The novel coronavirus is highly contagious, so isolation is the most common and probably the most effective way of managing risks.
As people are stuck at home, consumer demand has naturally been reduced. Together with the Spring Festival break, the catering industry, hotels, amusement parks, museums and theaters, and many industries are now in a state of depression.
Not to mention that countless big and small forums and conferences have been canceled.
Such a shock to the economy has spread to Japan, South Korea, Singapore, Thailand and Hong Kong.
So how long will this depression last? It depends on when the epidemic can be effectively controlled. At present, the key lies in Wuhan, the epicenter of the epidemic, and in whether a large number of people returning to work will trigger the renewed spread of the epidemic.
The shining exemption in all this is that the digital economy has played a stabilizing role between consumption and the macroeconomy during the epidemic. It is different from the situation during the SARS outbreak 17 years ago.
At that time, e-commerce had not yet formed in scale.
Alibaba Group’s Taobao platform was established in June 2003 when SARS ended. Today, there are many large-scale e-commerce platforms in China such as Taobao, Tmall, JD and Pinduoduo, along with numerous small platforms and individual merchants on WeChat.
This means that consumption habits may shift to online and can at least partially offset the reduction in offline transactions. At this time, online shopping has accounted for more than 20 percent of total retail sales.
The catering industry is a good example. During the epidemic, about 40 percent of restaurants are working hard to develop online takeaways, and half of them did not have that option before.
Restaurants are able to do so at this time thanks to a well-rounded infrastructure that supports online operations, including online purchasing, fast delivery and mobile payments. This did not exist in 2003.
According to our estimates, the offline restaurant business decreased by approximately 70-80 percent while the online business decreased by 30 percent to 40 percent during the epidemic.
In other words, the epidemic has caused severe negative impacts on both online and offline businesses. But if there is no online business, the negative impact in the catering business will be even greater. This is why we call the digital economy a stabilizer.
In addition, another stabilizing function that has not been proved is that a unified national network is formed with transparent price information, which may curb surging commodity prices to some extent during the epidemic.
Since 2010, China’s economic growth has been declining. Some even suggest that the government needs to adopt a large-scale stimulus policy, but I have always been relatively cautious about this.
There are different opinions on what economic growth rate is appropriate. I usually pay more attention to two indicators. One is employment and the other is financial stability.
If these two indicators are relatively stable, I tend to think that there is no need to worry too much about GDP growth.
But now, as the epidemic directly triggers the survival crisis of small and medium-sized enterprises, both of the above indicators may be deteriorating.
According to a survey of Ant Financial, more than 70 percent of SMEs have suffered from the crisis severely due to the inability to restart work, decreased levels of business, logistical obstructions, and operating costs such as rents, wages and interest payments.
The accuracy of the data should be further discussed, but if most SMEs face such difficulties in survival, it may lead to a systemic risk.
It is common that SMEs may fail as one in five companies withdraws from the scene each year. But if half or more of SMEs suddenly face severe operating difficulties or even go out of business at the same time, it will likely become a big problem for the entire economy.
Private enterprises, mainly SMEs, contribute up to 60 percent of China’s GDP and 80 percent of urban employment. At the same time, small and medium-sized banks that provide a lot of financing for SMEs have asset quality problems.
If the bankruptcy of SMEs erupts suddenly, it will inevitably put huge pressure on economic growth, employment and financial stability.
What we are worried about is not the failure of individual companies, but a large number of companies that suddenly close down at the same time.
What we should try to avoid is a vicious circle between the collapse of SMEs, rising unemployment and the increase in non-performing financial assets.
The government should take the initiative to break this vicious circle as much as possible. It is similar to the US government’s rescue of several large financial institutions during the 2008 financial crisis.
The purpose is not to rescue these institutions or their employees or shareholders, but to prevent a systematic collapse of the US financial system. Similarly, if the Chinese government takes the initiative now, it is not to save individual SMEs, but to maintain economic, employment and financial stability.
At present, many regions are already trying to resume work, but they need time for confidence and economic recovery to be restored.
The digital economy is already supporting economic recovery, especially in online education and remote office businesses. But to prevent a vicious circle between corporate failures, rising unemployment, and deterioration in the quality of financial assets, the key is to prevent large-scale SMEs experiencing cash flow disruptions.
According to Ant Financial, about 80 percent of SMEs are facing shortages of funds, and 70 percent of enterprises said that as long as they can obtain financing, there is no problem in continuing operations.
There are only three ways to prevent cash flow disruption. One is to increase business income, the other is to reduce operating costs, and the third is to obtain external financing.
Increasing business income depends on economic recovery. The most important method is to have economic activities go back to normal by controlling the epidemic as soon as possible.
Of course, the central authorities can also take appropriate countercyclical adjustments, especially to subsidize low-income people and the unemployed, which not only is conducive to maintaining social stability, but can also increase the demand for SMEs’ products and services and increase their income.
It is even more urgent to reduce the operating costs of SMEs through various channels. In the short term, operation fee reduction is more important than tax reduction. After all, taxes need to be paid after income is earned.
Recently, many local governments have formed many good practices in reducing the operating expenses of SMEs.
One is to defer the payment of social security funds. The other is to reduce the costs of SMEs which have rented State-owned properties. The third is to reduce the costs of water and electricity provided by State-owned enterprises.
Some private enterprises have also offered many deductions to SMEs.
It is worth noting that when dealing with systemic risks, the consideration of fiscal and financial soundness should be put in the second place. The overall situation needs to be stabilized first, and then such problems can be resolved.
The most important way of solving the cash flow problem is to use financial tools. Past experience shows that after a disaster, companies will first withdraw deposits and then apply for loans.
Compared with traditional banks, online banks have outstanding advantages in providing financing for SMEs. First, they do not need to meet directly, and second, they can also do risk control without mortgage assets.
During this epidemic, the loan business of most of the traditional banks has stopped, but the application of small and micro loans by online banks such as XWBank has not declined. Ant Financial’s data show that more than half of SMEs intend to borrow from online banks.
Therefore, supporting policies of the central bank and the regulators should be tilted toward online banks or city commercial banks.
But the central bank’s 300 billion yuan ($42.9 billion) of special re-loans have recently gone to national commercial banks, and it may not be easy for them to flow into the hands of SMEs.