Covid-19 across the globe, it is that the crisis in China itself may be subsiding. Outside Hubei province, still in effective lockdown, the number of confirmed new cases has fallen sharply enough for authorities in many provinces to gently encourage people back to work. Traffic levels are rising, subways in Beijing and Shanghai are beginning to fill up and energy consumption is revealing signs of economic life.
That said, residual uncertainty continues to restrain economic activity. Schools remain closed, for example, and “social distancing” policies are in evidence: in Beijing, shoppers have been instructed to keep two square metres of space around them.
So the best one can say is that we are somewhat closer to the point where the Chinese government can claim “mission accomplished” in its effort to defeat the virus.
Yet even short of total victory — whose final symbol will be Xi Jinping’s visit to Wuhan — it makes sense to turn to the question of what kind of economic stimulus the world can expect from Chinese policymakers.
The best reason to expect a pretty strong stimulus from China is that the authorities there have faced two simultaneous threats. One is the threat to its legitimacy if it fails to control the virus. Another is the threat to its reputation for competence if it fails to support the economy. But these threats have been tough to counter at the same time: minimising the virus problem, which requires limits to human interaction, almost demands maximising the economy problem.
For this reason, most of the support that the government and central bank have offered so far is largely concentrated on ensuring the supply of food and medicine, and on providing liquidity and regulatory support for companies whose ability to repay debt could be jeopardised by declining income. Banks have been encouraged to offer debt repayment holidays in exchange for officially-sanctioned delays to recognising non-performing loans.
This means that real support for the economy — necessary for Mr Xi to keep his 2012 promise to double China’s 2010 per capita GDP by next year — can only move up a gear once the virus threat is contained.
The two most relevant weapons in China’s policy arsenal are likely to be infrastructure spending and measures to support the real estate sector. Mr Xi has already referred to the possibility of accelerating the delivery of “major projects” and, thanks to decisions taken last year, local governments in January went on a borrowing spree to issue Rmb700bn ($100bn) of project-related “special” bonds, so a decent amount of funding is in place for the near term. The quota for the full year could top Rmb3tn when it is finally announced.
Support for the real estate sector will be more limited. In the past couple of years, the Chinese authorities’ real estate policy has been guided by the principle that homes are for living in, and not for speculating on. And since most of the sharp increase in household debt during the past five years has been the result of mortgage borrowing, there may be reluctance to go all out.
That said, new regulatory measures — easing residence requirements, supporting developers’ refinancing needs, reducing downpayments and minimum holding periods — seem very likely.
On two occasions in the past 12 years, Chinese stimulus has delivered a strong and most welcome positive shock to the world economy. The first was the aftermath of the global financial crisis, a huge exercise of investment-generating policymaking that was sustained over three years. The second was in 2016-2017, giving a boost to emerging economies and the eurozone in particular.
China can have these globally significant effects because of its dominating influence on the global investment cycle, which in turn shapes global trade. Since 2010, China has been responsible, on average, for more than 60 per cent of global investment growth.
But it would be wrong to expect any future stimulus to have anything like the impact of the last two occasions. In the past couple of years, Chinese economy policy has been stimulus-shy for a reason. Thanks to the progressive stretching of Chinese balance sheets since 2009, financial stability is a much more prized objective than it used to be. A financial stability “lobby” — including the central bank, the banking and insurance regulator and the finance ministry — has tended to hold sway.
Indeed, an article by finance minister Liu Kun last month in Qiushi, the Communist party’s main journal, seemed to quash the idea of a substantial post-crisis stimulus, arguing instead for a “tight balance” as both central and local governments will need to respond to the pressure of lower revenues.
So even if the 2019-nCoV virus disappears fast, the world economy should not expect another bailout by China. And depending on how the virus spreads, the rest of the world may not be in much of a position to respond to Chinese stimulus if it does come. Which in turn, of course, creates additional risks to Chinese growth.
David Lubin is head of emerging markets economics at Citi.
beyondbrics is a forum on emerging markets for contributors from the worlds of business, finance, politics, academia and the third sector. All views expressed are those of the author(s) and should not be taken as reflecting the views of the Financial Times.
