(Bloomberg) -- China should shelve its “critical battle” against financial risks and consider absorbing the losses of small enterprises hit by the new coronavirus, said a former central bank adviser.
The government should cut interest rates, rethink its growth target for this year and use an even more expansionary fiscal and monetary policy than ordinarily needed to reach 6% annual growth, said Yu Yongding. Banks should roll over loans and postpone repayments if necessary to allow enterprises to survive this crisis, he said.
“Debt, inflation, bubbles -- those are secondary” problems, said Yu, 72, a member of the government's elite Chinese Academy of Social Sciences think tank in Beijing. “We can worry about this later when everything has calmed down.”
China's striving to rein in the coronavirus with extraordinary measures that include the lockdown of a population totaling some 50 million people in the outbreak's epicenter, Hubei province. Despite that, cases have surged to more than 28,000 with 563 deaths, prompting UBS Group AG to estimate that first-quarter growth will slump to 3.8% from 6% in the last three months of 2019.
Yu says the event should be viewed as a natural disaster and that losses should be borne by the whole society, not just producers hit by the shock. The virus is hurting some small- and medium-size companies very quickly, he said. Policies should be rolled out to help producers and he said the government should tell them, “Don't worry about these losses. These losses should be borne by the whole society because this is an external shock. It is not your fault.”
In a survey of 995 companies, 30% of small- and medium-size enterprises said they expect to see revenues plunge over 50% this year because of the virus. 85% said they are unable to maintain operations for more than three months with cash currently available, according to the survey conducted by professors including Tsinghua University's Zhu Wuxiang.
While acknowledging that absorbing such losses would be very costly and that efforts should be made to avoid moral hazard, Yu said, “I don't think there is any better way.” S&P Global Ratings estimates that the virus outbreak will add 5.6 trillion yuan ($803 billion) of nonperforming loans to the banking system, slashing the industry's capital adequacy level.
Yu stirred up a debate among China economists with influence in government circles late last year by arguing that growth shouldn't be allowed to slip below 6% even as deceleration seemed to make that inevitable.
Now he says even a 6% growth target should be reconsidered because of the hit from the virus. Even if the shock causes expansion to drop 1 percentage point lower it wouldn't negatively impact people's expectations because they know it's a temporary phenomenon caused by the virus, he said.
He rejected the argument that China is constrained in its ability to respond to the crisis following one of the most rapid buildups of debt in history after the global financial crisis. Should the battle to contain the virus be protracted, interest rates can even be cut to zero if necessary, he said.
Conservative fiscal policy and prudent monetary policy “binds your own hands” and China should learn from the U.S., Japan and European countries that have used more expansive policies, said Yu.
China's core inflation is very low and government debt remains under 40% of GDP, indicating there's ample scope for supportive policy, he said.
“The question is whether you dare to take the risk to use it,” he said. “If there's inflation, if there's problems, then we stop using it but we haven't tried yet compared to other countries like the U.S. and European countries and Japan.”
--With assistance from Lucille Liu.
To contact Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net
To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Reinie Booysen, Robert Fenner
©2020 Bloomberg L.P.
With assistance from Bloomberg
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