Will China resort to massive monetary easing again?

March 06, 2020 12:54
There is speculation that Beijing may dramatically loosen the monetary policy to counter the impact of the coronavirus outbreak. Photo: Bloomberg

It's often joked that in China, what’s left out is even more important than what's being said.

During a briefing this week, the People’s Bank of China did not reiterate comments that it will not resort to strong stimulus to support the slowing economy. Following the omission of that language, there is intense speculation that Beijing may dramatically loosen the monetary policy to counter the downward pressure from the coronavirus outbreak.

As a matter of fact, China and the US have both taken a U-turn to aggressive Keynesianism.

Keynesian economics was developed during and after the Great Depression from the ideas presented by John Maynard Keynes in his 1936 book. Keynesian economists generally believe governments should take an active role by using fiscal or financial tools to stimulate demand during economic downturn.

As interest rates in major economies dropped to extremely low levels after the 2008 financial crisis, and debt-laden governments had little room to stimulate demand with fiscal measures either, the focus shifted to boosting the economy from the supply side.

Global economy turned to industrial policies to achieve technology upgrade and create new market supply such as smart products, electric vehicles, virtual economy, etc.

But Keynesianism has regained popularity after the coronavirus outbreak.

Sichuan, Shaanxi, Hebei and four other Chinese provinces have introduced a 25-trillion-yuan infrastructure plan. Meanwhile in the US, the Federal Reserve suddenly announced a 50-basis-point rate cut on Tuesday.

In Hong Kong, the government announced recently a HK$10,000 cash handout for all permanent residents aged 18 or above.

Stimulus and giveaways may bring unwanted side effects, including moral hazards, asset bubbles and wider wealth gaps, yet many companies and individuals may not be unable to survive the virus without such policy support.

This article appeared in the Hong Kong Economic Journal on March 5

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist