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Quarterly Issue 2

China’s financial response to COVID-19

Author: ICAEW Insights

Published: 17 Jul 2020

China skyline

With the IMF projecting average debt-to-GDP ratios exceeding 120% in 2021, we examine the measures taken by five countries to the economic impacts of the coronavirus pandemic. Here, we explore China’s response.

The reliability of Chinese growth as a lifeboat for the global economy is unlikely to prove very effective as the world’s second largest economy reels from the worst shock to four decades of continuous growth.

China’s economy shrank 6.8% in the first three months of 2020, with the country posting a trade deficit of $7.1bn in the first two months of the year.

Initially, China’s central bank said it would provide Rmb1.2trn ($173bn) in additional liquidity to money markets. Beyond that, the state-owned banking sector announced it would lend another $200bn to businesses, with particular help being channelled to smaller ones.

As it emerges from lockdown, debate continues over how best to kickstart a sustainable recovery. Liu Shangxi, President of the Chinese Academy of Fiscal Sciences, a finance ministry-affiliated thinktank, proposed issuing Rmb5trn ($700.5bn) in special Treasury bonds to help stabilise the economy.

But that strategy would violate one of China’s economic policy sacred cows, which prohibits the Central Bank of China directly buying government debt.

The impact on the country’s financial health has been relatively limited; the Chinese stock market saw only a 16% peak-to-trough spread, a long way behind the US’s, for example. Meanwhile bond spreads were similarly limited, suggesting that investors remained reasonably confident in China’s ability to manage its way out of lockdown.

China has taken a cautious approach to restarting its economy and protecting its all-important sectors. The raft of rescue policies it has announced will perhaps reach 3% of its GDP, observers suggest.

Looking ahead

It is unlikely enormous levels of new debt will form the centrepiece of the country’s recovery response. Instead, authorities will almost certainly focus on boosting consumer spending and strengthening the domestic economy through more public spending.

Despite the shutdown, unemployment in China has remained low (officially at least) at around 6%. It is telling that some significant structural changes are occurring in the types of work available and how workers are reacting.

The growth in e-commerce has led to a massive increase in those applying for warehouse and logistics jobs, especially at management level, for instance.

And while authorities haven’t ruled out further borrowing or fiscal support, so far the emphasis is on encouraging the private sector and maintaining a disciplined approach.