China’s manufacturing sector has bounced back after recovering from a miserable first two months as the economy was crippled by the Covid-19 outbreak. The official manufacturing purchasing managers’ index (PMI) went above 50 to reach 52 in March, up from an all-time low of 35.7 in February. The export sector also somewhat recovered, but it is still 3.5 percent lower than that of 2019. China’s exports in the first two months dropped by 15.9 percent year-on-year.
Despite these positive signs, the government should not be complacent. As the global pandemic is still ongoing and is yet to reach its peak, the government should prepare for the worst and take an aggressive approach to mitigate its impact. This means that the government should be more expansive in both its fiscal and monetary policies.
To cope with the impact of the Covid-19 pandemic, governments around the world have launched aid packages to help local businesses survive the crisis. The US government released an unprecedented US$2.2 trillion package to rescue the economy. The Australian government launched a A$130 billion scheme (US$82b) to provide replacement wages for up to 6 million people who may lose their jobs due to the coronavirus.
China has refrained from resorting to a central aid package in response to its struggling economy. Instead, local governments have launched their own policies, including reducing taxes and fees and issuing vouchers to consumers to help businesses cope with the virus control measures. But as the global pandemic hammers global demand, putting great pressure on China’s export sector, the central government should be ready to offer further help to businesses.
The central government should continue to increase the monetary supply to boost the cash flow in key economic sectors. Given the impact of the pandemic, the government should direct State banks to allow loan extensions. In the past months, disruption of the supply chain has led to an increase in commodity prices, driving up inflation, which in ordinary times should lead to a tighter monetary policy. Concerns over high debt may also discourage authorities from adopting a more liberal monetary policy. But as this is no ordinary time, tightening the monetary policy will have serious consequences.
In the meantime, authorities should adopt a more liberal fiscal policy. In the past years, the government has limited its deficit to within 3 percent of China’s GDP. The decline in tax revenues may limit the government’s capacity to spend more. If the pandemic is brought under control, the government can increase its spending on infrastructure to boost the economy.
All in all, the government should have a clear idea about its economic priorities, given the long-term threat posed by the coronavirus crisis, concerns over debt, and inflation. Even the much-focused-on annual growth GDP target should not be a top consideration. Economic policy is mostly about expectations. Even if China enters a recession in 2020, it would be as a result of external impacts, rather than due to internal problems with the economy. The government should not worry about it too much. As long as China can achieve an economic soft landing under the pandemic, the long term prospects of the Chinese economy will remain intact.
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