China has suffered economic strike from the COVID-19 during last two months or so. With the concern of the epidemic going out of control growing, people worried that China's economy, which stays in the period of traditional growth drivers being replaced by new ones, may abruptly lose its development speed.
To evaluate the economic impact of the epidemic, we should first identify its duration and sphere of influence. Actually, under joint efforts of Chinese government, medical staff and the whole society, the large scale outbreak of the epidemic is basically restricted to Wuhan city and Hubei province. Maximum impact to the economy is in the first quarter and situation will gradually recover from then on.
Nevertheless, the negative effects of the epidemic to China's economy are tangible and unavoidable. According to the National Bureau of Statistics, during first two months of 2020, the industrial production and service sector production experienced comparatively a large decrease, respectively 13.5% and 13% on a year-on-year basis. The total retail sales and investment volume also declined to various degrees. And the Purchase Manager's Index (PMI) contracted to 37%.
Faced with those enormous pressures, however, China has got the epidemic efficiently controlled. The newly emerged confirmed cases are mainly from outbound input except those in Wuhan, Hubei Province. But as of March 18, there is no report of domestic cases as the situation of epidemic prevention and control becomes positive. Coordination between epidemic control as well as social and economic development is a matter of urgency for China.
With the gradual and orderly resumption of work and production, China's unique advantages of the economy have further emerged: full resilience, relatively sufficient room for policy adjustment, and most importantly, space for deepening reform.
Full resilience is reflected in the gradual increase in the coordination of China's economic development. Looking back on the development over the past few decades, China has been beset by "investment-driven" and "export-oriented" economic development models. In recent years, domestic demand has become a ballast stone for China's economy. In 2019, the contribution rate of final consumption expenditure to GDP growth was 57.8%.
It can be said that with the development of the "troika" gradually balanced and domestic demand maintained steady growth, the endogenous driving force for China's economic development is solid. Under the impact of the COVID-19 epidemic, domestic demand such as consumption has been suppressed in the short term, but in the medium and long term, a recovery rebound may occur after the epidemic is over.
The total GDP of China in 2019 was over 100 trillion RMB (equal to 15 trillion USD), and per capita income of China is over $10,000 and the middle class is roughly over 400 million. China has a population of 1.4 billion, which means a huge market size and consumption potential. This is a huge driving force for the continuous upgrading of the supply quality and system, and also a huge advantage that no other economy can match.
The relatively sufficient room for policy adjustment is a vivid reflection of the decision-making and supervisory authorities' ability of maintaining policy determination. China is still one of the few countries with a normalized monetary policy. The fiscal deficit arrangement has taken into account some uncertain factors in advance, China also established a "anti-fragility" mechanism.
In fact, since the outbreak, China's financial markets have opened as scheduled and are operating smoothly, which shows that China's financial system has a strong ability to deal with risks. Resilience is gradually maturing.
Under the support of fundamentals, the overall RMB fluctuation range is relatively limited. In addition, with the improvement of China's domestic epidemic prevention and control situation, the market's confidence in the fundamentals of the Chinese economy has increased, and the onshore and offshore RMB exchange rates have seen a certain degree of appreciation.
Capital markets have also shown strong self-healing capabilities. In the past week, with the spread of the COVID-19 overseas, the risk aversion has rapidly increased, the European and American stock markets have suffered a severe setback.
However, in the context of the effective restoration of China's economic and social order and more effective policy responses, the domestic capital market's self-healing and regulatory functions have been brought into play, firmly holding the bottom line of not having systemic financial risks.
What is even more gratifying is that in the course of fighting the epidemic, the pace of deepening reforms and firm opening up, including capital market reforms, has not stalled. On March 1, the amendment to the new Securities Law was formally implemented.
The full implementation of the registration system, governing the market in accordance with the law, the significant increase in illegal costs, and the emphasis on improving the investor protection system have transferred reform directions that market parties have eagerly called for to fact.
It can be said that deepening reform and opening up is a development path that China has always adhered to and will unswervingly follow. It is also a manifestation of policy will and policy wisdom under the impact of this epidemic.
Looking back at the policy priorities of the past two months or so, the impact on enterprises, especially small, medium and micro enterprises, is a top priority. This is not only a move to stabilize the people's livelihood, but also to support the real economy and the development of private small, medium and micro enterprises.
As I put it very clear in my article What Effects is 2019-nCoV likely to Have on China and World's Economy, that the effects are manageable. We have no reason to doubt that, under the strong responsive measures, the order of production and living will accelerate to recover.
In the face of future challenges, we will continue to deepen internal strength, promote reform and opening up, and take the path of high-quality development more calmly and steadily. (The author is the Consul General of the People's Republic of China).
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