Targeted policies, support for SMEs help nation achieve growth amid headwinds

China's economic data for the first half of this year came out strong in July.

Figures from the National Bureau of Statistics in July show that the country's value-added industrial output rose 15.9 percent year-on-year in the first half, while consumption totaled $3.28 trillion in the same period.

Meanwhile, the official purchasing managers index, a key indicator of the manufacturing sector's health, came in at 50.4 in July, all sending good signs the country is on a gradual yet strong track of recovery since it was hit by the COVID-19 pandemic.

Many economists at home and abroad see this as a tremendous achievement. Particularly cheerful are smaller, micro-sized businesses who were once the most vulnerable group during the outbreak, but have robustly recovered this year. Some of those were on lifelines when the pandemic was severe and business activities basically ground to a halt.

Worldwide, government and academics have long been bickering about the policy response toward the pandemic. There has not been much of a conclusion yet. COVID-19's economic impact is new to many, and policy turned out to be very different in countries in light of their actual conditions.

Looking back, China's approach was reckoned as prudent, yet was proved to be targeted and effective. Even in the first quarter of last year, when the pandemic's impact was most pronounced, the government did not resort to heavy stimulus measures.

Instead, it acted by giving specific liquidity support to businesses and households in a well-calibrated manner. This includes allowing loan deferrals for smaller businesses, targeted tax and fee exemptions and a new mechanism that helps to directly allocate newly added fiscal funds to primary-level governments.

"Many policy tools used by major economies to battle against the pandemic are similar, that is, to inject liquidity into the market and keep businesses afloat. But the steps that China took supported businesses and made sure not to damage the health of the economy," said He Zhiguo, a finance professor at the University of Chicago Booth School of Business, who started to track China's policy and draw international comparisons since early 2020.

More support and jobs

In May 2020, He started to notice the uniqueness of China's policy response toward the hit.

Before the pandemic, He's research focus had been mainly on China's capital markets and its financial reforms. Served as the Fuji Bank and Heller Professor of Finance and Jeuck Faculty Fellow at Chicago Booth, He said he seldom paid very close and in-depth attention to China's macro policy stance and relative evaluations. This time, it was the uniqueness of China's policy response that caught his attention.

Coworking with Liu Bibo, a professor of finance at PBC School of Finance, Tsinghua University in Beijing, they published an article that gave an in-depth analysis on China's policy response, entitled "Dealing with a Liquidity Crisis: Economic and Financial Policies in China during the Coronavirus Outbreak".

In the essay, the two professors gave a detailed look at China's targeted policies, which mainly include extending loan terms and rearranged rollover debts for enterprises, tax and fee exemptions, and special loans for micro, small and medium-sized enterprises.

He said that one thing that policymakers across countries were bickering over was whether society will soon recover from the pandemic, or if the COVID-19 situation will remain in people's lives for a very long time. This prognosis is important because it impacts the country's employment and liquidity policies, that is, to keep payrolls stable with a minimum wage if the pandemic impact will be time-limited, or to cut payrolls for now and later hire workers back when the COVID-19 situation ends.

He and Liu noticed that China resorted to the first approach, with targeted liquidity channeled to specific businesses and sectors.

The State Council, China's Cabinet, announced in March 2020 a raft of policies supporting employment, particularly for vulnerable sectors, including more value-added tax relief, providing low-cost lending to smaller businesses, and lowering or waiving employers' contributions to old-age pensions, unemployment and workplace safety insurance schemes, exemptions for utility bills and rents and wage subsidies to help businesses keep payrolls stable.

Robin Xing, chief China economist at Morgan Stanley, hailed the support for the country's smaller business communities.

"While small and micro firms roughly account for 60 percent of China's GDP and 80 percent of employment, they continue to face structural constraints in obtaining financing, particularly during the heights of the pandemic when creditors tend to be more risk-averse. Targeted measures, especially those that directly address cash flow constraints for SMEs, can therefore be more impactful in sustaining growth momentum and stability in the labor market," he said.

"A more targeted approach can also limit risks of a rapid buildup in financial instability, compared to a scenario where policy easing is aggressive and indiscriminate," he noted.

Light at the end of tunnel

In spring 2020, many smaller businesses, particularly those in manufacturing and services, were practically out of business for several months. These very specific supportive measures successfully helped them during the tough times.

Zheng Le, an executive at CASI Vision, a high-tech firm whose products serve in detecting and accessing industrial products based in Luoyang, Henan province, recalled how the COVID-19 outbreak in February 2020 challenged their operations and how they benefited from supportive policies.

Zheng said the pandemic pushed most of their clients to shift their way of product detection from human labor to adopting the detection machines that they produce, which is conducive to their growth. Yet during the pandemic, many workers could not resume their posts and the confidence of employees was flagging.

Policies that Zheng's company enjoyed from the national level included employee subsidies and waiving employers' contributions to pensions. Besides, Zheng said funds for the company's rent subsidy, a policy incentive they've already enjoyed as a micro business, were in place faster than usual during pandemic times.

"All these have provided great relief for the company and to our workers, many of whom were anxious as they could not be back and resume work at the time," Zheng recalled.

For Little Bear Rental, a company that directly serves small, micro businesses by renting office equipment to them, the liquidity support it enjoyed from policies has greatly enabled the company to serve more micro clients during the pandemic last year.

Hu Zuoxiong, CEO of the company, said the firm was exempted from two months' social premium contributions according to State Council policies last February. They also enjoyed rent exemptions and deductions across the first quarter last year, while supportive policies for flexible employment greatly enabled their operations. The company later received a subsidy of up to 6 million yuan ($925,800) to cope with the epidemic.

Hu said all of the assistance enabled the company to give solid support to its clients, who are mostly micro businesses. With sufficient liquidity, the company managed to exempt rental fees from more than 1,300 clients and provided work-from-home support to about 30,000 employees.

The company robustly survived the pandemic's hit and completed its latest round of funding in August. Similar stories are happening to hundreds of thousands of small businesses in China.

When commenting on China's economic policy response during a forum last year, Geoffrey Okamoto, first deputy managing director of the International Monetary Fund, said, "China's example shows that, with the right policies in place, there is light at the end of the tunnel.

"Monetary, and financial measures helped mitigate the negative economic impact, especially on the most vulnerable," Okamoto said when referring to the People's Bank of China's lending facilities of more than 2 trillion yuan to fund loans for small businesses, poverty alleviation and the regulator's encouraging forbearance of small business loans.

"While necessary during the crisis, some of the unconventional policy support could threaten hard-won progress in structural reforms," he said. "The goal is to find the right balance between maintaining economic lifelines to viable businesses and preventing 'zombie' companies from undermining competitiveness and long-term growth prospects."

Going forward

For many economists, the COVID-19 situation has lasted long enough to permanently shift consumers' habits, lifelong plans, and business models. They believe China has so far performed notably well from the pandemic, yet there are challenges ahead.

For Robin Xing, the Morgan Stanley economist, policy support in China has largely focused on the supply side, which is effective, and is in very sharp contrast with the US stimulus. This allowed a rapid recovery in manufacturing activity and hiring in China which also supported a rebound in income, he said.

Yet he pointed out that a full recovery in consumption continues to hinge on domestic COVID-19 development and China's containment strategy, as services employment is close to half of total, while the sectoral outlook remains mixed due to the multiple resurgence of COVID-19 cases.

He noted that while manufacturing activity rebounded rapidly last year and has stayed above-trend, thanks to strong external demand and the efficient institutional response to COVID-19, the services sector and consumption recovery continue to face hiccups over the past months, and have yet to return to pre-pandemic levels.

In a similar vein, Feng Ming, a senior researcher at the Chinese Academy of Social Sciences, noted the notable weak link for economic recovery is sluggish internal demand, and weak consumption is a major factor hampering the domestic circulation.

The reason behind this is that COVID-19 has hurt the consumption motivation of people, while disposable incomes of households have yet to improve.

"More efforts are still needed to increase household disposable incomes. And efforts to improve the social welfare system and public service facilities will also appropriately boost people's willingness to buy, bringing the economy faster back on track," Feng said.