Revitalizing pick-'em-ups

The government needs to adjust its policies in several ways to help market entities overcome the current challenges

Many of China's 150 million market entities, especially those micro and small-sized firms and the nearly 100 million self-employed businesses, are struggling to stay afloat under the multiple effects of the COVID-19 pandemic, sluggish demand and policy uncertainties.

To help market entities weather the difficulties, the government should make timely adjustments to its economic policies to stabilize the economy and retain the foundation for future economic growth.

China's market entities are facing multiple challenges, among which the repeated resurgence of the novel coronavirus is the most severe one. Since mid-March, outbreaks have been reported in many parts of the country. China's most important economic hubs, the Yangtze River Delta and the Pearl River Delta regions, are among the areas hardest hit by the latest outbreak. Industries such as catering, entertainment, tourism and civil aviation have been severely impacted, with industrial and agricultural sectors also affected badly.

Sluggish demand is leading to poor revenues and profits.

The government needs to adopt expansionary policies to boost market demand. In the past, demand was shored up by allowing local governments to issue debt directly and by easing control over the real estate sector. Now, as the demand for housing is declining, loosened control over the real estate sector will not be able to prop up total demand. At the same time, local government financing vehicles are also facing pressures from hidden debt. Therefore, their capability to boost demand is also weakening.

There's concern over policy uncertainties, too. China is experiencing a shift from a manufacturing-based economic structure to a service-oriented one. The industrial and consumption upgrading will be focused on sectors such as scientific research, education, healthcare, sports and culture, commercial services, and high-end manufacturing which have great potential for growth and will create most of the new jobs. These industries have drawn large amounts of investment, and, a number of successful enterprises have stood out from their competitors. But with the continuous expansion of these companies, irregularities in their operation have crept in, causing regulatory problems. The slump in share prices of many overseas-listed Chinese companies in recent years has been in part due to investors' concerns about the uncertainties in regulatory policies.

To help market entities get back on their feet, the government should compensate enterprises that have suffered heavy losses because of the pandemic to help them resume operation. It is vital for the government to improve measures to compensate companies hit hard by the pandemic and notify market entities of the compensation policies in advance in order to shore up their confidence. Funding programs need to be launched to help small and micro-sized enterprises resume their operations and production.

Interest rates can be lowered too. There exists a great potential in lowering the benchmark interest rate by 25 basis points, each time, until economic activities regain robust for at least two continuous quarters. This will help reduce the debt burden on companies and drive up assets prices, both of which can improve the balance sheets of enterprises. China's market entities have a total debt of around 200 trillion yuan ($31.4 trillion). Lower interest rates will significantly ease the cash flow pressure of enterprises.

The government should leave enough room for trial and error of the market and make sure problems arising during an industry's development are properly solved rather than negate the industry completely. Views of stakeholders should be widely solicited before a regulatory policy is rolled out, and all foreseeable consequences should be fully considered.

Further slide of the real estate market should be prevented. Stabilizing the housing market matters not only to the upstream and downstream enterprises of the real estate industry chain, but also to the cash flow in the entire society. On the basis of "one city, one policy", multiple measures, such as tapping the potential of stock assets and supporting the construction of affordable housing, should be taken to improve the balance sheets of real estate enterprises.

As the above-mentioned policies or measures may not be sufficiently enough to reverse the situation in the short term, the government's investment in infrastructure will serve as an efficient instrument to support the expansion of aggregate demand and improve the cash flow of the whole society.

The old practice of local government financing vehicles raising capital from commercial financial institutions and investing in infrastructure should be avoided. The shortcomings of such stimulus packages are evident, including the high costs of financing from the commercial financial system, the mismatch between the maturity structure of debt financing and investment projects, the tendency of local governments to overuse such policy tools and the inconsistency between the regional distribution of investment projects and the flow direction of populations and industries.

These shortcomings tend to cause overborrowing and unreasonable investment projects, spawn large amounts of hidden local government debts and bad debts in the financial system, raise the leverage ratio to dangerously high levels and threaten the stability of the financial system.

Infrastructure projects with higher returns can be funded by raising funds through issuing special bonds, the issuance of which has increased rapidly in recent years. Projects related to water conservation, environmental protection and public facilities construction account for about half of the total infrastructure investment, and the ratio is expected to rise further in the future. These investment projects generally lack cash flow returns and have difficulties in raising capital from commercial financial institutions. By supporting such infrastructure projects with fiscal discount bonds and favorable loans worth 2 to 3 trillion yuan, the government can significantly reduce the financing costs of these projects, optimize the layout of construction projects, and mitigate the negative effects caused by the dependence on local financing platforms' raising capital from commercial financial institutions at high costs.

Zhang Bin is deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. Zhu He is deputy director of the research department of the China Finance 40 Forum.The authors contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn