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Thursday, May 28, 2020
Challenges Presented by the Pandemic to the Policy Toolbox in Various Countries
ANBOUND

At the press conference on May 28, a reporter from Reuters posed several questions to Chinese Premier Li Keqiang. With many countries severely affected by Covid-19, many governments worldwide have issued trillions of dollars in fiscal and monetary measures to deal with the economic impact caused by the pandemic. It has been observed that China’s government had yet to set a GDP growth rate for this year in its work report. According to Reuters estimates, the fiscal measures introduced in the Chinese government work report accounted for 4% of China's 2019 GDP, which is lower than what some economists expected. For the first time in decades, China’s economy has contracted in the first quarter this year. The reporter then asked if China will introduce larger-scale stimulus measures in the coming months, and in the longer term, if China has sufficient policy tools to cope with things as the pandemic continues to spread amidst tensions between China and the United States.

Premier Li responded that as the Covid-19 pandemic has severely impacted the world economy, many institutions expect this year’s global economic growth to be -3% or worse. As the Chinese economy is deeply woven into the world economy, it certainly will face the impact as well. For this reason, China has not set a quantitative indicator for GDP growth this year, which is a realistic move. However, it has made guaranteeing employment, livelihood, trade and others as its targets, all which are directly affect GDP economic growth. According to him, while economic growth is indeed important, resolving China’s issues is much more crucial. If these guaranteed targets are achieved, China will be able to achieve positive economic growth this year, and the country must strive to reach economic stability.

Regarding the policies introduced by China, Premier Li does not think that the scale is too small. "I have also heard from many sides that the policy scale is still effective. It should be said that, to deal with this impact, we must grasp the intensity of it and seize the opportunity." He added, “based on previous experiences and judging by the current situation now, we have introduced a ‘scale policy initiative’ into the government work report, with sufficient intensity. The funds raised by this large-scale policy are divided into two major parts – The first is an increase of deficits and the issuance of special pandemic-prevention government bonds totaling RMB 2 trillion. Then, there are the reduction and exemption of social insurance premiums, or payroll taxes for some countries, which uses unemployment insurance balances to promote state-owned commercial banks to make profits, results in enterprises lowering prices to reduce operating costs. This part is much larger than the former, about twice as much. We must promote these funds to protect employment, people's livelihood and the market, so as to support the people's income. Compared to the total sum of the people’s income which is over RMB 40 trillion, the ratio is more than double digits.”

Premier Li’s calculation shows the additional deficit and special national debt are RMB 2 trillion, and other reductions and exemptions of social security, commercial bank profits, and price reductions of monopoly companies total RMB 4 trillion. These add up to RMB 6 trillion, equivalent to all 15% of the citizens’ revenue of RMB 40 trillion. However, if the basis of comparison is the GDP scale of RMB 100 trillion, the proportion of the scale in the relief policy immediately drops to 6%. At present, the measure of the strength of national aid policies is generally compared to the GDP of each country, which is regarded as an unwritten "international practice".

ANBOUND macro research team's tracking research on the short-term policies of Covid-19 affected-countries around the world shows the proportion of national aid policies in the economic scale is higher than that of China's policies. For example, the Japanese government has announced a pandemic aiding plan of JPY 117 trillion twice over. So far, the total planned expenditure has reached JPY 234 trillion, equivalent to 40% of Japan's GDP. The US$ 2.2 trillion relief package (CARES Act) issued by the United States in March alone exceeded 10% of its GDP. On April 9, the Federal Reserve decided to provide up to US$ 2.3 trillion in loans to support the economy. The EU announced a rescue plan of 750 billion euros on May 27 (as part of EU’s next seven-year budget discussion) to help EU member states cope with the “unprecedented crisis” brought about by the novel coronavirus. Christened as the “Next Generation EU”, the proposal will include 500 billion euros in funding and 250 billion euros in loans. As early as March 16, the EU Economic Commissioner had stated that the amount of funds such as EU government guarantees and tax deferrals would increase by more than 10% of the country’s GDP. In the UK, the UK government may only have a public business loan of more than 100 billion pounds; SMEs’ delay in payment of tax amounts to 30 billion pounds. On March 11th, Rishi Sunak, the British Chancellor of the Exchequer announced the 30 billion pounds package. The British Treasury also pledged to invest 600 billion pounds in infrastructure before mid-2025. In rough calculation, the scale of these pandemic relief funds accounts anywhere from 10% to 40% of their national economy.

While the scale of the pandemic relief policies issued by various countries is only a general summary, it reflects the adequacy of the national rescue policy toolbox and whether there are sufficient policy tools to deal with greater risks. From the comparison above, we can see that developed countries’ aid policies are relatively strong, generally exceeding 10% of their GDP. On the one hand, it shows the condition of developed countries and on the other, it reflects these countries’ policy ideas in responding to the crisis; These countries utilize rescue policy to stabilize employment, society, and the market before economic recovery could be achieved. The Chinese government's pandemic and disaster relief policy has provided a lot of resources too, but there is still a clear gap in China when compared to developed countries. We have stated in our past analysis that it is generally thought that when comparing to the process of global central banks’ response to the pandemic, the Chinese central bank’s policy does not appear to be strong, and it was suggested that this was done so with the intention to save the resources and reserve them for the future economy. But it seems that there is another scenario now, that the People's Bank of China does not have sufficient resources. If the policy is introduced too fast, the central bank may fall into the dilemma of lacking in resources. This situation may not be limited to monetary policy, and it may be the same in the field of fiscal policy. If there are insufficient policy resources (especially considering the huge gaps in Chinese government’s debt pressure, corporate debt risk, social security and public services), then regardless of how aggressive the fiscal policy can be, it will never be able to deal with the challenges sufficiently.

Final analysis conclusion:

In facing the novel coronavirus pandemic, countries have issued monetary and fiscal policies to deal with the crisis. The policy tools of developed countries can generally account for more than 10% of their GDP. The proportion of China's policy scale is still far from that, which reveals insufficiency in its policy toolbox. If the impact of the pandemic continues to deteriorate in the future, it will pose challenges to both China's monetary and fiscal policies.

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