The continuous spread of COVID-19 pandemic has posed strong impact on China and the global economy. The series of contingency policies introduced by major global economies in the first half of the year are now in its window period after the initial stage of "low tide". The United States is discussing a new round of stimulus and rescue policies, while the European Union has launched a new stimulus plan. Meanwhile, Japan is still closely observing the situation and are still in the midst of coming up with corresponding measures to respond to the changes. It appears that global macroeconomic policies are now situated at a point where the past is connected to the future. As far as China is concerned, the series of fiscal and monetary policies introduced in the first half of the year have been implemented, yet the scale of the outbreak continues to grow. Additionally, the economy both inside and outside of China have undergone tremendous changes. Now, dealing with the prolongation of the pandemic and onset of anti-globalization are two key points that China needs to consider in the next stage of its macro policy.
During the first half of the year, courtesy of active preventive and control measures in China, COVID-19 was successfully quelled. On top of that, China's overall economy has effectively improved thanks a series of macro policies. The domestic economy saw growth in the second quarter though the degree of economic recovery is uneven. Industrial production has recovered relatively quickly, while the service industry experiences a slower pace of recovery. In terms of demand, investment has recovered relatively quickly, while the growth of consumer demand and foreign trade remain bleak. At the same time, the negative effects of some policies are beginning to surface. The presence of idle funds and the increase of shadow banking indicate the distortion of the monetary transmission mechanism in the financial system is still happening, and some bubbles have even appeared in the real estate and financial markets. Factors restricting economic stability and development both inside and outside of China are also constantly changing. Put simply, these new changes indicate that macroeconomic policies need to undergo "mid-term adjustments."
The ongoing spread of the coronavirus worldwide has caused China’s economy to be subjected to the "normalization" of pandemic prevention and control, which makes it difficult for China to fully return to its pre-pandemic state. New cases continue to emerge in Beijing, Xinjiang, Dalian and other places. This restricts production, livelihood and business contacts, making it difficult to generate demand, and the preventive measures places economic activities in a state of long-term inhibition by. Since the pandemic prevention cycle has also been extended, the cost will undoubtedly rise increase, which causes the damages to the economy to worsen as well. Particularly the development and application of vaccines and specific drugs require a long-term process. The pandemic is here to stay and that may be a fact. Many institutions and experts have realized that the impact of the pandemic on the economy may linger for few years. This means that longer cyclical time in countercyclical adjustments should be put into considerations to respond to the impact of COVID-19.
On another end, the pandemic has caused anti-globalization sentiments to take a turn for the worse, and adds to the international political, economic, and social turbulence. These conditions will worsen China's external environment and increase the economic risks that it faces. The spread of COVID-19 has forced countries to block off cross-border exchanges of goods and personnel, reduce external demand, and forced China to focus on developing its economic activities inward. Concurrently, the restructuring of the global industrial chain means China's supply-side reforms that focus on industrial upgrading need to undergo a comprehensive adjustment and shift to a "dual cycle" of supply and demand. Also, the global super-loose policy promoted by the Federal Reserve affects the global financial market and the international monetary system. In the context of global mass stimulus, the world is facing a larger "negative interest rate" market environment; and the recent depreciation of the U.S. dollar means the Fed's monetary policy risks have begun to spill over, affecting the stability of China's currency and financial markets.
In reality, in a post-pandemic world, China's economic recovery and the construction of a "dual cycle" in its economy will still be focusing on the domestic market. ANBOUND has previously suggested developing China’s domestic market, and China should move towards the direction of expanding market space to achieve economic development. As long as the pandemic persists, the dual market construction of the consumer market and the capital market will be the main focus of macro policy. The expansion and improvement of the consumer market will promote the increase of domestic consumer demand, while the optimization and improvement of the capital market will promote investment demand. The macro policy will shift from a countercyclical adjustment policy based on monetary and fiscal policies to a systemic policy based on market reforms to adapt and promote the adjustment and optimization of the economic structure.
Concerning monetary policy, the overall easing has come to an end. The current monetary policy has shifted to a combination of neutral and moderate easing means for SMEs. The reform and opening-up of the capital market in China are accelerating. However, as an economist said, the market is still managed by means of a planned economy, where the market could be easily distorted via various means. The issues in some shadow bank defaults and the potential problems of small and medium-sized enterprises indicate the use of small and medium-sized banks to rescue small and medium-sized enterprises may bring greater risks than the problem itself and will affect the stability of the overall financial system. Therefore, the construction of the capital market should be the top priority of monetary and financial policies, in order to optimize investment efficiency and realize the market-oriented allocation of financial resources, and to achieve the goals of monetary policy.
As far as the real economy is concerned, expanding market space and realizing "internal circulation" also need to focus on reforms. Previously ANBOUND has put forward strategic policy ideas such as " Yangtze River Economic Belt and Golden Waterway", "Urban Renewal", and "Comprehensive Construction of a Consumer Society". It now appears that these suggestions are more urgent and realistic than ever. Therefore, China’s future fiscal policies need to consider not only short-term changes on the supply side, but also adjustments to long-term supply and demand changes, and need to transform from short-term emergency to long-term improvement. This is not only to consider the sustainability of fiscal revenue and expenditure; fiscal expenditure also needs to strike a balance in expanding infrastructure, long-term institutional construction, and guaranteeing people's livelihood.
Final analysis conclusion:
As COVID-19 continues to linger, China's economic development is shifting to a “dual cycle” of domestic and foreign cycles that is dominated by “internal circulation”. Macroeconomic policies also need to be adjusted systematically to adapt and respond to long-term changes in both domestic and foreign supply and demand.
