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Gao Shanwen: Analysis of Virus-Hit China’s Economy


【Background Introduction】

The global outbreak of the COVID-19 is dealing an unprecedented blow to global economy. The China-US communication and how they economically respond to the pandemic not only influence the economic trends of the two countries but will produce a profound impact on global economy. Against such a backdrop, based on the previous China-US Track II Economic Dialogues, the National School of Development (NSD) at Peking University and the National Committee on US-China Relations (NCUSCR) launched their first online panel discussion on the night of April 29. Dr. Gao Shanwen, chief economist of Essence Securities, delivered a speech and the summary of his speech is as follows. 

Output Drops Sharply but Price Changes Slightly

First of all, the impact of this epidemic on the total economic aggregate is significantly greater than the 2008 financial crisis. China’s GDP growth rate for the first quarter of 2020 declined four times as much as during the 2008 financial crisis and its industrial output dropped twice during the same period.  

However, the impact of the epidemic on price fluctuations was significantly weaker than the 2008 financial crisis, and the price decline in the first quarter was only one-fifth of that in the 2008 financial crisis. If measured by the relationship between inflation and output during the normal period, the first-quarter change in the inflation rate is equivalent to a 0.5 percentage points drop in output.

Generally speaking, if the epidemic only affects aggregate demand instead of aggregate supply, we could see a simultaneous decline in output and price; if aggregate supply is also affected, it may result in a situation just like now that “output has fallen but prices remain unchanged”. Currently, the sharp contrast between output and price clearly shows that this round of the pandemic has dealt a heavy blow to total supply and total demand, and the total demand simply suffered from a slightly bigger effect. 

The policy significance of this result is that before lifting the blockade on the total supply, only stimulating the aggregate demand may not achieve desired results. Or even worse, it is more likely to cause inflation; on the contrary, on the condition the the spread of the epidemic could be controlled, a gradual relaxation of supply will improve the economic recovery. Therefore, policy makers need to consider the changes in aggregate demand and aggregate supply, and the dynamic evolution of the gap between demand and supply, in order to avoid the over-reliance on aggregate demand management.

Fears of Consumers and Decline in Online Sales 

Secondly, through an in-depth study of the retail industry and the details of consumer behavior, we can gain a deeper understanding of how people behave in response to the real and perceived risks they face in the epidemic, which will help understand the process of economic recovery.

In the early stage of the epidemic, offline retail sales fell sharply. The reasons behind this phenomenon is clear: during the outbreak of the pandemic, people have to keep social distancing to minimize infection risks. But meanwhile, the online sales of many kinds of commodities have also declined significantly, and the risk of infection could not be a good explanation. In fact, only the sales of food and other necessities online have remained stable. Therefore, under the influence of the epidemic, in the short term, people are overwhelmed by the panic caused by the epidemic. Apart from purchasing daily necessities, the coronavirus outbreak continues to disrupt nearly all economic activities.

As time goes by, people’s panic will gradually disappear and they possibly adapt along with the epidemic. People begin to assess the infection risks caused by various transaction behaviors, evaluate the availability and effectiveness of protective measures, and consider the potential profits if they conduct transactions.  The economic conducts seeking larger profits and meanwhile reducing the risk of being exposed to the virus will be gradually resumed, so as to dynamically adapt to the new living environment.

Such panic and adaptive behavior patterns are also applicable to the government and enterprises to a certain extent.

Since March, the above mentioned adjustments in buying behavior among consumers governments and enterprises have occurred. In many regions, the economy has gradually returned to pre-pandemic levels.

However, before the virus goes away, even if we can see full recovery of economic activity, the economy is unlikely to return to pre-pandemic levels. However, compared with the optimal state, we have a long way to go to get our economy back on track.

Giving Support to the Industries, Enterprises and Individuals Hit by Covid-19

Thirdly, observe the situation of middle- and low-wage workers. Against such a backdrop that the price decline is in general much lower than that during the 2008 financial crisis, the wages of these workers declined to a similar extent as they did in the period of the financial crisis. Given that the supply of low-cost labor has shrunk due to the imposed pay cuts, the decline in labor demand is more severe than the decrease in supply.

Since 2013, the number of new jobs in China’s secondary industry has registered a negative growth, indicating a less labor supply in this market. But we could see a lot of jobs being created every year, with service-sector jobs accounting for most of the new hires. In 2018, the service sector accounted for the largest share of the total employment in society with the proportion reaching 47%, or providing jobs for 350 million labors. In the service industry, most employees were engaged in wholesale and retail business, hospitality industries. However, these industries happen to be the biggest victims of this round of the epidemic.

Therefore, the government needs to adopt support packages for the businesses, enterprises, and low- and middle-income people who are severely hit by the epidemic.
Supporting these groups through cash transfer, which are not the most effective means to manage the spiraling decline in aggregate demand, is still extremely important, because it reflects the obligations and responsibilities that society should assume for specific groups amid the crisis. Besides, providing assistance to enterprises can also help stabilize the effective capital stock of the society. 

 (Edited by Liu Ruisong)