Amid hopeful signs, the economy can overcome setbacks from epidemic
Qian Jun, executive dean of the Fanhai International School of Finance at Fudan University, provides some insights into the economic impact of the novel coronavirus and the path of economic recovery.
I would like to address the economic recovery amid the fight to contain and prevent the spread of COVID-19. From the data inside and outside Hubei Province, we clearly see that the trajectories of progress in battling the disease have differed from place to place.
The great people of Wuhan and all of Hubei, with assistance from outstanding teams of doctors, nurses and medical workers from across China, are still working very hard to contain the virus. And in recent days, we see encouraging signs as the number of newly confirmed cases drops precipitously.
At the same time, we see newly confirmed cases outside of Hubei have been falling from a peak of 890 on February 3. In cities like Shanghai, we’ve seen five or more conservative days during which newly confirmed cases have been in single digits. So, at this point in many provinces and cities outside Hubei, people are beginning to resume work and start the process of economic recovery.
Clearly, we need to do this under conditions that fully contain the further spread of the virus, and we need to make sure that the mass migration of people back to cities like Shanghai won’t create a spike in new cases.
So the policy we will discuss is: “Resume work in an orderly fashion.” That means workers will return to cities like Shanghai and go back to their jobs. However, going back to work does not mean a mass return to offices or factories. It must be done in steps.
With that in mind, in cities like Shanghai, we do see people starting to return to work after a period of self-confinement at home — usually 14 days — to ensure they are healthy. If the current trend continues, we will see economic activity in Shanghai and other cities and provinces outside Hubei begin to resume some semblance of normalcy, allowing the pace of resumption to pick up quickly. I’m hopeful that by the end of March, in cities like Shanghai, we will see most of businesses operating at their usual pace of activities.
And if that is indeed the process of recovery from the epidemic, we are confident in reiterating our baseline conclusion that the negative impact of the coronavirus outbreak, both on the national and local levels, will be restricted to the first quarter. That impact is likely to be severe, but economic activities will begin to pick up in the second quarter and go on to record higher-than-trend growth rates in the third and fourth quarters.
In fact, with a strong rebound and an acceleration in economic activities and growth, the negative impact to China's gross domestic product this year will be limited. We would like to maintain our original estimate, made at the end of January before the Chinese stock market resumed trading, that the negative impact for the year will be between 0.1 and 0.6 percentage points.
Regarding Shanghai’s economy, what we call “tertiary industries” — mainly the services sector — are much more important here than in the national economy. Thus, the negative impact may be slightly greater because the services sector has been particularly hard hit. However, if economic activities begin to resume at the end of February, then the negative impact for the Shanghai economy will be below 0.5 percentage points for the year.
In this economic recovery, we need to pay particular attention to small- and medium-sized enterprises, or SMEs. These businesses in the services sector are among the hardest hit during this crisis because they rely on large groups of customers visiting brick and mortar stores and restaurants, travelling to tourist destinations and engaging in other activities that require people congregating.
To make matters worse, these small businesses usually don’t have abundant cash flows to sustain a downturn in revenue for an extended period, such as a quarter. Thus, SMEs need urgent help from the government, financial institutions and the communities where they operate or provide services.
What can be done to help them?
First, central and local governments can implement fiscal stimulus policies. For example, there can be temporary tax cuts or even tax refunds to SMEs. Efforts can also be made to lower other expenses and fees, such as delayed payment of social security taxes and insurance. All these measures would help these businesses maintain a healthy interim cash flow.
Second, financial institutions like banks can extend credit when loans mature, rolling over debt without increasing the interest rates substantially. Banks can also extend new credit to SMEs.
Third, as SMEs resume their business and activities, it is important to allow them flexibility in hiring workers, including temporary workers and staff from around the country, as people find their way back to normal workplaces.
And finally, we know for each business, there will be some paperwork required to resume operations. For example, firms must validate that their staff are healthy enough to resume work. But it's important for local governments to reduce red tape so that the process of resuming work will be efficient.
All of the measures discussed here have been included in the Shanghai municipal government’s “28 Policy Measures” to assist companies, especially SMEs, get back to their normal routines in a quick, safe manner and at reasonable costs.
