Virus Puts China’s Main Economic Goals on a Collision Course
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Two sweeping goals have dictated the direction of China’s economic policy during President Xi Jinping’s presidency: Doubling per-person GDP and household incomes over the 10 years ending this December and containing an explosion in debt.
Tiptoeing between the two conflicting ambitions hasn’t been easy, especially last year as the trade war with the U.S. deepened. Yet policy restraint held and economists ended the year surprised by the lack of big-bang stimulus. Now, as the coronavirus shutters huge swaths of the economy, it looks like one of those goals has got to give.
Even as top leaders mull whether to soften China’s economic growth target for 2020, they’re unlikely to tolerate too deep a slump. A target range of 5.5% to 6% growth for this year can ensure the doubling goals are met, said Xia Bin, an economic adviser to the State Council. But any less, and Xi may fall just short.
“Like most major economies, China is facing an economic shock with far less financial ammunition,” said David Loevinger, a former China specialist at the U.S. Treasury and now an analyst at fund manager TCW Group Inc. in Los Angeles. “It’s not clear they should use all the remaining bullets on what will likely be a severe, but temporary, event.”
Read more: China’s virus outbreak - tracking risks to growth
So far, economic policy makers have responded to the health crisis in a measured way, adding liquidity, and lowering lending rates and fees for companies and regions most affected by the outbreak. They are also considering further measures to shore up the economy, including selling more special government bonds that would raise funds for investment and increasing the planned cap on the ratio of the budget deficit to gross domestic product.
President Xi called on all officials to quickly work together to contain the deadly new virus at a rare meeting of top leaders, saying the outcome would directly impact social stability in the country. The effort to contain the virus directly affects people’s health, China’s economic and social stability, and the country’s process of opening up, he told a meeting of the Communist Party’s powerful Politburo Standing Committee on Monday.
Leaders also urged officials “to achieve the targets of economic and social development this year” and “promote stable consumer spending.” It was the second meeting of China’s senior-most leaders to handle the crisis in recent days, a rare occurrence over the past few decades.
The nation’s annual growth target is typically unveiled in March at the country’s legislative session after being endorsed by top leaders at the yearly closed-door Central Economic Work Conference in December. Economists had expected China would aim for output growth of “around 6%” this year after seeking a range of 6% to 6.5% in 2019.
But the coronavirus risks pushing growth to levels seen as unacceptable to its leadership. With two-thirds of the economy remaining closed this week as regions extend the Lunar New Year holiday to try to contain the spread of the virus, Macquarie Securities Ltd. expects growth to plummet to 4% this quarter. UBS AG estimates 3.8% in the first quarter and a 5.4% annual expansion for the year if the virus is contained in the first three months, and 5% or less if the hit to growth extends well into the second quarter.
The deteriorating outlook is forcing economists to ponder their call for the world economy to stabilize in 2020 as they consider the impact that deceleration and disruption in the second-biggest economy poses to global output and supply chains.
“This is really putting the leadership onto the horns of a major dilemma,” said George Magnus, an economist at University of Oxford’s China Centre and author of “Red Flags: Why Xi’s China Is in Jeopardy.”
Failure to meet the broad growth target “might cost reputational damage,” Magnus said. “But the implications for jobs and ‘better quality of life’ might be politically even more costly, coming after an awkward period where serious governance questions have surfaced over economic management, the trade war, Hong Kong, Taiwan, and now the coronavirus.”
The target to double per-capita income by 2020 from 2010 was announced by former President Hu Jintao in 2012 as he prepared to give way to a new generation of leaders. It has stood ever since as a sacrosanct goal to which all economic policies must adhere.
As for the stimulus restraint, that first came into focus in a landmark piece in the nation’s flagship People’s Daily back in 2016, where an “authoritative person” now widely assumed to have been Xi’s close confidant Liu He argued that policy makers should prioritize de-leveraging ahead of short-term economic growth. Total debt is around three times GDP -- high for a developing country and a level that’s caused financial problems for other economies.
While there’s uncertainty over whether the virus can be contained in time to prevent a further knock to second quarter expansion, a broad expectation among economists is for a modest rebound in the second half. That assumed rebound will hinge mainly on two things: how quickly the virus can be contained, and how willing policy makers are to juice the economy with more stimulus.
What’s already becoming increasingly clear is that China won’t be able to shrug off the coronavirus as easily as it did with SARS in 2003. Turbocharged by its 2001 entry to the World Trade Organization and an infrastructure investment boom, China roared away from the SARS virus.
The tailwinds that made that comeback possible have turned to headwinds. China’s total debt has ballooned since SARS, constraining its ability to drive growth with infrastructure investment. More recently, a hostile U.S. has saddled the country’s exporters with tariffs on $360 billion of imports.
Bloomberg Economics’s Chang Shu -- who says the economy could slow to 4.5% in the first quarter -- expects the government to switch back to a focus on growth once the outbreak is contained.
“The situation on the ground in China is evolving fast,” she wrote in a recent report. “Rapid containment and escalating contagion are both possibilities, and would result in widely different growth impacts.”
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