The scars left by the epidemic on China’s economy

Restoration will be a lengthy process that will require constant recuperation.

With the sudden withdrawal of the epidemic prevention and control policy, Chinese society has finally come to the present moment of reconciliation with the virus and with nature. Even if a large number of self-isolations bring about the same effect as the lockdown, the high degree of uncertainty, movement restrictions and collapse of expectations brought about by strict epidemic prevention will no longer exist. After about a quarter of adaptation and adjustment, Chinese society will gradually return to more normal production and life.

However, the unusual three years cannot be turned over like a piece of paper. Even if it is only considered at the economic level, the epidemic has become a scar affecting long-term economic operation, and the road to repair in the future will not be accomplished overnight.

The absolute loss of economies of scale is difficult to bridge in the short term. Before the epidemic, the annual growth rate of China’s economy was about 6%, but the compound economic growth rate in the past three years of the epidemic was only about 4.4%. Converted to the scale of the economy, there was a total direct GDP loss of about 5 trillion yuan in the past three years. In addition, the trillions of yuan spent on nucleic acid testing, “Dabai” labor services, shelter investment and other anti-epidemic expenditures included in the GDP in the past three years did not actually improve the lives and welfare of the public. There are additional opportunity costs and welfare losses that are not included in GDP. Therefore, the direct and indirect economic value of the three-year fight against the epidemic may be close to 10 trillion yuan, which exceeds the one-year GDP added value of China’s entire financial industry or real estate industry. If you want to use the economic growth of the next three years to make up for the economic losses during the epidemic, the actual economic growth rate needs to reach about 8%, and even the most optimistic economists dare not make such bold predictions.

The long-term potential economic growth rate will go down again. Historically, only institutional changes and technological revolutions can boost long-term potential growth rates, that is, there will be either innovations in production organization or technological industrialization; otherwise, the original path of economic growth will always bring about a decline in the rate of return on capital . In the past three years of the epidemic, on the surface, “online” production and living activities have increased, but in fact, due to the obstruction of the supply chain industry chain and the no longer optimistic expectations required for innovation activities, most companies have reduced R&D expenditures. It tends to be conservative in the form of production organization, and no longer trusts in decentralized division of labor and supply. The growth model also shows that from the second half of next year, China’s potential growth rate will continue to be below 5%, entering the low-to-medium growth range ahead of schedule, and bid farewell to the sequence of high-growth economies.

The loss of human capital is difficult to assess in terms of a temporary rise in unemployment. The youth group is the main source of human capital accumulation, and the epidemic has brought a lot of “human capital scars” to the Chinese youth group in the past three years. In normal years, the unemployment rate of youths aged 16 to 24 is about 10%, and this value has risen all the way to about 18% during the epidemic. In China, if fresh graduates fail to find a job within the term, they will be regarded by the job market as uncompetitive, which will lead to a long-term decline in income and an increase in the risk of secondary unemployment. The rising short-term unemployment rate during the epidemic also brought young people a strong yearning for job stability. Some young people gave up looking for employment opportunities and spent several years applying for civil servants, and some even quit the labor market directly, resulting in long-term labor participation. Downside, this is undoubtedly worse for the shortage of labor resources in the process of accelerated aging.

Countercyclical macro policy operations have brought about long-term imbalances in the economic structure. In response to the downward pressure on the economy, the government introduced expansionary fiscal and monetary policies to stimulate the economy. On the whole, the counter-cyclical stimulus policies in the past three years are still mainly manifested in the expansion of infrastructure investment, behind which are fiscal tools such as special bonds, and financial and monetary tools such as credit expansion to stimulate the investment expansion of state-owned enterprises and local governments. Of course, the tax and fee reduction policies are mainly conducive to the restoration of private enterprises and private investment, but in the past three years, the gap in operating stability between the state-owned economy and the private economy has widened rather than narrowed. For example, the profit growth rate of state-owned industrial enterprises has gradually become higher than that of private enterprises in the past three years. In the first 11 months of this year, the profits of state-owned industrial enterprises above designated size increased by 14.8% year-on-year, while the profits of private enterprises fell by 8.1% year-on-year. At the same time, the performance of private capital after entering public emergency areas such as nucleic acid testing has also been disappointing, while on the other side are restored and reconstructed supply and marketing cooperatives and state-run canteens. The long-term market vitality has been eroded by this ebb and flow. Although the just-concluded Central Economic Work Conference focused on ensuring the development of the private economy, the inertia of imbalances brought about by counter-cyclical policies will be long-term.

Rising liquidity preference and sluggish consumption. Since the outbreak, huge uncertainties have led to an increase in residents’ prudent savings, that is, residents are only willing to hold cash and savings, rather than other less liquid assets. Taking this year as an example, as of November, the accumulative value of newly added deposits of households reached about 14.95 trillion yuan, twice the total new deposits in 2018. Households and businesses are unwilling to invest and borrow. In the first 11 months of this year, the cumulative value of new deposits in financial institutions has exceeded the cumulative value of loans by more than 5.6 trillion yuan, and the phenomenon of “borrowers disappearing” is obvious. After the epidemic is over, although consumption will pick up, it may be too optimistic to expect a retaliatory rebound in consumption. Families who have experienced unemployment and companies that have experienced market exit pressure may tend to be conservative in the long run, and the speed and intensity of consumption recovery may be much weaker than expected.

These three years have revealed not only the fragility of the production organization methods established by people, but also the fragility of the seemingly large and sophisticated governance system. The scars of the epidemic have been engraved on all levels of the economic body, and economic recovery will be a long process. Only by adopting a continuous recuperation policy for micro-subjects can we create conditions for healing the scars as soon as possible. (Fortune Chinese website)

The author Zhang Lin is a columnist of Fortune Chinese Network and a researcher of rating agencies.

This content is the author’s independent point of view, and does not represent the position of Fortune Chinese Network, nor does it represent the views of the agency. Without permission, shall not be reproduced.

Editor: Wang Fang