EYESHENZHEN  /   Opinion

Stimulus prudence justified

Writer: Lin Min  |  Editor: Jane Chen  |  From: Shenzhen Daily  |  Updated: 2020-06-22

The United States and Europe have taken unprecedented steps, slashing interest rates and lavishing generous cash handouts to shore up economies reeling from the coronavirus pandemic.The 27 European governments negotiated for the first time Friday a proposal for a 750 billion euros (US$841 billion) stimulus package to tackle the COVID-19 crisis. Also on Friday, Russia's central bank cut interest rates by 100 basis points to 4.5 percent, their lowest level since the collapse of the Soviet Union.

These came after the United States rolled out a US$2 trillion stimulus package in May, with cash and assistance for individuals, businesses and hard-hit airlines and manufacturers, among others. Earlier in March, the U.S. Federal Reserve slashed interest rates to near zero at the outset of the coronavirus pandemic. Since then, the central bank has committed billions of dollars to propping up the slumping economy. Still, Fed Chairman Jerome Powell said June 10 that the central bank, as well as the U.S. Government, might have to do more to get the economy back on its feet.

In contrast, China's stimulus so far has been moderate, avoiding flooding the market with cheap money as the United States and other major economies did.

At the annual session of the national legislature last month, China announced 2.5 trillion yuan (US$353.57 billion) worth of cost cuts for the country's struggling enterprises in 2020. This was regarded as a moderate economic stimulus package, disappointing stock investors at that time.

The official fiscal deficit target of "more than 3.6 percent" of gross domestic product in 2020, or additional 1 trillion yuan in deficit over last year, wasn't considered aggressive enough by some economists.

UBS Asset Management's Hayden Briscoe told CNBC that the Chinese Government has been "a lot more controlled" in rolling out stimulus measures than was expected. Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission (CBIRC), reiterated last week that China will not adopt "flood-like" stimulus nor negative rates. There are good reasons behind China's measured approach.

Firstly, China believes its economy is resilient, backed by a strong domestic consumer market. With lockdown measures mostly ended, the Chinese economy is recovering quickly, with consumer spending returning to some level of normalcy.

Secondly, China needs to leave room for future stimulus should the economy face further headwinds. While China has a rich collection of tools for supporting the economy, going all-in too soon will lead to excessive speculation in the housing market and the stock market.

Thirdly, a "flood-like" stimulus package will leave a lot of thorny aftereffects. China's epic 4-trillion yuan stimulus after the 2008 global financial crisis helped the country and the world to recover quickly, but has left a prolonged "hangover" to deal with, such as a mountain of debt, industrial overcapacity and housing market speculation. The massive traditional infrastructure investment has also left many local governments heavily indebted and resulted in a waste of investment in some projects.

Bearing these in mind, China is now offering targeted measures to help the real economy, especially medium and small-sized enterprises, which are key to maintaining adequate employment. Employment and people's livelihood are the focus of this year's economic policies, as compared with the investment-driven stimulus unveiled in 2008.

China is also on alert over the impact of developed economies' stimulus binge on developing countries. CBIRC's Guo urged governments to "think thrice" before rolling out fresh stimulus measures.

"There's no free meal in this world ... and you must pay a price for your blank checks," Guo warned.

(The author is a deputy editor-in-chief of Shenzhen Daily.)