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Despite the Influence of COVID-19, China’s Economy Remain Strong in the Long Run

2020-03-27 09:03Source: 国际生态经济协会(IEEPA)中文

Recently, people are concerned about the “global financial market turmoil”. Everyone is worried that we will see an economic downturn, in the worst case, one like the Great Depression in the 1930s. Regarding this issue, I have following opinions to share:

1. What influence does “global financial market turmoil” has on global economy?

Personally, I think we should sort out the underlying reasons for the turmoil in global financial market before analyzing what influence it has on real economy. There are great controversies over this issue. Zhu Min, Chair of National Institute of Financial Research at Tsinghua University, thinks that: “The turmoil did not arise from panic; it is a rational judgment made by the market.” He believes the turmoil will continue, and assert that: “It is very likely that global economy will head into a recession.” which means that this turmoil is inevitable and is caused by inherent laws of the financial market. In this regard,I hold a completely view. As far as I’m concerned, the turmoil is mainly resulted from the inconsistency and incompetence of the U.S. and EU governments in dealing with the pneumonia pandemic. It is people’s panic and fear reflected on the market.

Before the outbreak, western economies had been going smoothly, especially the U.S.,the real economy and stock market has been flourishing in recent years. There are lurking perils, of course. For example, trade tensions between U.S. and other countries have set back international trade; Trump’s “America First” policy has aggravated conflicts between countries over national interests; protectionism and populism have resurged. In addition, the Brexit has also further fractured relations between European countries. However, although these factors may have negative impact on the development of western economies, none of them was responsible for such strong fluctuations on the financial market. After the subprime mortgage crisis, many countries have seen a rise in sovereign debt and corporate debt, but the leverage ratio was acceptable. In my opinion, compared with China, they are safer. Thus, I disagree that this turmoil was caused by market forces, not to mention that there will be a great economic panic in the 1930s in the recent world economy.

The EU & US stock market has been bullish for a long time. It is possible that it will take some time to settle, but I don’t think violent fluctuations will continue. As the pandemic gets controlled and defeated, the stock market will also stabilize, I speculate that it will calm down after June this year.

The pandemic and stock market turmoil will no doubt have an impact on global economy this year. I assume European countries will receive greater shocks than U.S. and China do, because in addition to the pandemic, they are also dealing with Brexit. Although China has contained domestic epidemic, it has paid large bills in control and prevention, and its economy is not likely to recover until the latter half of the year. Even with appropriate macroeconomic policies to prevent financial turmoil, China’s growth rate is expected to drop at least 1% on last year’s basis. As for Japan, South Korea and other countries, financial fluctuations will have little influence on them.

2. What does “global financial market turmoil” mean to the U.S.? Were interest rate cuts a bailout plan?

In my opinion, to America, “global financial market turmoil” means: First, the "presidential election" is more variable, which is not good for Trump; second, due to close economic and financial relationships between U.S. and the EU, economic supply chain will be affected to a certain extent; third, it will impede Trump’s plan to boost capital reflow.

We know that the Fed's interest rate cuts and quantitative easing policies were set before the capital market turmoil. Their intention wasn’t to bailout, it was to prevent economic downturn. However, these measures do have a positive effect on stabilizing capital market, so America scored a lucky hit. If the turmoil is indeed caused by market forces, such modest rate cuts and $700 billion of QE barely provide any help.

Even though China’s financial connections with America are not as compact as that between the U.S. and the EU, China won’t be able to prosper alone if the turmoil continues and bring about global economic recession. China’s stock market is still immature. After a long time of observation, I found that China’s stock market is associated with ups and downs of U.S stock market to a certain degree. But I believe this was not out of internal relations, it was mainly psychological effects.

China’s A-shares are growing more mature, just like the country’s economy, with much tenacity. So I don’t think there will be notable problems in A-shares this year.

3. Should we worry about “imported” cases extending the battle with COVID-19, and having further influence on China’s economy?

I’ve always believed that any contagious disease has its regular pattern of arising, evolving, and vanishing, and this pneumonia is no exception. As long as we quarantine suspected cases in time, and treat confirmed cases in time, the pandemic won’t be longstanding. Besides, Chinese government has attached great importance to imported cases and has taken effective measures. Thus, I think it’s not likely that China will see another NCP outbreak. Moreover, I think the pandemic will be controlled globally in the first half of this year. Global pandemic affects China’s economy mostly in dragging back our resumption of work and production. If domestic cases cause a 1% drop in Chinese economy, imported cases may result in a 0.1% drop at most.

4. What are the major problems facing China’s economy after the pandemic? What should governments do to help companies resume work and production?

I think the major problems after the pandemic are that some enterprises may be on the verge of bankruptcy due to capital shortage and market problems; unemployment rate will go up,household consumption will slump. Some economists believe that the Chinese economy has bottomed out, and I am not optimistic about them. At present, our priority is to help enterprises resume work and production, promote employment, and regain our confidence and anticipations. We must use all means to boost rational capital flows, help companies solve their problems, and improve the well-being of the people. We should take measures in both financial and fiscal field, and prioritize large corporations which have a stable market and can offer more jobs.

First, we should treat large, medium, small companies as equals, as well as various ownership economies, and engage them in fair competition;

Second, proper fiscal policies must be implemented in both revenue and expenditure. We should continue to cut taxes and reduce fees, and use general transfer payments as the main approach, direct fiscal support and targeted fiscal transfers as auxiliary measures. We should try to reduce administrative intervention, and let the market play its role.

Third, we should free medium and small private enterprises and lessen their burden. The government should encourage entrepreneurs, and help them clear obstacles.

Fourth, we should attach great importance to developing high-tech manufacturing industry, conduct proper guidance to the flow of capital, labor, and brainpower, and try to maximize productivity. We should take actions to encourage innovation and entrepreneurship.

Fifth, the government should simplify administrative procedures and delegate powers to lower levels. Government officials must deeply engage in researches to find and solve problems, and stand firmly against bureaucratism and pointless formalities.

In my opinion, despite COVID-19’s influences, China’s economy remains sound and strong in the long run, if we do not mess with ourselves. If we prioritize stability in economic development, inspire central and local enthusiasm, and follow out basic principles of the Central Economic Work Meeting held last December, we will be able to overcome all the difficulties, and the country’s economy will soon recover and resurge.