This crisis is a systematic pause, not to be understood by the traditional point of view.
This time the crisis has gone beyond the traditional financial and economic crisis, is a super-exogenous shock caused by the economic system’s violent shock. As you will see, the first is the loss of supply, and the second is a sharp contraction in demand. More importantly, in this sharp contraction in supply and demand, there is a super-panic over the fear of death, uncertainty about the spread of the epidemic, and economic uncertainty. This panic and expectation spevendirects directly lead to variations in trading patterns and behavior patterns.
Therefore, the impact of the current new crown epidemic on China’s economy and the global economy, must be understood with a new framework, not the traditional view: because of the economic boom, the economic inherent defects and internal problems, in a certain link of the break, and then triggered the typical currency crisis, bank ingress and credit crisis, and so on, Then lead to the break of the capital chain, and finally lead to economic contraction, economic depression, must use this paradigm to understand it.
At present, it is very important that the outbreak directly leads to the future world economic situation has a more pessimistic expectations, due to the super-spread of the epidemic, so that countries are likely to take strict isolation, city closure, seal the country’s initiatives to control the outbreak. This outbreak control will directly lead to the collapse of the global production system, a short-term shock, which will lead to production chain, supply chain fractures. This break is not the same as the slowdown in economic performance brought about by the recession and the decline in economic production.
This phenomenon has not been seen before, and we don’t know what will happen to it. From the current data from China in February, the economic impact of this phenomenon will be greater than in previous economic crises. As a result, there has been a major turmoil in financial markets in Europe and the Us since the end of February, especially since mid-March.
The immediate and underlying cause of the upheaval is the expectation of the outbreak. Of course, there may be some indirect causes of this situation due to the vulnerability of the financial system itself. At present, the understanding of the epidemic, we must realize that it is not a cyclical shock, nor is it an endogenous shock, nor is it the impact of external disturbance, but the impact of the system stop.
There are deep-seated contradictions in the capital market of developed countries
The Fed has taken a series of moves in recent weeks, including a variety of monetary stimulus, but the stock market is still a meltdown, revealing some deep contradictions in the capital markets themselves. Financial markets themselves have the effect of amplifying volatility because it is an important financial accelerator. The expected change is a very central factor in financial volatility.
It is important that, although the financial crisis of 2008 has been more than a decade since now, a series of deep-seated problems arising from the last round have not been solved, and a series of new problems have emerged.
First, non-financial companies have higher debt and leverage ratios than they were in 2008.
Second, in corporate debt, or on the balance sheets of non-financial firms and related funds, its high-yield, junk, BB-grade debt ratio is too high.
Third, U.S. financial markets have seen systemic asset mismatches and systemic arbitrage under long periods of low interest rates. In the past, the U.S. market often appeared, through the issuance of high-yield debt to obtain the corresponding funds, and then to the stock market buy-back operation, on the one hand, led to the debt market issuance, debt ratio rose significantly, on the other hand, led to the stock market bubble, the price-earnings ratio reached a record high. This is a very painful problem.
Fourth, the current global debt ratio is too high, the total debt is close to $260 trillion, the debt ratio has exceeded 320%. In particular, we have seen a number of key economies with a number of indicators. For example, we will see france and Russia’s non-financial debt ratiorise very sharply, and second, emerging economies, with a sharp rise in dollar-denominated sovereign debt. This makes them likely to be weak links in the market. Under such huge shocks, they are likely to break up their funds, causing a series of problems.
The outbreak is essentially a short-term shock, but a medium- to long-term response should be made
As for how the next policy should deal with the suspension, it is now important to realize that the impact of the epidemic on the economy is essentially a short-term shock, will not continue for several years like the financial crisis and economic crisis, or like the Great Depression for more than a decade, its impact is a strong exogenous impact. If we had put in place the protection of the economic system and the economic body during the outbreak, the impact might not have been particularly severe after a short-term shock pause. Therefore, in the medium and long term, it will not fundamentally change the potential growth rate of the world economy and China’s development, this we still have a basic understanding.
Of course, to prevent such a one-time, short-term sharp impact, will not evolve into a trend, systematic change, so first, to give sufficient protection to the economic subject, can not let it during the outbreak, due to changes in asset prices, industrial chain changes and changes in the capital chain and collapse. Adequate assistance to the main body of the economy to enable it to survive the short period of the outbreak.
Second, after the outbreak, we must achieve the restart of the economic cycle, the shorter the restart time as possible. Too long or too little push may cause systemic damage. This is what we should pay attention to.
Third, in this process, there should be a good assessment of some medium-term changes, especially the world’s industrial chain, because the progress of the epidemic in different countries is not the same, so the industrial chain will be the first to cause a great impact on the local. It is important to build a flexible, tire-ready supply chain system around the world. That means we can’t hang it from a tree.
For example, we deal with the next round of the european and American outbreak brought about by the economic impact, first, may open up some new battlefields, second, moderate internal conversion, with domestic demand to supplement external demand. Third, according to the length of the duration of the outbreak in Europe and the United States, our export-oriented economy to fully assist. These aspects are important.
New infrastructure may be at the forefront of this round of expansionary investment, but not all, if not the main body
The policy on the development of new infrastructure is certainly no problem. However, the first is to assess whether it is conducive to our rapid recovery of the economic cycle during the resumption of production. After the victory of the global epidemic, it is the first point that the economy can be restored to the economy simultaneously.
Second, everyone is in the same time to resume production, you have to give it a full demand pull, and this demand pull is able to make the main body of the economy feel strongly. Our demand for different fields, different industries, should be different. Therefore, effective demand, consumer demand expansion is very important, such as some places issued consumer vouchers, strong subsidies to some families, some enterprises to produce insurance jobs comprehensive subsidies.
The resumption of work in the production phase, on the one hand is a big boost of action, and the second is to rescue enterprises and economic entities, so that they ensure productivity. Third, it is very important, is to be through consumption and investment pull, synchronously so that the order of enterprises to maintain a relatively stable. All these aspects are needed, not simply as long as new infrastructure is needed.
New infrastructure may be a pioneer in this round of expansionary investment, but it is not all, if not the main body, because it is too small. So the core issue of the new infrastructure is not whether to do it, but in fact, first, it is not enough to generate a big boost, hedge the gaps created by the outbreak, and shrink demand from the global economic contraction.
Second, who will implement the new infrastructure? It should go beyond the traditional old infrastructure and do it in a pluralistic way, rather than simply by government. Because many new industries run mode and old industry is not the same, the operation of new industries and infrastructure between a lot is inseparable, simply rely on the government to carry out, may lead to a lot of crowding out effect, so the main body of new infrastructure and ways to pay attention to.
Third, its sources of funding should also be diversified, not simply fiscal. In the future, China’s expansion policy must be based on different stages of the different problems, the multi-group policy rescue system, rather than a single.
The biggest damage this time is the service sector, not the so-called infrastructure sector, the service sector is the real focus of our attention, including some small micro-enterprises. In fact, for the service sector, it is necessary to do it in some unconventional way. For example, the resumption of work by individual industrial and commercial households cannot be like large-scale manufacturing, and cannot be stimulated by simple tax cuts and fees to stimulate it to expand production and demand. At the same time, many services themselves are associated with our social order, and in this regard we must realize that it is not the same as the traditional way of stimulation.
Adjusting the supply chain and opening up a new battlefield of “Belt and Road” ushers in new opportunities
The opening up of new battlefields, as mentioned just now, is in fact a good link with the “Belt and Road” that has been advancing. However, the “Belt and Road” is relatively wide, so it should also be classified. There is no doubt that at present, developed countries suffer from the epidemic and economic contraction is relatively large, certainly on the traditional supply chain and demand has a great impact. In the traditional market on the basis of the opening of some new markets, new production system, which is the “Belt and Road” strategy itself to reflect, and recently it provides a new opportunity.
But this new opportunity, first, the Belt and Road also have to be classified, because there are also national outbreaks in the country is very serious. Second, there must be a medium-term layout, the outbreak itself is a short-term shock, if the short-term impact led to some immediate major adjustments in our entire strategic system, it may not be worth it.
Epidemic control gives play to institutional advantages, but grass-roots governance should also be reflected
The outbreak is a big test for us, a test of the governance system. At present, it seems that China in the fight against the epidemic, our national system, under the party control of all the system, can play a good system advantage, there is no doubt.
But at the same time, we have been over-levelined in the past, too one-size-fits-all, and there are other problems. Therefore, in the grass-roots governance, there are some areas characterized by technical management, whether we should build a more direct, more transparent governance model, are worthy of our further thinking and reconstruction.
The most obvious is the health and epidemic warning system, which is purely technical and meets the scientific decision-making process without having to be subject to administrative trade-offs at the local level. So when the state builds these systems, it may have some new ideas.