By Dr. Tao Peng
With the 2019 Novel Coronavirus Outbreak (COVID-19) accelerating the economic recession, Beijing has recently decided to launch a new economic expansion plan in advance. It has been accused that it will be similar to the "Four Trillion" stimulus plan in 2008, which brought serious after-effects such as "adopting a deluge of strong stimulus policies", capital inflation, RMB depreciation and other problems and that Xi Jinping's "second reform" and previous efforts to adjust the economic structure will also be put to death. However, whether this new economic stimulus plan has the effect of boosting the economy, or repeating the past "Four Trillion" mistakes, depends on where the funds invested and the money released by the plan flowed into, and whether the recent Coronavirus outbreak can be effectively controlled.
At present, the new coronavirus epidemic continues to plunge the Chinese economy into recession. China’s manufacturing purchasing manager index (PMI) for February this year was only 35.7%, down 14.3 percentage points from the previous month, and the non-manufacturing business activity index was 29.6%, down 24.5 percentage points from last month. The impact of the Novel Coronavirus outbreak on China's economic operation has exceeded the impact of the 2008 international financial crisis. To mitigate this trend, the central and local governments are vigorously pushing for resumption of work and production, and launching an "economic expansion" plan in advance. From the end of January to March 3, the central bank has released a total of nearly 4 trillion yuan in liquidity through reverse repurchase (agreement) and special loans. China's 15 provinces have announced the list of key projects for 2020. Through the issuance of special bonds and additional financial investment, the cumulative investment will increase by nearly 25 trillion yuan. Since only one-third of China's enterprises resumed work in February, the entire small and medium-sized enterprise (SMEs) was severely impacted. China also plans to provide over RMB 1 trillion (approximately $ 144.3 billion) in tax reduction and exempt administrative fees.
Will the current economic expansion plan become the new version of the “Four Frillion” plan in 2008? From the end of 2008 to 2009, in response to the international financial crisis, the Chinese government adopted a "Four Trillion" economic stimulus plan. Although the plan has stimulated the economy, it has also caused many aftermaths. Not only did it cause China to lose an opportunity for economic transformation, but also the problems such as overheating the economy, capital inflation, financial abnormal development, inefficient expansion of production capacity, and severe overdraft of effective demand have intensified. The 2008 four trillion yuan credit stimulus caused two major sequelae to the economy and society in the following ten years: soaring housing prices and overcapacity. Since 2015, China has urgently stepped on the economic "brake." Xi Jinping implemented the "secondary reform" and adopted a strategy of economic growth speed reduction and adjustment to reorganize and restructure the administrative system and financial system. The "three go, one drop, and one supplement" proposed at the end of 2015 (cutting overcapacity, reducing excess inventory, deleveraging, lowering costs, and strengthening areas of weakness) is partly to address the sequelae of excessive credit stimulus in 2008. Since then, in terms of credit easing, the government has been emphasizing an end of adopting a deluge of strong stimulus policies and the extension of the directional regulation and precision trickle irrigation of on-lending in order to prevent money from flowing into the property market again and to avoid driving up property prices. However, the sudden outbreak of the novel Coronavirus has quickly disrupted the existing rhythm of the government's policy. The high-level meetings of the Communist Party of China were held intensively, and experts put forward various suggestions. As a result, fiscal and monetary policies were continuously introduced, and the investment dose has been increasing.
Judging by the differences in economic volume, the current fiscal and monetary stimulus plan may not be exactly the new version of the 2008 “Four Trillion” plan. In this stimulus plan, the amount of currency has reached or even exceeded four trillion yuan, but its impact cannot be compared with the past, because China's economy is now larger than in 2008. In that year, China's total GDP was about 32 trillion yuan. In 2015, total GDP was approximately 68 trillion yuan. At present, China's total GDP is nearly 100 trillion yuan, which is three times and 1.5 times higher than the previous two. Depending on the size of the economy, the impact of the same amount of credit varies to some extent. Although the absolute amount is large enough to withstand the sequelae of a stimulus program, as well as the overall impact of the new RMB 4 trillion stimulus plan will perhaps not be too great. However, if the money disbursed in a short period of time is concentrated and quickly flowed to a certain area, it may also cause a major shock. This depends on whether money flows mainly to the property market, or to the consumer goods market, or the stock market?
Recently, several provinces have successively announced plans for key projects in 2020, and a new round of investment dramas totaling more than 20 trillion yuan has also begun. Judging from the information that has been disclosed, infrastructure investment is still a major issue in the planning of local governments. Because investment in infrastructure is still the most direct and effective economic stimulus policy. But in this round, China’s government from top to bottom has formed a consensus to invest in "new infrastructure", that is, on the basis of complementing traditional infrastructure such as railways, highways, and rail transit, the government will vigorously develop new infrastructure such as 5G, artificial intelligence, industrial Internet, smart cities, education and healthcare.
There are signs that although the Coronavirus epidemic has impacted the economy, the digital economy has become a "counter attacker" in the process. Taking online office, online education and other fields as examples, the "online model" can effectively offset the losses caused by shutting down production. For example, companies can continue to work and students can continue to learn online. In the long run, the digital economy has great room for growth, especially because of this epidemic, which has made more industries aware of the importance of digital construction. Therefore, in the post-epidemic era, the digital economy will become an important content of "new infrastructure" investment such as cloud computing. As the infrastructure of the entire digital economy, the "new infrastructure" will have unprecedented opportunities for development. In the past, when infrastructure was mentioned, people immediately thought of stimulating infrastructure such as railways and highways, but now the new infrastructure means cloud computing, AI, and 5G technologies. It is showing sufficient vitality and is expected to become a new growth point for China's future economy.
Whether the new round of economic stimulus will repeat the "Four Trillions" plan of 2008 and how much it will play a role in boosting the China‘s economy depend on the focus of government investment funds and where the money released by credit flows? If money flows into the housing market in the short term, the stimulus plan will have many negative impacts like the old “Four Trillion” plan. If money flows into the consumer market and new infrastructure (such as cloud computing, AI, 5G technology) for a long time, the economic boost after the epidemic will have another picture. However, there is a sharp contradiction between fighting the epidemic and returning to work. Whether the novel Coronavirus outbreak is mitigated and controlled in the short term will determine whether the new economic stimulus plan can be truly implemented and effective.
Tao Peng (PhD), a political scientist, is an editorial writer and a senior columnist for the daily newspaper World Journal in New York. He obtained his Ph.D. degree in political science and sociology at the University of Münster (WWU) in Germany.