2020 - Insights
Author: Guo Wanda, Executive Vice President of China Development Institute
What is Sustainable Financing
Sustainable financing refers to financing activities taking account of sustainable development criteria. It forms a financial development model that considers the coordination of humanity, society, economy and environment, and guides financial resources’ flow to more inclusive and sustainable areas.
The UN Environment first published a report in October 2015, entitled ‘Building a sustainable financial system’, which extends the field of sustainable financing to public debt, society and governance. This was further explored in November 2017, when the UN Environment and the World Bank jointly published the ’Roadmap for a Sustainable Financial System', which demonstrated how financial industries can play a different role in contemporary society by practicing sustainable financing, and engaging in social responsibilities. This report also suggests that financial technology has the potential to protect environment, and support sustainable development finance.
In February 2018, the G20 convened its Sustainable Finance Study Group (SFSG) in London. The SFSG focused on green finance as the core of their study, and also included sustainable development factors such as financial supports for disadvantaged groups, innovation and entrepreneurship, income distribution and SME development to the scope of study.
Why ‘Belt and Road Initiative’ needs sustainable financing?
Financing is essential for the Belt and Road Initiative (BRI). Based on the capital and financial needs of the BRI, a diversified, inclusive and sustainable BRI financing system has been initially established.
To enable this, the construction of diversified financing network has taken shape. The sizeable BRI financing network covers development finance, financial policy, multilateral development institutions and capital markets.
In addition, the sustainable financing policy has formed an initial framework, which has allowed a series of sustainable financing policies to take shape, and has been introduced by China and BRI countries. Some of these policies include ‘Guiding Principles on Financing the Development of BRI’, ‘A Framework to Assess Sustainability and Financial Risks under the BRI’, ‘Regulatory Commission Guidance Opinions on the Standardization of the Banking Sector’s Provision of Service to Enterprises Expanding abroad and the Strengthening of Risk Prevention and Control’ and ‘Environmental Risk Management Initiative for China's Overseas Investment’.
Moreover, sustainable financing activities are increasingly enriching, and innovative financial products and services are widely applied in the BRI countries by issuing different types of bonds; such as green ‘Belt and Road’ interbank normalization cooperative bond, green financial bond and non-sovereign secured debts.
How to promote sustainable financing for ‘Belt and Road Initiative’?
It is recommended establishing a BRI multilateral financial institution, from which lessons can be drawn within international organisations like the World Bank, the International Monetary Fund and the International Finance Corporation. The multilateral financial institution will be led by the BRI countries and will be dedicated for their financing.
More specifically, the organisations within BRI institutions will focus on some key factors; they will create and improve the sustainable financing regulation based on the BRI countries’ general agreement, they will facilitate the mandatory use of relevant sustainable financing regulations for BRI’s bilateral or multilateral financing, and will formulate the BRI sovereign debt relief mechanism, so as to cope the debt default problems involved in the BRI investment and financing. Furthermore, incorporating these mandatory sustainable financial regulations will strengthen the policy coordination among BRI countries, in areas of law, taxation, trade, investment, financial supervision and accounting standard. Thus, a transparent and non-discriminatory financing environment as well as a fair, efficient and stable financial infrastructure can be created.
Author: Fan Gang, President of China Development Institute
Only through further opening-up its economy can China boost its global competitiveness
The remarkable achievements China has made over the past four decades in institutional reform and economic development is a result of its opening-up policy and the development of its export-oriented economy.
Opening its economy enabled China to give its productive forces full play, and to export labor-intensive products in exchange for urgently-needed machines and technologies. Opening the domestic market and introducing foreign investment was crucial for China to grow its economy. It allowed China to learn advanced technology and science from other countries. Large numbers of students, scientists and technical professionals went abroad for studies and exchanges.
Opening-up also allowed China to engage in global affairs through joining international organizations. China's entry into the World Trade Organization in 2001 marked another milestone in its process of going global.
Today China is witnessing changes in the global landscape unprecedented in a century. The COVID-19 pandemic is having a huge and far-reaching impact on the global economy and trade, bringing more uncertainties to economic globalization. Undoubtedly, during the period of the 14th Five-Year Plan (2021-25), China will face a more complex, harsh, and changing external environment, which will bring unprecedented challenges as well as opportunities. To navigate through the complex and challenging global environment, China must further open its doors and safeguard an open world economy, thus gaining the initiative in global competition, promoting comprehensive in-depth reform and quality development, and fostering a stable and sound global environment.
With a population of 1.4 billion people, China has a per capita GDP of around $10,000, roughly one-fifth or one-sixth that of developed nations, and a large rural labor force is seeking employment in the urban economy. China needs to expand domestic demand and foster its domestic market while tapping into the global market and using global resources to fulfill its potential in production, and narrow the gap with developed nations.
Only through further opening its economy can China keep advancing its science and technology level and research capacity, and increase its global competitiveness. Although China has made significant progress in science and technology over the past four decades and is leading in some areas, it is still lagging behind in many others, while being on the lower end of the industrial chain, as well as facing external constraints in some key technologies. China should strengthen independent research and development by further opening-up.
Further opening-up would enable China to attract more innovative personnel. China should foster its own talent pool by accelerating the development of education and scientific research while also attracting global talent. China should encourage foreign enterprises to set up research institutes in China and improve its talent import systems by providing more convenient services for foreign professionals such as for visa, work permits, residency and the lives of their families to build a good work and living environment for them.
In improving business conditions, China could attract more foreign investment and prevent foreign enterprises from leaving China, as some foreign politicians threaten to decouple from China and even block China. China should shorten the negative list for foreign investment access, orderly open the service sector, encourage foreign investors to engage in research and development and allow foreign enterprises to take part in major science and technology projects. China should implement the Foreign Investment Law, treating domestic and foreign companies equally. Increased production and investment of foreign enterprises in China will help boost the country's GDP, create more jobs and elevate incomes, while strengthening China's weak links and cementing its position in the global industrial chain.
Only through further opening the economy can China promote reform and create a vibrant and competitive market mechanism. For example, further opening the financial market is driven by China's own demand for developing and perfecting the financial market. The further opening-up of the financial market and easing of access restrictions will bring in more global financial institutions which will lead to fiercer competition in the domestic market. Higher-level competition will foster stronger competitiveness. China can only integrate into the global financial system by participating in global competition. Fiercer competition will help the country identify areas in need of reform, improve market regulation and optimize the allocation of resources.
Only through further opening the economy can China optimize the management and service system for foreign investment, thus forging a group of world-class Chinese multinationals. Chinese companies need to go global to tap into resources to grow stronger.
Only through further opening the economy can China improve the international economic cooperation mechanism and boost the capacity of participating in global economic governance. A growing Chinese economy has laid a solid foundation for the country to engage in global economic governance, but it should also bolster its soft power. Especially, China should improve its capacity in line with high standard global trade rules. In this way, China will be able to counteract the trend of anti-globalization, sustain multilateralism and realize the ideal of building a community with a shared future for humankind by implementing and promoting international cooperation initiatives such as the Belt and Road Initiative.
Author: Fan Gang, President of China Development Institute
Editor’s Note: At "Global Venture Capital Conference 2020" held in Qingdao on 9th May, Prof. Fan commented on the big change and China's economic future.
Uncertainties continue to increase as the pandemic swept the world. The undetermined probability made it extremely difficult to conduct risk assessment, economic analysis or judgement. Hence, caution should be exercised in any analytical effort towards economic trends. Countries ought to apply bottom-line thinking and pay close attention to how the pandemic progresses.
With the tendency to becoming a norm, the pandemic’s side effects include interruption of supply chain and the resulting food crisis. Agricultural production reduced dramatically as they could not be transported to the destination country. On the other hand, quarantine dictates that labor-intensive industries, including food processing factory, halts operation. Subsequently, global food supply is greatly affected.
China’s economy is also facing a lot of uncertainties, especially in terms of international politics, e.g. decoupling and desinicization. Trump administration has been pressing on Sino-US trade issues, undermining the development of Chinese companies.
Although it could be positive while quarantine ends and the market, revives, China’s economic growth would barely reach last year’s figure. Currently manufacture industry and infrastructure are seeing a relatively fast recovery, with service sector lagged behind. However, be that as it may, the bounce back would not be able to make up for first half’s loss.
In a time that huge changes to global economy structure are taking place, new business adventures are in order. Industries such as IT, AI, biotech, pharmaceutics and public health are currently under the spotlight. However, two other areas should be taken a closer look.
First, general consumer goods industry still has huge potential in store. GDP per capita of China reached 10,000 US Dollars last year. In both theoretical and practical sense, such phenomenon indicates that China is entering the high consumption stage characterized by higher proportion of expenditure and lower proportion of savings to income.
After a short decline in second quarter, consumption will bounce back once quarantine ends. In addition, the poverty-stricken areas of China are gradually embracing a moderately well-off society and the low-income groups in rural areas and small cities are exhibiting larger capacity for consumption as well. If and when this trend extends to the entire population of 1.4 billion, the potential is enormous.
Second, industrial restructuring. Not all the manufacturing enterprises are the right choice for investors. Many industries have massive potential, but are shackled by overcrowdedness and excessive competition. As a result, orders are scattered within the industry, making it difficult for enterprises to achieve a scale-based development and stand out. However, there are a small number of well-performing enterprises in each industry. Given the past case of overheated economy and excessive investment, restructuring is imperative for most industries. As enterprises with few orders continue to be wiped out during this pandemic, those in good shape will pick up more orders and become suitable candidate for investment.
Author: Fan Gang, President of China Development Institute
Editor’s Note: How can we cope with uncertainty during the initiate stage of pandemic? We should release “probable information” and take “regretless actions” instead of missing the window of opportunity, which is what we learn in the COVID-19 pandemic from the perspective of economics.
The toughest economic issue derived from the COVID-19 pandemic is “uncertainty”, which refers to not knowing the trend of something due to either the lack of existing knowledge or the insufficiency or inaccuracy of available information.
The first uncertainty about COVID-19, a virus that has never appeared before, is that people knew nothing about it when it was first discovered. Once cases emerge, the medical institutions and local governments should promptly report to experts of statutory authorities for scientific analysis. A public health disease cannot be defined without rigorous scientific research. It is fair to say that we would all be in a period of “uncertain information” before basic issues are clarified.
Another question pertains to how information should be released. How can you explain things you don’t yet understand to the public? How should governments, at both central and local levels, make decisions during what seems to be a “protracted” period of uncertainty before the release of exact information by national authorities? How should they explain to the public after decisions are made? What information can and should be released to the public when no exact information is available?
In this period of uncertainty, should we do nothing and helplessly watch the precious window of opportunity to slip away? When we take no actions because of our ignorance about the disease, it will continue to spread. As a result, we will lose the best chance to contain it.
This is the dilemma we may fall into. We need to find a better way to deal with this “protracted” period of uncertainty, that is, seeking truth from facts, acknowledging uncertainties, releasing “probable information” during the period of uncertainty, and timely taking “regretless” and preventive actions on a limited scale according to this information.
“Probable information” refers to incomplete or uncertain information. Instead of offering no information at all, it includes speculations and judgment on the basis of a limited amount of facts. “Regretless action” involves relatively low cost and rather slight negative effect. If the early judgment is later found to be misguided, it would be rather easy to correct. Its most important value should be interpreted “in reverse”: if actions are not taken now, not even actions with little disturbance, then we would regret it even more in future for wasting the window of opportunity for pandemic prevention.
For example, first of all, the protection of medical personnel in a region (or city) can be strengthened. This measure comes at a rather low cost and helps to ensure the health of medical staff. Even if the “pandemic” turns out to be nothing, we will not regret taking such an action. Next, suggestions can be made to residents in the pandemic-hit city to wear masks. This measure will come at a cost, including the cost of materials for making masks and the discomfort of wearing them, but the cost is relatively low. Then it is also possible to strengthen sanitation efforts in public places and restrict and reduce big gatherings. These are all preventive measures with low cost. Moreover, as the situation becomes clearer, the local government may even impose stricter restrictions on residential areas and commercial districts. The cost of this local preventive measure is still relatively low from a national perspective, while its benefit is to timely contain the pandemic within a local range and prevent it from escalating to a public health crisis. If the measure is later shown to be over-reacting, it can be corrected without too much difficulty. All of them are early preventive measures that can be introduced at a local scale before definite information is available.
The following conclusions can be made based on the above analysis:
Decision-making regarding major preventive measures, like lockdowns, must be based on definite information. This kind of definite information, provided by statutory authorities on the basis of scientific research, will inform decision-making of the central government. China’s existing laws and regulations have clear and unalterable stipulations about it.
The period starting from the appearance of the first case to the announcement of definite information by the statutory authority is a “period of uncertain information”,during which the primary task of medical institutions and local governments is to provide accurate information to authoritative departments in a timely manner. This is also clearly stipulated in China’s current laws and regulations, and needs to be effectively implemented.
Meanwhile, the following provisions should be included in national regulations on the management of major public health incidents: local pandemic prevention agencies and local governments during the period of uncertain information should be allowed to issue “probable information” and take “regretless” actions in a prudent manner as early preventive measures. If the information is far from being certain, the local government can take moderate “regretless actions”, while stronger preventive measures may be taken by authoritative agencies at higher levels only when the information reaches a higher degree of certainty and when the pandemic is proved to be severe.
What needs to be made clear is that information release and preventive measures are complementary to each other. If local governments take “regretless” actions early on, they must be allowed to issue the then available but not so certain information - the “probable information”. Otherwise they cannot explain to the public why these preventive measures are necessary. What’s more, it is also important to explicitly tell local residents about the uncertain nature of the “probable information” when it is released, and that the final decisions will be made by more authoritative agencies.
The authority of local health and pandemic prevention agencies and local governments to take actions should also be clarified through laws and regulations, with detailed implementation processes, decision-making procedures and action guidance. It can also be categorized into several levels of response, which should follow stipulated procedures.
To discuss these issues now is, of course, to mend the fold after a sheep is lost, but can help us do better when facing similar situations next time, though we do hope that there will not be a next time.
Author:Fu, Yongjia, Postdoctoral Research Fellow, China Development Institute
Editor’s Note:Confronting the deadliest virus in a century, China, Japan and South Korea demonstrated remarkable solidarity. The three nations in East Asia are giving helping hands to each other in hard times. In early February, when China’s confirmed cases were climbing, Japan and South Korea provided China with urgently needed protective gears, though they also face the danger of domestic transmission.
Now, when COVID cases are subsiding in the East Asia continent, China has been ramping up efforts to support Japan and South Korea and sending them medical supplies in large quantities. In an era where trust between major countries is running low, such mutual help and aids in combating COVID-19 is an uplifting sign that China, Japan and South Korea could upgrade their cooperation on health issues to a new level.
First, peoples in the three countries share a common cultural heritage and tend to sympathise with each other in the face of natural disasters. Recently, aid workers in the three countries printed classical verses from The Book of Odes (China, 1046-700 BCE), poems composed by Prince Nagaya (Japan, 685-729 CE) and Choe Chiwon (Korea, 857 CE) on packages of medical supplies as a unique way of expressing solidarity. Looking back at history, we can see the three nations had also proactively come to each other’s help during massive disasters such as the 2008 Sichuan earthquake and the 2011 Tohoku earthquake and tsunami. Warm memories like these provide an optimal starting point to pool the three countries’ resources toward disease prevention.
Second, China, Japan and South Korea’s respective responses to the pandemic bear similarities, which is conducive to a consensus on how to deal with a large-scale health emergency. In fighting COVID, the Chinese government showed strong determination, carried out the lockdown, reversed the trend, stopped the contagion and restarted the economy. Meanwhile, with mass testing, the use of big data and contact-tracing technology, South Korea implemented a nuanced approach that flattens the curve without shutting down the entire economy. On the other hand, Japan has been exploring a softer approach and trying to keep COVID’s disturbance to the national economy to the minimum. Despite their differences, China’s ‘hard’ solution, Japan’s ‘soft’ approach and Korea’s ‘middle way’ are all based on effective leadership of the government, the values of collectivism and the proper state intervention. These shared traits of the three nations’ responses to the coronavirus could facilitate their collective actions to tackle infectious diseases.
Third, the close economic ties and frequent movement of people between the three countries makes joint mechanism against infectious diseases an absolute necessity. In 2019, China was the biggest trading partner of both Japan and South Korea; while Japan and South Korea were China’s 2nd and 3rd largest trading partner, respectively. China is also South Korea’s biggest export market and its largest origin of imports. As of 2018, Japan remains the largest cumulative investor in China, with US$ 112 billion in investments. Chinese visitors to Japan increased tenfold in the recent ten years, reaching 9.59 million in 2019. Similarly, Chinese visitors to South Korea numbered 8.07 million in 2016. According to the statistics of the Embassy of Japan in China, about 140,000 Japanese citizens live in China, while the number of Chinese citizens residing in Japan amounts to 674,000.
To sum up, China, Japan and South Korea have a shared destiny in the face of contagious diseases. The three countries are so near to each other, their economies are so intertwined, and travellers between them are so numerous, that a disease outbreak in one country will quickly spread to the other two nations. The SARS in 2003 was the first strain of coronavirus posing a threat to entire East Asia. Later, in May 2015, only eight days after Korea reported to the WHO the first domestically confirmed case of MERS, China had seen the first imported case, which incurred as many as a hundred contacts. Although MERS did not spread widely in Japan and China, it did show the weakness in the disease prevention system in East Asia. The current COVID crisis should serve as a ‘wake-up call’ that the three countries should join together to fight the virus and build a joint mechanism to tackle future epidemics:
- China should continue to ramp up its support to Japan and South Korea to stop the pandemic in East Asia. Although China had contained COVID’s spread within its boundary, its national safety will be under continuous threat so long as Japan and South Korea are troubled by the coronavirus crisis. The wisest strategy for China is to aid the two neighbours and make East Asia free of COVID as soon as possible. Therefore, China should provide more protective gears and medical supplies to Japan and South Korea, send experts and volunteer teams to the affected areas and provide infrastructural support should it be convenient.
- The three countries could explore new ways to resume international travel between them. The pandemic had locked borders and crippled international travel. The reopening of the closed borders still poses hard challenges for most countries. In light of this, the immigration departments of the three countries should carry out joint inspections at each other’s border, stopping high-risk persons from boarding planes and ships. Moreover, the three countries could share their screening and testing results, create ‘health passports’ for international travellers. By using smartphone apps and Bluetooth technology, the three nations could offer travellers an option to isolate themselves at their own homes before travel, which significantly reduces the cost of mass quarantine.
- China, Japan and South Korea should build a long-term joint mechanism to deal with future outbreaks of contagious diseases. They should make full use of the goodwill accumulated in fighting COVID and turn the temporary measures during the crisis into long-term institutions. For example, the three parties could maintain a permanent green channel for crucial medical supplies. To ensure swift and proper treatment of each other’s citizens, governments should also negotiate the mutual recognition of medical insurance regarding epidemics. Last but not least, the three countries should take collective actions to secure the supply chain in East Asia, relieve the tax burden of companies and protect the industries of the region from future disasters.
Contributor: Fan Gang, President of CDI,Yuwa Hedrick-Wong, Chief Economics Commentator, Forbes Asia
Editor’s Note: China’s economic recovery will be unlike the V-shaped rebound from the SARS outbreak in 2003. The structure of the Chinese economy today is very different from 2003, and China will also face global headwinds as the economies in North America and Europe are slowing down because of COVID-19. Expect a more gradual recovery.
Since the SARS outbreak in 2003, China’s economic structure has become more domestic consumption-led in an expanding service sector, and less dependent on infrastructure investment and manufacturing. It is ironic that this positive development is a key reason why the Chinese economy is hit harder this time by COVID-19 than it was by SARS. An epidemic’s economic impact stems from the need to isolate people, which instantly restricts their movement, hence their ability, let alone desire, to spend in terms of entertainment, shopping, travel, socializing, and so on. In 2003, investment counted for about 55% of China’s GDP, and with investment/construction projects having kept going, economic growth continued and the recovery was very quick. Although the GDP growth rate was down by about 5% in the second quarter, the annual growth of 2003 still ended up higher than 2002 by 1%. In contrast, investment in 2019 accounted for less than 40% of GDP, while consumption had risen to 60%. Corresponding to the rise of the weight of consumption in the economy is the expansion of the service sector, which now account for 54% of GDP. In a recovery from an epidemic like COVID-19, restarting activities in private consumption is much slower than restarting investment and manufacturing. This is indeed corroborated by a slower “restart ratio” in consumption and services compared with the “restart ratio” in investment and manufacturing. As a result, the preponderance of consumption and services in the Chinese economy today means that we will not see a sharp V-shaped recovery from COVID-19 as in 2003 as illustrated below.
Furthermore, COVID-19 is a much trickier virus because it can be spread by people who are showing no symptoms at all. It therefore requires longer periods of quarantine and social distancing, which in turn makes the restart of economic activities even slower compared with SARS. The speed and extent to which COVID-19 became global is yet another key difference with SARS. Even as the Chinese economy is returning to normal, Chinese companies have to prepare for a “second wave” of breakdowns of their global supply chains due to the shutdown of foreign factories and international transportation. At the same time, China has to tackle “imported infections” as thousands of Chinese nationals are returning home to “safe-heaven” to escape COVID-19 that is raging in other countries.
It would come as no surprise to see China’s GDP growth rate for the first two quarters of this year down to a very low range of 2% to 3% year-over-year. In the second half of 2020, recovery will gear up, partially thanks to the timely fiscal stimulus and monetary support announced by the government. However, for reasons mentioned above, and given the unfavorable global economic and financial conditions, it is highly unlikely that growth in the second half of the year could be sufficient to bring the full year of GDP growth back to a “normal” level of 6%. Don’t expect a V-shaped recovery like in 2003.
Author: Liu Guohong, Director of Department of Finance Industry
Editor’s Note: COVID-19, ran rampant during China’s Spring Festival. Currently, as the epidemic has been gradually brought under control and remains stable, we need to be alerted to inappropriate response by government departments at different levels, such as frequently rolling out economic policies or extending them to an undue degree, as they may lead to elevated local debt levels, inflation and even economic stagflation. Policies aimed to deal with the epidemic should stabilize market expectations and maintain market ecology, and not swing from side to side. It is important to reinvigorate the market and protect its fundamental mechanisms from harm, instead of taking over everything.
From the demand side, the epidemic coincides with the Spring Festival holiday. Consumption including catering, accommodation, tourism and entertainment has almost dried up. By far, we still cannot estimate how long consumption will remain stagnant, as this depends on the duration of the epidemic. The current complexities in international economy and trade make it difficult to rely on external market for rapid compensation of demand.
From the supply side, the lockdown of cities and roads and the suspension of work in response to the epidemic have resulted in a large number of stranded workers, short supply of production materials and shrinking sales of enterprises, threatening the survival of many small, medium and micro enterprises, while further impelling the shift of the global supply chain out of China since the onset of Sino-U.S. trade frictions in 2018. As they help businesses survive and address human resource issues, government departments shall also closely watch for the potential de-linking of domestic and global sectors, including economy and trade, science and technology and other fields of international exchanges, as well as the resulting cyclical collapse of profit-making capacity.
Given the huge and complicated impact of COVID-19 on the economy, the society expects strong stimulus from the government. However, China’s current debt rate is already elevated, withinflation rate approaching a ten-year high, squeezing the space for fiscal and monetary policies. No government in the world has ever managed to rely on strong stimulus policies to achieve sustainable economic development.
In face of the huge impact of the epidemic, what is most needed is common sense and a rational response with targeted, forward-looking and substantive policies:
- Adhere to stable money supply and respond to inflation expectations in advance; guard against increasingly visible potential inflation expectations that may be caused by the epidemic, ensure proper quantity of money supply with good rhythm, maintain reasonable and sufficient liquidity, and keep market interest rates at proper levels, in a bid to create a stable and predictable monetary and financial environment for both epidemic control and production resumption.
- Lower the statutory deposit reserve ratio in an orderly fashion, release more low-cost funds, reduce the capital cost of financial institutions and improve their balance sheets. Financial institutions will need to deliver reduced capital cost to the real economy and provide feedback on market capitalto regulatory authorities.
- Deepen supply-side financial reform, further open up the financial sector, accelerate market-oriented development of financial institutions, and make financial institutions more sensitive to interest rate, monetary policy signals, market opportunities and economic conditions.
- Priority should be given to ensuring special emergency assistance to directly deal with the impact of the epidemic; ensure that enterprises and industries could safely survive the period of stagnation during the epidemic.
- Increase the scale of special bonds issued by local governments and promote the marketization and transparency of local bonds; moderately expand the scale of special bonds of local governments, strengthen the information disclosure of local bonds, and lower the threshold for local bond investment with improved protection mechanism for investors; encourage and guide local governments to issue bonds in a reasonable way based on market feedback, and improve the quality of investment for post-epidemic economic revival.
- Give full play to the role of professional financial institutions, and capitalize on existing special funds to identify creative investment opportunities engendered by the epidemic, and provide support in a safe and efficient manner.
- Local governments should reasonably introduce economic policies according to the epidemic situation and their own fiscal and taxation realities;they should not blindly subsidize or issue debts in order to overtake competitors, nor should they interfere with market price signals in any irresponsible way or force non-governmental investment out of market.
At present, what is urgently required in dealing with the COVID-19 epidemic is to adopt reasonable and stable policies, mobilize individual wisdom, stimulate market power, and build a more reliable global innovation chain, industrial chain and value chain.
Author: Cao Zhongxiong, Executive Director of New Economy Research Department of CDI
Editor’s Note:The “black swan” incident of the COVID-19 outbreak has led to the temporary shutdown of the global supply chain, making China the “gray rhino” in the world economy. To be sure, COVID-19 will not impede the process of China’s economic transformation and urbanization, but will change their development path.
The spread of the epidemic was accelerated by intense population flow, which is the characteristic of China’s “semi-urbanization”. Semi-urbanization is an incomplete state in the process of transforming rural population into urban population. This is manifested in the fact that farmers have left the countryside to work and live in cities, but cannot enjoy the same treatment as urban residents in many aspects such as labor remuneration, children’s education, social security, and housing, etc. They do not have political rights such as the right to vote and stand for election in cities, and cannot really assimilate into the urban society.
At present, some unilaterally attribute the impact of the epidemic to unconventional urbanization. This view is questionable as I see it, and should be re-examined from a deeper perspective. The spread of the epidemic in cities is not caused by urbanization per se, but by insufficient urbanization and structural problems in the urbanization process, which can be more appropriately termed “semi-urbanization”. The COVID-19 epidemic is estimated to have a profound impact on China’s urbanization. The shortage of public services, imperfections in urban governance and the lack of emergency supplies are closely related to the current state of semi-urbanization. These problems have driven the spread of the epidemic.
During the epidemic, non-natives became hidden hazards. Huge flow of people leaving and returning to cities have brought tremendous challenges to social governance. Especially when work and production is about to be resumed, the health screening, the tracking of suspected cases, and service for those in quarantine all bring pressure to social governance. The root of the huge population flow also lies in China’s traditional household registration system. To emerge from the semi-urbanization state, it is necessary to further step up reform of the household registration system, facilitate the movement of people to mega-cities, large cities and surrounding second-and third-tier cities, so as to allow them to settle and flow within city clusters. In this way, people will be able to assume a “fixed identity” in addition to their physical presence in cities, thus realizing the urbanization of people.
The epidemic requires us to reflect on urban planning. In the planning and development of cities, more small and medium-sized industrial communities are needed, with improved integration between industries and city functions, so as to reduce the ineffective flow between different urban areas. For epidemic prevention, control and follow-up measures, this will make it easier to take differentiated measures in different city areas, and resume work and production accordingly, so as to minimize the impact of the epidemic on the city.
What has happened in this epidemic points to the notion that first-class city clusters are the future of China’s development. Of course, in the future, challenges faced by the development of city clusters will come more from the coordination between regions and between cities, the integration of industrial chains, and the supply of high-quality public services required by high-intensity population flow. Only on a larger scale can we provide public services of higher quality.
Author: Cao Zhongxiong, Executive Director of New Economy Research Department of CDI
Editor’s note: The impact of this epidemic on the economy can be felt in both short and long terms. In the short term, the economy will be hit hard. In the long run, the epidemic will definitely have a profound impact on China’s industries.
In the short term, consumption, infrastructure and labor-intensive industries will suffer a greater blow. The impact on retail businesses such as shopping centers, wholesale markets and hotels is disastrous. Infrastructure construction, real estate development, and labor-intensive industries, such as textile and clothing among other traditional industries, have been hit hard. Many industries have been temporarily shut down. When it comes to high-tech industries, PCB circuit board manufacturers and mobile phone assembly plants, among other labor-intensive enterprises in the field of electronic information, are greatly affected.
Moreover, it is also a hard time for small and medium-sized start-ups, which are less resilient against risks. Declining sales, rising labor costs and high uncertainties have exacerbated difficulties in their operation. If one enterprise has an epidemic situation, its staff will be quarantined and production halted, which means it will be practically out of business. In particular, start-ups are burdened by rent and wages in an overall hostile financing environment. Many start-ups, which are not able to profit, face mounting pressure of survival in this time of extraordinary hardship.
It is important that the government readjust its economic policy, industrial policy and tax policy as soon as possible and make policy arrangements during the epidemic. While controlling the epidemic, the government shall also introduce new economic control policies, such as increasing tax relief, lowering or deferring social insurance payments, and providing subsidies for key industries, so as to ease the difficulties of enterprises. It is also important that enterprises adjust their production plans and formulate work-from-home measures as soon as possible to minimize adverse effects, and be ready to resume production after the epidemic is over and make up for production delayed by the epidemic.
In the long run, the epidemic will definitely have a profound impact on China’s industries. The health industry has always been a key area for consumption upgrading. After this epidemic, the public awareness of health will be further enhanced. Health protection, medical care and sports will embrace further opportunities of development. People’s health awareness will extend from the demand for masks to other fields.
During this epidemic, e-commerce and Internet companies have played a role in epidemic prevention while providing convenience for people’s daily life. Life-related e-commerce companies have served as a channel for providing daily necessities for people staying at home. In the future, with the development of 5G infrastructure, Internet-related industries will once again usher in a golden period of development. The reorganization of the Internet no longer means simply more economy of scale, but a further reconstruction of non-Internet fields, a deep integration with hardware and the incorporation of hardware into services.
In first-tier and second-tier cities, to cope with labor shortage and ensure production during the epidemic, enterprises will use more machines to replace people, as a number of unmanned factories and workshops continue to emerge. Intelligent manufacturing will further strengthen China’s “world factory” status.
Global enterprises, especially multinationals, will further examine their dependence on China’s supply chain, with industrial transfer occurring in certain industries. As multinationals represent a large proportion in China’s manufacturing sector, the epidemic, coupled with Sino-U.S. trade frictions, will compel multinational manufacturers to add new considerations into their plan to optimize their global presence.