China needs stimulus based on innovative theory

By Liu Yuanchun Source:Global Times Published: 2020/4/8 21:21:53

Illustration: Luo Xuan/GT

To secure the pre-set social development goals to build a moderately prosperous society this year despite the temporary setback of the coronavirus outbreak, it is crucial for China to set a proper economic growth target and a feasible and efficient policy package backed up by an innovation-based  framework.

According to the target of the 13th Five-Year Plan - an average annual GDP growth rate of no less than 6.5 percent - the economic growth rate in 2020 should be set no lower than 5.5 percent. To achieve a goal of an unemployment rate below 5.5 percent, the increase in the urban employed population should surpass 11 million and GDP must reach 5.5 percent.

If we use the income approach to measure GDP, the forecast for the first quarter is negative 5 percent. Considering different levels of external impacts brought by different pandemic development conditions, China's economy can operate for the whole year in following scenarios.

First, if external impacts bring growth down by two percentage points in the second quarter, the growth in the next three quarters should be 6.63 percent, 8.63 percent and 8.63 percent to meet a 5.5 percent target, which is highly achievable.

Second, if external impacts in the second quarter cause growth to drop by 5 percentage points, growth in the next three quarters should be 4.43 percent, 9.43 percent and 9.43 percent to meet a 5.5 percent target, which would be hard to achieve amid a collapsing global economy.

Third, if the outside economy deteriorates significantly, growth in the next three quarters should be 3.75 percent, 8.75 percent and 8.75 percent to reach a goal of 5 percent.

According to the above calculations, a 2020 economic growth target of 5 percent to 5.5 percent is feasible. And having such a clear goal is necessary for the economy during the challenging pandemic. It will play an important role in formulating economic policies and carrying out economic work. It will clearly show that the government will adopt stimulus programs to protect employment and ensure growth targets. 

After the US announced its unprecedented stimulus package of $2 trillion, a zero interest rate and an unlimited quantitative easing program, various suggestions have been made that China should roll out its own stimulus package too.

First, China's stimulus plan should match the size of other major economies'. Second, China should learn from the 2008 stimulus plan and avoid excessive sequelae. Third, China should increase investment in the construction of new infrastructure projects. Fourth, social assistance and post-epidemic relief are needed.

A scientific macro-policy package must recognize that the core problems currently facing China are not its governance in the economic crisis, financial crisis and economic depression in the traditional sense. The challenge we are facing is not a demand shock caused by endogenous distortion, but an external shock which has caused a short-term halt of our economic and social systems.

Therefore, the theoretical basis on which a package will be based is not traditional Keynesianism, nor simple counter-cyclical adjustment theory and conventional crisis management theory. Several important goals must be met: first, epidemic control; second, epidemic relief; third, production resumption; fourth, hedging downward pressure; and fifth, maintaining stability and growth goals.

If the first scenario happens, to reach the annual target of 5.5 percent, the policy package needs to hit 5.2 trillion yuan, except the previous 1.3 trillion yuan plan that has been adopted.

In terms of funding sources, the budget deficit could increase from 2.8 percent in 2019 to 3.5 percent in 2020, which would expand fiscal expenditure by 1 trillion yuan. The actual fiscal deficit rate could increase from 3.9 percent in 2019 to 6 percent. Special epidemic treasury bonds of 2 trillion yuan could be issued to help market players endure the blow from the virus. 

The author is vice president of Renmin University of China and a member of the China Finance 40 Forum.


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