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China’s Local Governments Roll Out Consumption Stimulus
March 29, 2020

Local governments have taken stimulus into their own hands, launching a range of programs focused on boosting consumer spending. Three major cities in eastern China have issued coupons with a combined face value of more than 400 million yuan ($56.5 million) to encourage spending on leisure and tourism; 

• Qingdao in Shandong launched a 100-day “consumption season” focused on promoting 10 major sectors using retailer discounts and government subsidies; 
• Changsha in Hunan said earlier this month that anyone buying a car made by certain local factories will get subsidies. 
• Ha Zengyou, director-general of the employment and income distribution department at the National Development and Reform Commission, warned last week that local governments should first consider how much they can afford and ensure the measures bring real benefits to businesses and the public.

Ha is not the only one concerned about affordability — the question of what governments can and should do in response to the coronavirus’s economic impacts remains unresolved. Zhu Zhengfu, a member of the Chinese People’s Political Consultative Conference, proposed the central government consider giving each citizen 2,000 yuan as a pandemic subsidy for personal consumption. Anatole Kaletsky, chief economist of research firm Gavekal Dragonomics, says “governments in every major economy must guarantee unlimited compensation for lost revenues and wages to all businesses and workers affected by quarantines and lockdowns” to avoid a 2008-style financial crisis, going much further than measures taken thus far. Zhu Min, chair of Tsinghua University’s National Institute of Finance Research, however, argued in a Caixin op-ed that governments might not have much room roll out policies like they did during the 2008 financial crisis.

• Many of the economic challenges posed by Covid-19 stem from a lack of demand. Monetary policy can’t realistically solve these problems and stimulate activity on its own — fiscal measures will have to take the lead.

• Some of the disagreements over what governments should do come down to basic questions about how much debt they can take on. Some are much more concerned about rising debt-to-GDP ratios than others. Kaletsky suggests every G-20 country could “increase its government debt-to-GDP ratio by 25 percentage points without raising any serious questions about solvency,” but Zhu thinks that as a “result of large-scale government debt issuance, the risk posed by sovereign debt today is greater than it was in 2008.” Consumption stimulus and government revenues are linked. Localities with shrinking coffers won’t be able to spend as much as before, not to mention handing out money to residents for boosting household consumption.

Using limited fiscal funds as leverage to spur consumer spending still makes sense, suggests Shen Jianguang, chief economist of JD Digits. Chinese authorities will this week start to lift quarantine measures in the central province of Hubei, where the Covid-19 pandemic first erupted, as the country looks to revive an economy that has nearly ground to a halt amid the outbreak.

• The stocks and bonds of Chinese property developers have been hit hard by turbulence in capital markets triggered by the coronavirus outbreak as investors shun the sector amid concerns over profitability and sales.
• State Grid Corp. of China is finally getting out of the real estate business after years of urging from the central government.
• China’s mobile carriers are doubling down on 5G, scaling up investment in their next-generation telecom networks.
• CEO of the China Beige Book, who warned that economic deterioration caused by the novel coronavirus was, as we put it, “worse than you think.” On Monday, Miller’s firm released a fresh report that confirms that earlier view. 
• His takeaway now: for investors, the notion of “worse than you think” only tells part of the story. 
• With more firms reporting in for the final first-quarter tally, Miller said, results are worse, even as parts of the country unwind government restrictions on movement and travel intended to contain the spread of the deadly pathogen. As CBB’s report puts it, “results continued to deteriorate even into mid-March when most firms were re-opening and supposedly ‘back to work’.”
• Miller thinks it is critical that investors understand how bad the downturn in China is so that they can read official reports with some healthy skepticism. “There’s going to be mixed signals sent to markets,” he said. “Gloom in Europe and the U.S. but growth in China. That will be very alluring. But it will be wrong.”
• Specifically, Miller expects the Chinese government will report a “March recovery” and then data from then on “will shoot to the moon.” That will help China appear to have met President Xi Jinping’s growth targets.
• But investors need to understand that the Chinese economy hasn’t just fallen off a cliff because it was the epicenter of the blow from the coronavirus, Miller said. It is also because of the way the virus is now rippling around the world. “The China recovery story is no longer just about domestic resilience, but also factors beyond Beijing’s control,” the report explained.
• “Chinese factories went down just when the world badly needed auto parts supplies,” Miller said in an interview. Wuhan, China, where COVID-19 was first identified in December, is an auto-manufacturing hub in Hubei province. “Now those factories are being cranked back online just as demand falls off a cliff. You’ll have an oversupply.”
• Now, the rest of the world is undergoing the sorts of severe restrictions that China went through weeks ago, Miller noted, and global mitigation efforts from the biological threat are expected to throw much of the globe into recession.

​What next? In the short term, oversupply could lead not just to destabilized global markets but to more trade tensions. President Donald Trump’s administration made supply gluts a major pillar of its negotiations with China. 

• But in the long term global interconnectedness will be the biggest victim of the illness derived from the novel strain of coronavirus. Firms have spent years thinking about rerouting supply chains away from China. And between the trade war throughout 2019 and the coronavirus now, “this might finally be the point where people say, no mas. There are too many implications,” he said, suggesting that countries may adopt more isolationist policies and reroute supply chains.
• Some industries may be able to decouple, but some players, like Apple Inc. find themselves too dependent on China. In fact, if the U.S. and China find themselves locked in a Cold War, there may be political implications for American companies that continue to rely on Chinese supply chains.