On July 24, 2022, CF40 released the Q2 2022 Macroeconomic Policy Report at a seminar themed The Mid- and Long-term Impact of the COVID-19 Pandemic.
The latest CF40 quarterly report led by Dr. Zhang Bin, CF40 Senior Fellow and Deputy Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, points out several major challenges facing the Chinese economy in the second half of the year: 1) pandemic-induced uncertainties; 2) concurrent weakening of consumption, real estate and export; 3) enlarging fiscal deficit of local governments; 4) possibilities of new risk events; and 5) further escalation of global geopolitical conflicts.
Against this backdrop, while it remains a priority to implement aggregate target and policy tools aimed at expanding total demand in order to achieve a decent annual growth, the report reminds that specific policy tools would also be necessary to address structural problems. To this end, it proposes several policy recommendations: 1) step up governments’ debt financing to close the revenue-expenditure gap, with issuance of special bonds, government subsidized bonds and policy financial loans in support of infrastructure investments being some of the moves that merit consideration; 2) cut the interest rate, and clearly state that policymakers are planning to reduce the rate by 25 basis points a time until the economy stays vibrant for two or more consecutive quarters; 3) stabilize regulatory policy expectations, and give the market adequate space for trial and error; and 4) pull the real estate sector out of the quagmire.
Framed by the report, the seminar kicked off first with a keynote speech by Liu Shangxi, CF40 Member and President of the Chinese Academy of Fiscal Sciences, followed by the delivery of the report by Zhang Bin and comments from Tu Guangshao, CF40 Executive Committee Member and Chairman of the Executive Council of Shanghai Finance Institute (SFI), Gao Shanwen, CF40 Academic Committee Member and Chief Economist at Essence Securities, and Zhang Xiaohui, CF40 Nonresident Senior Fellow and former Assistant Governor of the People’s Bank of China.
Liu Shangxi observed the Chinese economy going forward from a risk-cost perspective. He said that all major problems facing the economy are derived from public risks, or to be specific: 1) it’s more about the weakening of expectations than about economic downturn; 2) it’s more about a rising wage risk premium than about a lack of job openings; 3) it’s more about the pandemic engulfing policy effects than about a lack of policy stimulus; 4) it’s more about internal jobs insufficiently done than about external uncertainties. He reminded that China has to carefully balance five sets of relationships, i.e. that between development and security, between the digital economy and the real economy, between the urbanization of rural residents and rural revitalization, between multiple goals and policy coordination, between economic regulation and economic governance, and between local governments’ ability and their administrative and fiscal capacity.
Tu Guangshao recognized the complementarity of the analysis by Liu Shangxi and Zhang Bin, while adding several points on both speakers’ research. He suggested that the definition of “public risks” proposed by Liu may deserve further discussion, and noted that public risks could evolve into other types of risks including economic risks as evidenced by the COVID-19 pandemic and thus called for further exploration of what could be driving such conversion. He also stressed that looking at the pandemic’s impact on the balance sheets of governments, businesses and households could make relevant discussions more systemic and in-depth.
Gao Shanwen directed attention to three interwoven layers of impacts of COVID on economic activities: 1) physiological impacts, such as being temporarily or permanently forced out of the labor market; 2) psychological impacts, such as heightened risk aversion against future uncertainties; and 3) damaged balance sheets. All need a rather long period of time to repair, if that is even possible. As such, he emphasized the importance of analyzing not only the level of economic output and other indicators in relation to these tolls the pandemic has taken, but more importantly, their changes and the speed of such changes.
Impressed by the report’s in-depth reflection on lessons China has learned during the 2008 global financial crisis and the alarm bell it rings that policies dealing with COVID-induced economic challenges could backfire as history has shown, Zhang Xiaohui focused her comments on how macro policies especially monetary policies could play a sustainable role driving economic growth. She advised that monetary policy should focus on maintaining short-term demand balance to avoid radical fluctuations, while balancing that with long-term interests and other types of macroeconomic policy goals.
The seminar was moderated by CF40 Secretary-General Wang Haiming.