Unconventional Threat, Unconventional Response

The Covid-19 virus represents a wildly different type of threat to China’s economy than anything seen before. And as a result, the short-term policy response must be and will be fundamentally different in character. Even as newly discovered cases of the virus are declining in China, the foremost challenge for Beijing is to incentivize people to return to work quickly, followed by measures to restore small firms’ cash flows.

The typical countercyclical policy arsenal, via monetary and fiscal policy support, will be less effective while companies are struggling to maintain revenues without workers operating. But more support will be forthcoming, from a larger fiscal deficit to additional local government bond issuance and interest rate cuts. The most important signal to watch in the short term will be the rescheduling of the annual National People’s Congress (NPC), which will send signals to local officials that they can relax transportation restrictions, and will hopefully mark an end to the worst phase of the virus outbreak. Key measures to watch for at the rescheduled NPC will be corporate tax and fee reductions to maintain small firms’ cash flows, as well as any regulatory changes targeting the banking sector to permit greater credit expansion.

Posted March 13, 2020
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