Houze Song on China’s Latest Fiscal Stimulus Measures

As the global economy faces the fallout from the coronavirus pandemic, markets and policymakers alike are closely watching economic data coming out of China. Amid two months of virus-induced anemic economic activity, Beijing announced several policies to stabilize the economy. MacroPolo Research Fellow Houze Song recently analyzed Beijing’s economic policy response. In a new interview, he discusses why China took the actions it did, what other countries—including the United States—can learn from China’s policy approach, and more.

The coronavirus precautions are affecting economic growth worldwide, with central banks responding in different ways. Why did Beijing choose to focus on helping small private businesses?

Small business accounts for more than half of employment in China. Compared with larger firms, smaller firms have fewer resources to cope with the disruption caused by the coronavirus. Without government help, many small businesses would be forced to close, creating massive unemployment.

How was Beijing’s response unique compared to that of other governments?

There are both similarities and differences between Beijing’s response and that of other governments. The similarity is that the economic challenge posed by coronavirus is the same across countries. Yet, due to institutional differences, the way each government responds is different. In China, for example, many migrant workers don’t have access to unemployment benefits. Therefore, increasing unemployment benefits would not help Chinese workers as much as it would in the US.

How did Beijing’s response differ from its response to past financial crises, including the economic slowdown from SARS in 2003? What explains the difference?

The difference can be attributed to multiple factors. First, the disruption caused by SARS was smaller. There was no complete lockdown back in 2003. Moreover, the Chinese economy was actually overheating before the SARS outbreak. As a result, the economy was in a better shape to handle the disruption. Also, in 2003, the Chinese economy relied much more on exports than domestic consumption. As a result, SARS had very little impact on the global economy.

2020 is a particularly important year for Chinese economic growth given Beijing’s pledge to double the size of the economy from 2010 levels by 2020. Do you foresee Beijing revising that target? Why did Beijing opt not to focus its response on supporting growth?

Beijing has worked pretty hard to support the economy, but we also need to remember that growth is not Beijing’s only target. Beijing also cares about other things, like poverty elimination. This means that not all Beijing’s resources and attention will be devoted to growth.

Are we seeing any other central banks mimic China’s approach? How relevant is China’s fiscal stimulus experience to other countries, including the United States?

I think the most relevant lesson is that a targeted approach is the most effective in dealing with the economic consequences of the coronavirus.

Why did you decide to focus on credit spread as the primary metric in your methodology? Were there other metrics that you considered?

Credit spread is available daily, which makes it possible to examine how it moves immediately following policy news. I also planned to study how the stock market reacted to policy news, but the stock market is influenced by too many factors, making it really difficult to attribute stock price movement to any single factor.

Did the data surprise you at all?

The fact that some news, such as an increase in fiscal investment, has a nearly non-existent impact on credit spread was a small surprise to me.

Do you expect Beijing to take further stimulus measures?

Given that both the US and global economy are expected to enter a recession soon, Beijing will increase stimulus in the coming months. Announcements will most likely be made at the upcoming National People’s Congress meeting.

For further analysis of China’s fiscal policy approach, read Houze Song’s latest commentary. Catch up on the latest from the Paulson Institute’s in-house think tank at MacroPolo.org.