By: Chen Yulu Source: UK Financial Times Published: 2020-02-21
The Chinese government is taking forceful prevention and control measures in response to the recent outbreak of the novel coronavirus, known as Covid-19. The contagion has exerted some downward pressure on China’s economy, but it will not last long. Supported by a resilient economy and ample room for policy adjustments, the People’s Bank of China expects a quick recovery after the outbreak is contained.
Growth is slowing down in the short run due to the epidemic. Transportation, tourism and offline shopping have borne the brunt. Medical care, online shopping and the internet sectors are more resilient. Consumption of non-essential goods will drop temporarily, but the long-term trend of increased and upgraded spending remains well on course. Some small and medium-sized enterprises are running at partial capacity but have continued paying wages and other expenses. They face cash flow pressures at the moment.
Although the financial markets experienced large-scale corrections when they reopened after the Spring Festival holiday, they have rebounded and stabilised.
The sound fundamentals of China’s economy in the medium and long term remain unchanged. China has strong endogenous growth momentum that is supported by the growing service sector and by innovation-driven industrial upgrading. These underpinnings of high-quality growth will not reverse due to the epidemic.
Meanwhile, China has sufficient policy space to support steady economic growth. China is one of the few major economies in the world that have maintained normal monetary policy. Equipped with a rich policy toolkit, China is capable of coping with various uncertainties. Our experience with the 2003 SARS outbreak is very telling. Thanks to well-targeted provision of credit to epidemic control and other measures, China’s economy rebounded quickly after the virus was brought under control.
This time, the Chinese government responded quickly to the outbreak of the coronavirus epidemic and introduced supportive policies, including fiscal and financial measures, which have helped contain the impact of the outbreak and stabilise economic growth.
The PBoC has strengthened countercyclical adjustments of monetary policy through open market operations. This has ensured reasonable and adequate levels of liquidity and helped to boost market confidence. The PBoC, with other financial regulators, rolled out 30 policy measures to support enterprises heavily affected by the epidemic, in particular small and micro ones, private enterprises and the manufacturing sector.
The central bank also provided Rmb300bn in special central bank lending to large banks and selected local banks in Hubei and other severely-hit provinces. It provides credit support at preferential interest rates to manufacturers of essential medical supplies and daily necessities. These policies have proved significantly effective. Many SMEs seriously affected by the epidemic were given access to new bank loans. Preferential loans to a rapidly-identified list of eligible enterprises are receiving fast-track approval. Financial regulators have also ensured the stable functioning of markets by ensuring the uninterrupted operation of financial infrastructure.
In general, the impact of the coronavirus outbreak on the Chinese economy will mainly be in the short run. With strong and effective measures taken by the Chinese government, the PBoC expects that the epidemic will gradually be brought under control, and economic growth will rebound to its potential output level.
As the postponed consumption and investment activities resume, the economy is expected to experience a compensatory recovery. The Chinese economy is expected to recover rapidly as it is supported by a restart of factories and inventory replenishment; the most likely scenario is a V-shaped curve, which means a decline in economic activities followed by a rapid recovery, with the total economic impact relatively contained.
The PBoC will continue to implement the financial policies designed to support epidemic prevention and control efforts, including strengthening countercyclical adjustment of monetary policy, adopting structural monetary policy instruments when necessary, and ensuring stable functioning of the financial markets, which we believe will provide necessary conditions for a post-epidemic economic recovery.
Chen Yulu is deputy governor of the People's Bank of China