As the Covid-19 pandemic hits the world, a rare economic crisis is forming around the world, 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 stabilize 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".
China was the first country to emerge from Covid-19 outbreak emergency after paying a heavy price, though now it still faces the pressure of 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.
How should China react in the face of severe economic challenges?
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, 2020, local governments have released investment plans and major infrastructure projects with a total value of nearly RMB 50 trillion, of which RMB 7.6 trillion 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% of announced infrastructure investment by 2020, with 6.6% going to urban subways and intercity high-speed rail, 3.8% to 5G and 1.2% to ultra-high voltage. Wuhan, newly unlocked, is also eager to launch a number of major projects, with 1,326 major projects of over RMB 100 million under construction with a total investment of RMB 2.93254 trillion. Of this, the total investment in the modern manufacturing industry was RMB 547.37 billion, in the modern service industry RMB 1.55027 trillion, in infrastructure projects RMB 590.98 billion, and social programs RMB 243.92 billion.
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, 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 sizable "national economic recovery fund" to promote post-pandemic economic reconstruction. China's current situation is different from the "RMB 4 trillion" 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 RMB 5 trillion. 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 RMB 5 trillion 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 EUR 315 billion development program 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 EUR 21 billion 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 program, to 2020, with a target of EUR 500 billion 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% to 20% 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 RMB 10 trillion, or 10% of China's GDP.
There is international precedent for this ratio. For example, the U.S. launched a US$ 2 trillion economic rescue program to support small and medium-sized enterprises, as well as low- and middle-income American residents; the economic rescue scale is equivalent to 11% of GDP. In addition to two interest rate cuts, Britain's financial aid to businesses and workers will be about 16% of its GDP in 2019; Australia's cumulative financial assistance is close to 10% of GDP; Germany has the largest economic rescue effort, with a cumulative financial rescue scale of up to 22% of GDP; Japan's rescue and the stimulus was about 10% of GDP; France's bailout and the stimulus package is equivalent to 14% of GDP. Overall, the scale is similar to the ANBOUND's proposal of RMB 5 trillion 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 emphasized that China's national economic recovery fund should focus on public welfare and support people's livelihood 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.
Final analysis conclusion:
The Covid-19 pandemic has 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 safeguard, 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.
