China’s response to the outbreak can help drive social development and boost economic efficiency

(SHI YU / CHINA DAILY)

While it would be misguided to underestimate the short-term impact of the novel coronavirus epidemic on the Chinese economy, it would be equally unwise to overestimate the long-term impact, which is likely to be marginal.

For the government, aside from managing the epidemic and ensuring people’s basic livelihoods, the goals of policymaking should be supporting small and medium-sized enterprises instead of launching a new round of macroeconomic stimulus. As it is the evolution of the epidemic that will ultimately determine when the economy gets back on track, the government should have plans in place for different scenarios.

The epidemic has highlighted some of the advantages of the system in China, while throwing into sharp relief issues and deficits in its development thus far. If the country can reflect honestly and address the problems that have appeared, the epidemic could prove to be a catalyst for reforms to drive social development, improve the country’s institutions and boost its economic efficiency.

The extent of the economic impact of the epidemic beyond the first quarter will largely depend on the evolution of the outbreak itself, which has proven to be highly uncertain. Given the fact that China is fully committed to bringing the epidemic under control no matter what, it is extremely unlikely that the novel coronavirus will continue to wreak havoc over an extended period of time. 

Based on the evolution of the SARS epidemic in 2002 and 2003, it is reasonable to assume that the spread of the virus will be reined in within two months.

For an optimistic scenario, we can assume that the virus will be thoroughly contained within a month. For a pessimistic scenario, we can assume that it will take three months to bring the epidemic under control.

Regardless of the scenario that ultimately plays out, a reasonable policy response should, besides meeting the urgent needs of managing the epidemic and ensuring the production and transportation of emergency supplies, also focus on being the helper of last resort to small and medium-sized enterprises to prevent them going out of business en masse.

When the entire country is doing all it can to control the epidemic and prevent it from spreading further, local measures to shut down the main transportation routes can lead to a classic case of the prisoner’s dilemma. Therefore, it is a good idea for the central government to consider banning local governments from such attempts aside from areas under lockdown, so as to ensure the smooth circulation of goods.

Based on past international experience, the World Health Organization’s announcement of a Public Health Emergency of International Concern has limited impact on the overall trade in the related countries. However, this year, due to 2019-nCoV, manufacturing companies cannot resume work on time after the holiday, and goods delivering and payment collection will be significantly impacted.

With several major countries having issued varying degrees of travel restrictions, their airlines have successively canceled flights to China, which will have a greater impact on Chinese companies engaged in service trade in the short term.

The central bank and State Administration of Foreign Exchange can help enterprises in terms of liquidity supply and foreign exchange management. While the central government is keeping the production of critical medical supplies, the prices of everyday products can rely more on the invisible hand of the market to bring supply and demand back into balance. The government can focus on ensuring production, prohibiting local roads from being excessively closed, and improving logistics.

If the epidemic lasts three months or more, the government should ensure access to key supplies such as masks, protective coveralls and disinfectant. The government can also take a localized approach in prioritizing the reopening of factories in places with significant improvement in epidemic management.

In key manufacturing hubs, factories with good isolation practices can reopen depending on their individual circumstances. 

If the epidemic lasts longer than expected, the central government can consider subsidizing local governments for them to build permanent health establishments that can serve as centers for the prevention and control of infectious diseases in cities of a certain population size and above.

A case in point is the Nanjing Public Health Medical Center, established five years ago. The experience of Nanjing and other cities can be quickly replicated in areas in need.

Barring extreme, unforeseen circumstances, the impact of the novel coronavirus should be limited to the near term. We can expect to see poor growth in the first quarter, with revenue losses in sectors such as hospitality and transportation. Therefore, a slowdown in the first quarter will drag down annual growth figures.

Should something be done to stimulate the economy to recover the GDP lost in the first quarter during the rest of the year? Not necessarily. Once the epidemic comes to an end, there will be a rebound in demand. As the demand that has been delayed or constrained is released, the economy will bounce back and quarterly growth will bottom out, offsetting to a certain extent demand depressed during the outbreak. 

When that happens, accommodative policies should be rolled back in an orderly manner, so as to avoid going overboard and resulting in unnecessary inflation, over-indebtedness and a possible rise in defaults.

Expansionary policies and potential stimulus packages in response to the epidemic must be disciplined, manageable, targeted, and focus on helping those in dire need over the short term.

As long as the impact is handled properly, market players can outlive the outbreak with government support, and the long-term impact on the Chinese economy should be negligible.

And, as long as this epidemic is taken as an opportunity for soul searching and learning hard lessons, this misfortune may end up being a catalyst for needed reforms in many areas including the public health system, emergency response system, social governance and government administration.

The author is chief China economist at Nomura Securities and Council Member at China Chief Economist Forum. The author contributed this article to China Watch, a think tank powered by China Daily. 

The views do not necessarily reflect those of China Daily.