Upward trajectory will continue

Past epidemics indicate novel coronavirus outbreak will only be temporary setback for the Chinese economy

While the novel coronavirus epidemic has produced unexpected shocks to the Chinese economy and society, the impacts are external, partial and temporary, and will not change the upward trajectory of the Chinese economy over the medium-or long-term.

In theory, the medium－to long-term trajectory of a country's development and production capacity are determined first and foremost by its capital stock and growth rate. China's tangible capital stock will not disappear as a result of the epidemic, nor will there be fundamental changes to the way in which it accumulates or its rate of renewal, as the rate of accumulation is determined by the national savings rate.

A country's development trajectory and production capacity are also determined by the labor force and human capital accumulation. While people are dying because of the virus, the mortality rate is extremely low, and since most of the people who have died from the illness in China have been old or ill, they were not actively employed, so the impacts on the labor force and human resource accumulation are only temporary. The biggest determinant of human capital is education, which will not be stopped by the epidemic.

The epidemic has also made us value technological progress and better resource allocation all the more, which is another determinant of a country's development trajectory.

There have been no cases in history in which an epidemic has caused the stagnation of a major economy or derailed its medium-to long-term development. Once an epidemic dies down, confidence and economic order can be restored quickly, and it will take about three months to get the economy back on track.

A case in point is the effect the 1918-1919 Spanish Influenza pandemic had on the United States, where although it claimed the lives of 675,000 people, it did not alter the upward trend of the US economy, which afterward soon approached its potential rate of growth. With a stronger economy and greater response capacity than the US in the early 20th century, China has also been seeing less impact and lower fatality rates from the coronavirus than the US from the flu pandemic.

In light of the above, the effect of the epidemic will be at most a dip in growth in the first and second quarters of this year, while the Chinese economy will still trend upward in the medium to long term. In fact, the Chinese economy is highly resilient; it will withstand the impact of the epidemic and bounce back in a relatively short time. It can overcome the current hardships and risks and get back on track.

With its institutional advantages, China has created growth miracles under ordinary circumstances, and the country is united in its efforts to beat the virus and restore normal socioeconomic order.

Economic policies have also been rolled out to calm expectations, recover and coordinate the production of critical supplies, support small-and medium-sized enterprises, stabilize the financial market and maintain order in the market.

China is already home to hundreds of trillions in fixed assets, a 900-million strong labor market, the largest in the world, and the biggest and one of the most highly diversified manufacturing sectors. It has the material conditions and production capability to win the war against the novel coronavirus and achieve economic recovery.

While many experts are predicting the impact of the epidemic to be in the trillions of yuan, it should not be forgotten that China spends 41 trillion yuan ($5.9 trillion) in aggregate retail consumption, 55 trillion yuan investing in fixed assets, and exports 31 trillion yuan worth of goods and services each year. The Chinese economy was already in an upward cycle that will not be derailed by the epidemic, which will only have temporary and limited impacts on supply and demand.

Additionally, successful economic restructuring in the past eight years has brought new paradigms and growth drivers, which have been playing a significant role in buffering the shocks of the epidemic. For example, the online economy and the wide use of the internet have kept the economy and society afloat throughout the outbreak.

The Chinese government also has strong macro-control capabilities, a wide array of tools and ample policy room, which alongside financial regulations have significantly improved the resilience of market entities. Currently, government debt is less than 60 percent in China, the fiscal deficit has not exceeded 3 percent in previous years, and the average weighted interest rate on loans remains around 5 percent. These provide the conditions for the Chinese government to take broad-based policies to stabilize employment, the financial sector, trade, foreign investment, investment and expectations. Meanwhile, the government has also been able to coordinate resource allocation in a way that keeps aggregate demand and supply growing at close to their respective potential rates through a combination of prudent monetary policies, active fiscal policies, as well as sector and regional planning.

Between the end of January and mid-February, the capacity utilization rate of critical materials grew from less than 30 percent to 70 percent, the financial sector bounced back on track from its previous slump, and the currency is trading at less than 7:1 against the US dollar, with market fears under control. With stable expectations, small and medium-sized enterprises no longer fear the potential loss of access to capital. Work has resumed on stalled projects. All of these point to the effectiveness of evidence-based responses and hedging policies.

Just as President Xi Jinping pointed out, the epidemic is an important test of our governance system and capability. The outbreak has provided a window to see the state of current governance and provided alerts to some shortcomings. It has shown the need for institutional reforms to increase the efficiency of resource allocation as well as the need to identify and empower new growth drivers. Successful reform will increase the potential rate and quality of growth.