Virus and the Chinese stimulus
I received this question: How big can any new stimulus be without debt leverage going through the roof?
China so far has soft-pedaled its economic response to the economic impact of the coronavirus. We’ve seen a couple of short-term measures, including lower lending rates, short-term loans to hard-hit sectors, loan extensions for mortgages, an interbank injection of CNY550 billion, and lower interest rates on 7-day and 14-day reverse repurchase agreements by 10 basis points to cut the cost of funding for banks.
However, beyond these measures, the markets may be over-estimating the possibility of large scale fiscal and monetary stimulus. Beijing has avoided thus far a massive stimulus similar to the response to the 2008 financial crisis. Beijing is likely to rely on targeted measures. More important, the government will continue to shift the burden of stimulus and recapitalization to the private sector. This is a key point. Beijing is primarily concerned with the impact of an economic slowdown on unemployment and the potential for unrest. If these goals can be achieved with modest policies, a multi-trillion tax cut and monetary supply stimulus package is unlikely to occur.
Some have argued that the coronavirus changes the calculus. China is certainly worried that its awkward response to the coronavirus threatens to break the “social contract” with the people. However, that hostility to weak health policies and suppression of information has not caused rampant protests or online anger.
Instead, the key concerns remain 1) unemployment and 2) a financial crisis. Beijing seeks to ensure that unemployment does not rise enough to cause unrest. A bigger fear is a financial crisis. That could a) lead to a greater domestic political crisis; and b) risk affecting China’s global reputation (something Xi Jinping is particularly conscious of.)
A third concern is weak local economies.
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