Even as the death toll in China is rising in the aftermath of the Coronavirus pandemic, China has a real problem on hand. With more than 1500 deaths and nearly a lakh infected, it is a pandemic of epic proportions. Most importantly, it is badly hitting the Chinese economy, which was already struggling at around 6% GDP growth. It is in this light that the Chinese central bank, PBOC, has announced a stimulus package of $174 billion. This will include an infusion of liquidity into the markets, support to asset prices as well as support to Chinese manufacturers as scores of plants and factories have been shut down on account of the epidemic. While it began in the province of Wuhan, the fear factor has created a large number of ghost towns across China.
Here is what you need to know about the stimulus
- The Chinese central bank (People’s Bank of China) will inject Yuan 1.2 trillion ($174 billion) worth of liquidity into the markets via reverse repo operations to support the stock markets in the aftermath of the virus outbreak.
- China has pledged to use a mix of monetary policy tools and fiscal policy tools to ensure liquidity remains ample and to also lend support to firms affected by the virus epidemic. There are already talks of buyers from China looking at alternative suppliers from Vietnam and India and that is something China wants to avoid.
- The PBOC announced that the total liquidity in the banking system will be Yuan 900 billion higher than the same period in 2019 after the injection. This will ensure that banks have adequate funds to lend for productive purposes and for asset creation. This includes Yuan 1.05 trillion of reverse repos that matured recently.
- Volatility in stock markets became a major issue for China because the pandemic hit just around the Lunar Chinese New Year, which is a holiday season when markets are shut for nearly a week. China’s stock, currency and bond markets had been shut since Jan 23 for almost a week to avoid the market panic.
- The China Securities Regulatory Commission (CSRC) has decided to help firms to avoid stock distress. For example, to support firms affected by the epidemic, the CSRC said companies that had expiring stock pledge agreements could apply for extensions with securities firms, and it would urge corporate bond investors to extend the maturity dates of debt. In addition, additional hedging tools have also been launched for the A-share market to help alleviate market panic and avoid any sudden short selling pressure on the stock markets.
- The situation turned worse for China after the WHO declared the virus attack as a pandemic. This led to most airlines cancelling flights to China and some of the exporters and importers also cancelling trade agreements on account of the epidemic. As a result, China is facing isolation as other countries introduce travel curbs, airlines suspend flights and governments evacuate their citizens. This runs the risk of the situation worsening and a distinct slowdown in the world’s second-largest economy.
- China also took strong objection to remarks by an American official that this virus epidemic would lead to jobs going back to the US. The official Chinese news agency assured the markets that the Chinese economy was resilient enough to counter the shock caused by the virus.
Will the infusion really help?
To a large extent, the infusion of liquidity will help the Chinese markets in four ways. Let us look at how the benefits will accrue.
- The first step will be to address the panic in the equity, bond and currency markets. The Chinese central bank sits on forex reserves of $3.5 trillion and hence has the necessary war chest to protect all the markets.
- The second step will be to ensure that banks are adequately funded. In many of the industrial townships even working capital credit is becoming difficult forcing factories to shut down. This can be avoided by ensuring that the banks are adequately funded to meet these shortfalls.
- Thirdly, Chinese manufacturers need to be given comfort to a mix of monetary and fiscal incentives to ensure that they don’t lose out on the big export orders. In reality, it is hard for any other country to currently match China’s scale, infrastructure rand low costs. Fiscal boost will just help that.
- Lastly, the funds must also be used to bring things under control. China has faced the dreaded SARS virus in 2003 but back then China was not pivotal to the global economy. Things are very different today and that is something the whole world will be waiting with bated breath.
Do you think this can really help China to come out of its current crisis? Let us know in the comments below.