SCIO briefing on increasing special local government bonds and strengthening inclusive financial support for micro, small and medium-sized enterprises

SCIO briefing on increasing special local government bonds and strengthening inclusive financial support for micro, small and medium-sized enterprises.

China SCIO April 7, 2020

Economic Daily:

At present, the epidemic is spreading all over the world. Will its impact exceed that of the financial crisis of 2008? In addition, if the Q1 economic data is not what is expected, does the central bank have a new way to deal with it?

Liu Guoqiang:

This is a very important issue. Many people are now probably concerned about the current state of the economy and how to handle it. They each have their own opinion, some of which may be quite different. As for the world economy, the impact will be great. But how serious will it be and when will it get better? This is still full of uncertainties. My answer may not be enough, but I can only speak to this extent. I cannot provide anymore certainty.

The impact is currently obvious in three aspects. The first is in the industrial chain. Some enterprises, and even industries, can't produce without raw materials. The second is in trade channels. There are no orders even if enterprises do produce items. These two impacts are very significant. The third one is in the fluctuations of market expectations as everyone tries to lower risks. 

What will happen next? And will the impact exceed that of the 2008 financial crisis? The answer is no for now. Let's look at the stock market for example. Since February 24, the stock markets around the world have fallen about 25 percent. During the 2008 financial crisis, they dropped by about 50 percent, which is seen as a sign of a crisis. So far, they have plummeted by 25 percent. Will they drop another 25 percent? No one knows. The International Monetary Fund recently said that the global economy may have negative growth in 2020, and the recession may exceed the financial crisis of 2008. This statement is relatively clear, but it's only a possible scenario. So it is very uncertain. However, at the same time, we should not ignore that at present, each country has introduced a great deal of hedging policies, while also putting more efforts into epidemic prevention and control. International cooperation is also being enhanced, so we need to follow up and pay close attention to developments.

What will the impact on China be? The Q1 data hasn't come out yet. Taking the epidemic situation into account, I think the data will certainly not look good, but we should also see marginal changes. A comparison between February and March will show a significant improvement in March. Therefore, I think the impact of the epidemic on China's economy will be temporary. China's economy will continue to show strong resilience. In addition, we have a variety of tools and sufficient policies to stabilize economic growth.

What to do next? The central bank has issued a prudent monetary policy which pays more attention to flexibility and moderation, and puts support for the recovery and development of the real economy in a more prominent position. This is also required by the CPC Central Committee. Specifically, there are several aspects. 

First, we should implement policies in stages with due consideration for their extent, key points and timing. In the early stage, epidemic prevention and control was the core, which gradually turned into resuming production. Now, we need to recover whole industrial chains to make the whole economy move. Therefore, it is necessary to keep liquidity reasonably adequate to fully meet market demand. That is to say, we should not let the market run short of money or cause inflation. We should make sure M2 and non-governmental financing growth rates are largely consistent with and a little higher than that of nominal GDP. 

Second, we will continue to make good use of the 300 billion yuan in special relending fund and the 500-billion-yuan relending and rediscount program, both of which have been issued. Presently, the two quotas have not been used up and they of course should be utilized in a more targeted way.

Third, the new 1 trillion yuan in inclusive refinancing, which is also a relending and rediscount fund, should be implemented. This covers a wider scope than the previous 500 billion yuan, and should be implemented as soon as possible to achieve a seamless connection with the previous policy without interruption. 

Fourth, we should implement targeted cuts to the reserve requirement ratio and give full play to the positive incentive and guiding role of reserve tools. 

Fifth, we should promote LPR reform, strengthen pricing self-regulatory mechanisms, guide banks to cut their profits to a certain extent in favor of the real economy, and facilitate a significant drop in enterprises' comprehensive financing costs. 

Sixth, we need to strengthen global cooperation, create a good international environment and work with the international community to fight the epidemic and stabilize the global economy. At the same time, we should further our active communication with the market and the media, and make our policy intentions clear in a timely manner. Thank you. 

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