As the Covid-19 pandemic hits the world, a rare economic crisis is forming around the globe, with the impact comparable to that of the Great Depression. In the face of the biggest economic crisis since World War II, countries are responding with aggressive monetary, fiscal and consumption policies in an attempt to stabilise financial markets, support asset prices, restore production and safeguard basic consumption activities. The global economy is in a state of low activity and sustainability and the world is, as The Economist puts it, in search of a “business for survival”.
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China was the first country to emerge from COVID-19 outbreak emergency after paying a heavy price, although now it still faces the pressure of an imported outbreak. Still, the economic strain on China remains enormous. Before the outbreak, China’s economy was already under great downward pressure. During the outbreak, China was also hit by global supply chain disruption, reduced external demand, shrinking foreign trade and a nearly “frozen” state in China for more than two months.
We have noticed that both the central and local governments in China have implemented various investment projects in post-pandemic economic reconstruction. According to incomplete statistics, as of March 20, local governments have released investment plans and major infrastructure projects with a total value of nearly 50 trillion yuan, of which 7.6 trillion yuan is expected to be invested in 2020. China’s “new infrastructure”, which has been in high demand recently, is estimated to account for about 14 percent of announced infrastructure investment by 2020, with 6.6 percent going to urban subways and intercity high-speed rail, 3.8 percent to 5G and 1.2 percent to ultra-high voltage. Wuhan, newly unlocked, is also eager to launch a number of major projects, with 1,326 major projects of more than 100 million yuan under construction with a total investment of 2.93254 trillion yuan. Of this, the total investment in the modern manufacturing industry was 547.37 billion yuan, in the modern service industry 1.55027 trillion yuan, in infrastructure projects 590.98 billion yuan and social programs 243.92 billion yuan.
In the case of pandemic prevention and control, which consumes a lot of financial resources, how to promote so many large-scale projects after the pandemic is a realistic challenge for all levels of governments in China. Chan Kung, chief researcher at Anbound research centre, believes that without the intervention of state resources and capital, reviving the economy will surely not be enough for cash-strapped local governments. Given the global pandemic and the economic situation, China does not have much time left. It needs to make a decision on the direction and strategy of what should be done.
Chan Kung’s basic concern is that China should establish a sizeable “national economic recovery fund” to promote post-pandemic economic reconstruction. China’s current situation is different from the “4 trillion yuan” stimulus policy introduced after the 2008 financial crisis, the current situation facing China is a full-blown economic crisis rather than just a panic in financial markets. As the outbreak impact involves all walks of life and hit the production, consumption, and supply chain, it is an unprecedented human economic activity freeze and a major threat to human life security. Therefore, the national economic recovery fund should mainly focus on the public welfare of the whole society, and selectively conduct investment and construction and financial support in a market-oriented and open way. This national economic recovery fund should have a certain size of around 5 trillion yuan. It could be raised mainly through bond issues, either in the domestic market or offshore. Judging from the aggregate volume of China’s economy and investment activities, the scale of 5 trillion yuan is certainly not enough, but the use of funds can act as a kind of capital guarantee and a leading role for the market.
In fact, there have been similar ideas in Europe historically and now. This week, European Commission’s Internal Market chief Thierry Breton and European Economic Commissioner Paolo Gentiloni, published a joint article calling for the establishment of an economic recovery fund, to which all member states must have equal access. Regarding financial issues, the EU Commissioners have put forward three principles: (1) No country should be left behind; (2) No economy should be an isolated victim of the pandemic; (3) All EU countries must have fair access, under comparable conditions, to the financing needed to fund their plans. It can be seen that the EU economic recovery fund is considered with the intention of promoting the public welfare of various economies.
Back in 2014, after the financial crisis, EU officials considered launching a 315 billion euros (about $342 billion) development programme to revive the European economy. The fund, known as the European Fund for Strategic Investment (EFSI), is a major post-crisis effort to rescue struggling EU countries. At the time, the EFSI had 21 billion euros to start with, all with a small amount of public money and lots of leverage to attract private capital. The project is based on the soundness of public finances and the European Investment Bank (EIB) is a successful example of this approach. The EIB, which relies on a relatively small capital base, has raised a lot of private funds to fund big infrastructure projects across the EU. Following the launch of EFSI, by December 2017, the European Council agreed to extend the strategic investment fund, the flagship project of the European investment programme, to 2020, with a target of 500 billion euros of additional investment.
At present, China can learn from the European Union to establish a similar national economic recovery fund for its post-pandemic economic reconstruction. Regarding the establishment of a similar fund in China, Teng Tai, the dean of the WANB Institute, pointed out that the bailout and stimulus scales of European and American countries are between 10 percent to 20 percent of the GDP of the country. This not only reflects the importance of each country to the impact of the COVID-19 pandemic, but also reflects their own assessment of its impact. It is also of great reference value to China’s rescue package and stimulus plan. Teng suggested that the total size of the bailout and stimulus plan should be no less than 10 trillion yuan – 10 percent of China’s GDP.
There is international precedent for this ratio. For example, the US launched a $2 trillion economic rescue programme to support small and medium-sized enterprises, as well as low- and middle-income US residents; the economic rescue scale is equivalent to 11 percent of GDP. In addition to two interest rate cuts, Britain’s financial aid to businesses and workers will be about 16 percent of its GDP in 2019; Australia’s cumulative financial assistance is close to 10 percent of GDP; Germany has the largest economic rescue effort, with a cumulative financial rescue scale of up to 22 percent of GDP; Japan’s rescue and the stimulus was about 10 percent of GDP; France’s bailout and the stimulus package is equivalent to 14 percent of GDP. Overall, the scale is similar to Anbound’s proposal of a 5 trillion yuan national economic recovery fund and its idea of continuing to expand in the future.
Facing the impact of the pandemic on the economy, China needs to make up its mind to establish a national economic recovery fund with a relatively large scale, raise funds in a more market-oriented way, and support post-pandemic reconstruction in a relatively market-oriented way. It should be emphasised that China’s national economic recovery fund should focus on public welfare and support people’s livelihoods and consumption, instead of boosting investment to boost GDP. China should make early decision on this issue and do all it can to improve its public welfare.
The COVID-19 pandemic hit China and then the rest of the world. This disaster shows that nothing is more important than public welfare; if human life cannot be safeguarded neither the economics nor the politics would be of any use.
Hence, the establishment of the national economic recovery fund should be an important lever to promote public welfare. It is with this concern that China should make up its mind early.
He Jun is a partner, director of the China Macro-Economic Research Team and Senior Researcher of the Anbound think tank based in China.