VIETNAM NATIONAL UNIVERSITY - HANOI

University of Economics and Business

GROUP ASSIGNMENT

CHINA'S ECONOMIC POLICIES BEFORE AND AFTER THE COVID 19

PANDEMIC
FACULTY: Political economy

Instructors: Dr Khuc Van Quy

Group 7: Nguyen Manh Nam
Nguyen Hai Dang
Vu Hai Dang
Vu Tung Lam

Year: 2022-2023
Contents
Abstract................................................................................................................................................1
Structure...............................................................................................................................................2
1. Introduction.......................................................................................................................................2
2. Main contents....................................................................................................................................6
2.1 China’s Macroeconomics Management Policy Before Covid-19 Pandemic ( from the 1990s to
2013 ).........................................................................................................................................................6
2.2 The impact of the Covid-19 pandemic on the Chinese economy..............................................11
2.2.1 The first impacts on the economy caused by the pandemic...............................................11
2.2.2 Economic policy and response measures implemented.....................................................17
2.3 China’s Macroeconomics Management Policy After Covid-19 Pandemic...............................19
2.3.1 The Chinese economy after the covid 19 pandemic...........................................................19
2.3.2 Government policies to turn the economy back on............................................................20
2.3.3 The challenge of restoring the economy.............................................................................22
2.4 Solutions and result...................................................................................................................23
2.4.1 Solutions.............................................................................................................................23
2.4.2 Result..................................................................................................................................26
Conclusion..........................................................................................................................................27
References...........................................................................................................................................28
 Abstract
COVID-19, the disease caused by the novel coronavirus SARS-CoV-2, has had a major
impact on financial markets, economies and societies around the world. This study
focuses on China and examines a range of issues including: the impact of COVID-19 on
the Chinese economy, China's policy response to this shock such as fiscal measures ,
currency and institutions, and implications such as the nature, benefits, and costs of
China's Policy Response. This study also explores future issues that need to be answered
such as economic recovery and growth and potential bad scenarios. Considering China's
importance in the world in terms of economic size, its contribution to world growth, and
its growing influence, this study has timely and important contributions to policymakers
and investors worldwide.

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 STRUCTURE
1. Introduction
The outbreak of the COVID-19 pandemic affected the global economy. COVID is
an enormous group of infections that can cause several illnesses, such as minor
cough, extreme respiratory severe condition (SARS), and Middle East respiratory
disorder (MERS). In China, a worldwide spread of the virus COVID-19 has broken
out, as it is the developed form of Coronavirus (Mayo Clinics, 2020) and numerous
other COVID strains contracted from bat populaces. The symptoms of this virus
appear after 2 to 14 days in patients, and most patients face breathing problems,
fever, and sickness. The seriousness of the indications of the new COVID-19
infection shifts from individual to individual very quickly. This infection is
perceived inside and out, yet most seriously sick patients are older or are
experiencing other genuine and persistent illnesses. This virus is more deadly for
patients with respiratory illnesses, such as influenza or other illnesses (Mayo
Clinics, 2020)
The first case was registered in December 2019. It is considered a deadly virus that
infected more than 52 million people globally. The death rate was also high, as 1.2
million people died from this fatal virus by November 2020 (Kuckertz et al, 2020)
So, it has a broad negative impact on the lives and health of people. Regardless of
the health sector, COVID-19 negatively impacted economic activities. The
COVID-19 pandemic badly affected almost all sectors of the economy by reducing
their performance and activities. Hoteling, transportation, manufacturing, tourism,
and trade industries experienced a remarkable decline in their revenues.
Some statistics show that COVID-19 is negatively impactful for global economies,
such as that the world’s GDP declined 2% below its benchmark, and developing
countries declined their GDP by about 2.5%. Industrial and developed countries
reduced their GDP by about 1.8% (Islam et al, 2020). This virus spread worldwide
very quickly, and most countries closed their borders to the entire world. This
caused a considerable reduction in international trade, immigration, and tourism.
The World Health Organization (WHO) suggested these isolation policies, so
developing countries also employed these policies. The services sector suffered
greatly from this pandemic because all countries restricted social interaction.
Therefore, many labour forces became unemployed, especially those engaged in
the tourism and transportation sector. The manufacturing industry was also shut
down, and it caused unemployment. The demand and supply mechanisms were
negatively disturbed by this situation (Kuckertz et al, 2020)

2
The COVID-19 virus commonly spreads through sniffles, touch, or talks that
create tiny drops in the environment. These beads are too hefty to ever stay in the
air and drop on the floor or onto different surfaces. Suppose that people are inside
and one meter away from a COVID-19 patient. In that case, they might be tainted
by breathing in the infection or touching a polluted surface before washing hands
and afterward touching their eyes, nose, or mouth (WHO, 2020). Currently, no
antibody or any other antiviral medication is available that can forestall or treat the
COVID-19 infection. However, tainted individuals should get treatment and
maintain social distance, while severe patients should be hospitalized. Most
patients recover in the wake of accepting a steady treatment. Immunizations and
particular medication treatments are being investigated and tried through clinical
preliminaries. The World Health Organization (WHO) is, until further notice,
planning antibody and medication advancement to forestall and treat COVID-19
(WHO, 2020). As per the most recent forecast model of Harvard University, the
pandemic may have a more genuine episode, and there may, in any case, be a
repeat before 2025. Considering the information demonstrated, the analysts
proposed to foresee that without antibodies or other powerful medicines, the
pandemic may even repeat before 2025. Accordingly, the investigation highlighted
a critical chance: this pandemic, which has given many nations bad dreams, will
have the danger of returning what is to come (Yu et al, 2021).
Similarly, given the information displayed, the analysts propose that without
antibodies or other successful medicines, COVID-19 may even repeat before 2025,
according to a recent statistics review(Qiu, 2021). For group invulnerability, it is
necessitated that adequate treatment or precautions be tainted. The absence of
accessible hosts stops the transmission of the infection, and it occurs after far and
wide openness. With an illness as pervasive s COVID-19, specialists accept that
more than 66% of the populace would be resistant so that crowd insusceptibility
can be made. Therefore, much work is needed to save humanity from COVID-19
(Craven et al, 2020)
The new coronavirus (COVID-19) outbreak has resulted in a public health
catastrophe and an economic crisis on a global scale, affecting a wide range of
sectors. Having been initially hit by the COVID-19 pandemic, China was also the
first country to recover and resume economic activity. COVID-19′s impact on
SMEs in China was investigated in February 2020, and this report proposes
governmental initiatives to mitigate the detrimental consequences of the pandemic
on small- and medium-sized enterprises (SMEs) (Lu et al, 2021)
There are many fiscal policies, such as subsidies, increases in spending, loans, and
equity purchases. Chinese governments chose to extend long-term loans to the
industrial sector. These long-term loans will help the industrial and business
sectors continue their business. Moreover, it will ensure the employment of the

3
labour class and the provision of commodities to households. Long-term loans will
build business people’s confidence, and they will adequately run the business
because they have no fear of repaying loans early (Meng et al, 2020). This loan
amount will promote economic activity and help other linked industries. However,
these loans should provide a low-interest rate compared to the market rate, and
governments may advise the banks about the timely and easy provision of credit.
So, government loans are senior to other banks loans. The subsidy and transfer
payment have many disadvantages, such as it will not precisely promote economic
activity. The free-of-cost government assistance may make the people in business
passive and will not work to promote economic activities.
Objectives of study.
Study the impact of COVID-19 on the Chinese economy and how it copes with
and recovers from the pandemic. There are a set of specific objectives by which a
general purpose can be achieved.
 To explore the relationship between COVID-19 and GDP growth.
 To explore the relationship between COVID-19 and the industrial sector.
 Impact of COVID-19 on international trade of China.
 To deliver the theoretical context of the COVID-19 pandemic.
 To provide the trend analysis of COVID-19 and the economic growth of
China.
 Suggest policy implications so that recovery and development from COVID-
19

Review of Previous Studies Related to COVID-19

Many studies discussed this pandemic; (Dhar, 2020) tried to explore the impact of
COVID-19 on the economy of China. The study found the effects of COVID-19 on
GDP, the balance of trade, and the stock exchange. COVID-19 negatively
impacted Chinese exports and imports. Exports declined up to 17.5%, and imports
decreased by 4%. The outbreak of COVID-19 also caused the decline of share
prices, such as SSECI, which decreased by 36 points. Social distancing and
isolation policies also minimized production and other economic activities. So, the
GDP of China did achieve its targeted value due to the spread of the COVID-19
pandemic.
(Liu and Hu, 2020) examined the impact of COVID-19 on the Chinese economy.
The study used the neoclassical growth model. The study found that while the
COVID outbreak did not affect China’s domestic demand, the virus’s global
spread reduced the Chinese goods market. With time, China’s social distancing
policies caused a significant decline in production. The global spread of COVID-
19 and the WHO-recommended border closures harmed trade balance. The study

4
could not examine the long-term effects of COVID-19 on the Chinese economy.
So, as COVID-19 spread globally, the saving rate increased in China, which may
be used in economic activities.
The OECD (Yang and Deng, 2021) studied the impact of COVID-19 on the global
and Chinese economies. The study used the NIGEM macro model and suggested
an exogenous fiscal policy to mitigate the study’s adverse effects. In the worst-case
scenario of COVID-19, more spending, lower taxes, and subsidies were beneficial.
According to the study, China’s demand fell by 2% to 4%. Commodity prices fell
10% globally, and the global GDP fell 0.5% in 2020. Due to the global spread of
COVID-19, China’s GDP fell 0.2%, and imports fell 6.0%.
To investigate the impact of COVID-19 on the economy (Wei et al, 2021), the
study found that the outbreak of COVID-19 disrupted production, business, and
households’ standard of living. As the industrial sector is vital to an economy,
COVID-19 harms their industry, causing many businesses to close. This situation
makes it difficult for businesses to manage credit, staff, and expenses.
(Luo et al, 2020) studied the Chinese economy and found several impacts of
COVID-19. Globalization has accelerated the spread of COVID-19, which began
in China. The study found that China’s social distancing and isolation policies
slowed the spread of COVID-19 but hampered economic activity. China’s
declining production and border closures affected global and Chinese economies.
The study found a 3% global GDP decline in 2020, with developing countries
losing 4% to 7%. The author used graphs to examine China’s GDP growth and
fluctuations in other economic sectors.
(Wang and Su, 2020) studied COVID-19’s economic effects in China. The author
estimated that COVID-19 broke out, and high risk cities shut down in January
2020. The study also investigated how China could spread COVID-19, which had
no new cases in March. The study found that the COVID-19 outbreak reduced
consumption. Shutdown policies also harmed other economic sectors, such as
industry, transportation, tourism, and education. Moreover, the shutdown and
isolation policies reduced investment, resulting in lower GDP growth. Export and
import levels fell due to WHO restrictions, the author added.
COVID-19 had a negative impact on all sectors of the economy, but this study
(Zhang et al, 2020) focused on the agriculture sector of China. This study also
investigates the impact of COVID-19 on macroeconomic indicators. The author
used SAM multiplier analysis to discover many results. The study found that
China’s GDP fell 6.8% in the first quarter of 2020, with the agriculture sector
losing RMB 0.26 trillion. This represents a 7% loss in agricultural value-added and
a 27% loss in agricultural employment. In 2020, the agricultural sector's target
growth rate was 1.1%, but it only reached 0.4%. The author stated that the

5
agricultural sector suffered due to the drop in global demand for Chinese
agricultural products.
COVID-19 and China’s agricultural exports were examined by(Lin and Zhang,
2020). The COVID-19 outbreak disrupted agricultural supplies from China to the
world. The study focused on the agriculturally rich Fujian Province in China. This
study used regression analysis and found some critical results. With the spread of
COVID-19 came a decline in agricultural exports, which worsened as international
borders closed. The level of medical herb exports correlated negatively with the
COVID-19 pandemic.
COVID-19 also harmed edible fungus, horticultural, oilseed, and edible oil
products. Due to the transportation shutdown, the labour force could not migrate to
other sectors. The authors propose that the government should aid and subsidize
this sector.
(Lu et al, 2021) studied China’s social policies in the presence of COVID-19.
COVID-19 had many adverse effects on China’s economy, such as slowing
industrial growth, decreasing GDP, reducing national exports and imports, and
increasing unemployment. The author explored how the Chinese government
provides financial assistance, social insurance, and social welfare. People receive
social, medical, pension, and unemployment benefits. In this COVID-19 pandemic,
special medical, educational, and legal aid was available. The author also stated
that China’s government provided special assistance to children and disabled
people.

2. Main contents
2.1 China’s Macroeconomics Management Policy Before Covid-19 Pandemic (
from the 1990s to 2013 )
During the previous thirty years, China has effectively attained an average yearly
growth rate of just below 10 percent, while successfully managing to keep the
average annual inflation rate below 3 percent. (Thoburn, 2015)
This success is attributed to a very high savings rate, an abundant supply of skilled
workers and engineers, and especially the sizable improvement in total factor
productivity (TFP). (Thoburn, 2015)
After a period of thirty years, China has transitioned into a market economy,
although the transformation is still in progress and not entirely finalized.
State-owned enterprises and local governments continue to play significant roles in
China's economic landscape, while state-owned commercial banks maintain their
dominance in the financial market. Although financial liberalization is ongoing,
China's macroeconomic management exhibits fundamental characteristics of a
market economy while possessing distinct features.

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Starting from the early 1990s, China’s macroeconomic development can be
divided into five significant periods: 1990–1997, 1998–2002, 2003–2008, 2008–
2010, and 2010 to the present.
The period from 1990 to 1997
At the beginning of the 1990s, the Chinese economy was in poor condition.
Though the inflation rate had fallen due to China’s anti-inflation campaign in the
late 1980s, GDP growth was just 4.1 percent in 1990, the lowest rate since 1978.
Deng Xiaoping's expansion of reforms and "opening up" the economy led to a
surge in investment, facilitated by an increase in money supply and credit, with
astonishingly high rates of 42.6 percent in 1992 and 58.6 percent in 1993. As a
result, China's GDP growth rate rose significantly to 14.2 percent and 13.5 percent
in 1992 and 1993, respectively. However, this rapid economic growth also led to
inflation, with rates of 6.4 percent in 1992 and 14.7 percent in 1993.
The surge in investment during this period was primarily driven by the real estate
industry, which experienced astonishing growth rates of 93.5 percent in 1992 and
124.9 percent in 1993, and finally peaked at 24.1 % in 1994.
Faced with worsening inflation, the government further tightened the money
supply in 1995.
In 1996, the excess supply of manufacturing goods became ubiquitous and
inflation continued to fall from the 1994 peak. In 1996, the excess supply of
manufacturing goods became ubiquitous and inflation continued to fall. By the end
of 1997, the growth rate of GDP and the inflation rate fell to 8.8 percent and 2.8
percent, respectively.
The period from 1998 to 2003
In 1998, China's export growth dropped significantly due to the Asian crisis. This
was followed by a corresponding drop in investment growth with some delay.
Despite a further loosening of monetary policy, China's growth rates fell to below
7% in the first half of the year.
After some hesitation, the Chinese government adopted an expansionary fiscal
policy ("proactive fiscal policy") in the second half of 1998 in response to the
economic slowdown. This policy proved effective and China's growth rate
increased to 7.8% for the year. However, the inflation rate fell to -0.8%, marking
the first time in history that the inflation rate had become negative over the course
of a year.
Investment growth in real estate development in China rebounded significantly
from negative levels in 1997 to 13.7% in 1998 and continued to rise to 21.5% in
2000. These trends played a crucial role in improving the country's growth outlook
during this period.
The growth of the Chinese economy has accelerated since the second half of
2002.with 9.1% percent. (Thoburn, 2015)

7
The period from 2003 to 2008
The investment boom maintained since 2002 and become the trend in 2003 with
the main factor being the growth of real estate investment.
In October 2003, the People's Bank of China raised benchmark interest rates for
the first time in six years. This signaled a shift in macroeconomic policy from
loose to cautious tightening.
Despite changes in monetary policy, investment in China continued to grow
rapidly. To address this issue, the government tightened macroeconomic policy
and implemented administrative measures. As a result, the growth of money supply
and credit fell sharply throughout 2004, reaching 13.5% and 10.9%, respectively,
by October of that year.
Between 2005 and 2007, China experienced a period of strong growth despite
overcapacity in the market. Investment and net export growth rates remained high,
and the economy grew by 12.7% in 2006 with inflation staying low. However, in
the second quarter of 2007, China's share price index crashed, and inflation began
to worsen steadily.
Despite attempts to tighten monetary policy, strong growth continued, and inflation
reached an 11-year high of 8.7% in February 2008. Then, the US subprime crisis
hit, causing China's economy to suffer due to a decline in exports. In response, the
government implemented a stimulus package, leading to a quick rebound in the
economy by 2009. However, the excessive expansionary monetary policy led to
asset bubbles and inflation.
The 2008 global financial crisis severely impacted countries worldwide, including
China. China experienced a decline in foreign direct investment (FDI) and a
widespread decrease in stock market values. The public lost trust in securities,
stock markets, fund projects, and real estate loans, resulting in increased
speculation and reduced production. Chinese export growth in 2008 was only 7%,
down 8.5% from 2007, and GDP growth slowed from 12.6% in 2007 to 6.8%. In
response, the Chinese government implemented market rescue measures, including
a substantial "double rate" monetary policy, starting from November 2008.
The IS-LM model can analyze the effects of government policies in China on the
economy following the financial crisis.

Due to the US financial crisis and Chinese government policies, China's economy
has undergone significant changes, as depicted in the IS-LM model. China's IS and
LM curves are both steep, but the LM curve has a steeper slope of 6 compared to
the IS curve's slope of 2.2. A steeper IS curve signifies a greater policy impact,
while a steeper LM curve limits this effect. Thus, the IS-LM model analysis
demonstrates the strong effect of China's current market rescue policies
constrained by the LM curve. (Wang, 2022)

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 Figure 1 : China’s firstly IS-LM curve
Due to the Chinese government's actions in 2008, including a 400 billion RMB
investment, local social investment greatly increased. Tax reductions and increased
disposable income also boosted consumer spending. Governments can stimulate
output and maintain price stability by increasing spending and reducing taxes. This
is shown in IS-LM modeling through a rightward shift in the IS curve and an
increase in equilibrium production (Y). (Wang, 2022)

Figure 2: Positive effect of China's economic policies

China's accommodative monetary policy, characterized by interest rate reductions,
has been effective in stimulating the economy. This policy has reduced funding
costs for commercial banks and increased lending activity. The central bank has
increased the issuance of basic money, expanding the money supply. The
government's measures, such as securities purchases and currency issuance, have
mitigated the impact of the financial crisis. As a result, there is an excess supply of
currency, leading to lower interest rates and increased investment demand. In IS-
LM modeling, these developments cause a rightward shift in the LM curve and a
decrease in the equilibrium interest rate (r). (Wang, 2022)

Combined with the IS-LM model, China's IS-LM modeling can be summarized as
follows

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 Figure 3: IS-LM model of China
As a result of the substantial investment by the Chinese government in the
financial market and the implementation of diverse policies, the IS-LM curve
demonstrates a shift from the initial equilibrium point a to a new point a'. This
indicates that the interest rate remains relatively unchanged, but there is a transition
in the national income from Y to Y'. This shift signifies an upturn in economic
growth and GDP or a slowdown in the rate of economic decline. (Wang, 2022)
China's moderately accommodative monetary policy, including "double rate"
reductions, mitigated the financial crisis's adverse effects, as seen in the substantial
increase in the money supply. However, the long-term impact of these policies
diminishes over time, lacking sustained benefits. Comprehensive recovery may
require coordination with fiscal policies, and a robust market system is crucial for
China's post-crisis economic recovery. (Wang, 2022)

The period from 2010 to 2012

From 2010 to 2012, China faced challenges with inflation and economic growth.
The government responded by implementing policies to tighten monetary policy,
including raising reserve requirements and benchmark interest rates. While these
measures curbed inflation, they also slowed economic growth. In 2012, the
government changed its approach, stimulating the economy through new projects
and cuts in reserve ratios and benchmark interest rates. However, the recovery
relied heavily on investment growth, raising concerns about potential overcapacity
issues. China's experience underscores the importance of a balanced economic
management approach that prioritizes sustainable growth over short-term
expansion.

The period from 2013 to 2019

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GDP growth: China's GDP growth averaged 7.4% per year from 2013 to 2019,
down from an average of 10.5% per year in the previous decade. This slowdown
was due to a number of factors, including the aging population, rising labor costs,
and an over-reliance on debt-fueled investment. (International Monetary Fund,
2013)
Exports: China's exports grew at an average annual rate of 4.2% from 2013 to
2019, down from an average annual rate of 14.4% in the previous decade. This
slowdown was due to a number of factors, including the global economic
slowdown, the US-China trade war, and the rise of protectionism. (International
Monetary Fund, 2013)
Imports: China's imports grew at an average annual rate of 7.1% from 2013 to
2019, down from an average annual rate of 17.8% in the previous decade. This
slowdown was due to a number of factors, including the global economic
slowdown, the US-China trade war, and the rise of protectionism. (International
Monetary Fund, 2013)
Investment: China's investment growth slowed from an average annual rate of
20.3% in the previous decade to 9.3% from 2013 to 2019. This slowdown was due
to a number of factors, including the aging population, rising labor costs, and an
over-reliance on debt-fueled investment. (International Monetary Fund, 2013)
Consumption: China's consumption growth accelerated from an average annual
rate of 7.1% in the previous decade to 8.6% from 2013 to 2019. This acceleration
was due to a number of factors, including the rising middle class, the government's
focus on boosting domestic demand, and the slowing pace of investment.
(International Monetary Fund, 2013)

2.2 The impact of the Covid-19 pandemic on the Chinese economy

2.2.1 The first impacts on the economy caused by the pandemic
The economic condition and its involvement in international trade make China
important for all other countries. The financial or manufacturing fluctuations in
China can disturb the trade balance globally. The current situation of COVID-19
hit the Chinese economy badly, and it also negatively impacted other economies
around the world. Manufacturing activities stopped when COVID-19 spread
around the countries. The social distancing rules cause the underutilization of
labour and capital in China, increasing the cost of production. Moreover, shutting
down international borders and other transportation restrictions made the exports
difficult for China, and it suffered huge losses, such as a reduction in its exports by
3.7%(Liu and Hu, 2020).
Figure 4 presents the export trends of the Chinese economy from 2017 to
December 2020. The figure shows that exports of China remarkably declined in
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January 2019 due to the worst period of the COVID-19 pandemic. Then the
passage of time and development of precautions against COVID-19 made a
positive impact on the exports of China. By the end of 2020, exports were at their
highest level.

Figure 4. Exports of China. Source: The figure reproduced with permission from
(National Bureau of Statistics of China, 2021)

The epidemic of COVID-19 made many short-term and long-term shocks, and
there are many types of research, such as (Chen et al, 2020)and(Liu et al, 2020),
exploring the COVID-19 impacts and government policy of this pandemic. In a
short-term analysis, the Chinese government took many emergency steps in
response to COVID-19. The isolation and social distancing policies negatively
impacted the domestic demand for commodities, such as decreased domestic
demand. Moreover, the global market of Chinese products also decreases due to
isolation and social distance policies. The categories of stages by which we can
divide the impact of COVID-19 are as follows.
The first stage substantially negatively impacted consumption because it was a
spring festival. All types of shopping malls were closed during this period, so there
was a remarkable reduction in the consumption of commodities. Moreover,
tourism, industrial, and retail activities were minimized, negatively impacting the
country’s consumption level. The restaurant and hoteling sectors suffered a lot, and
about 93% of catering companies closed their business due to low demand for their
services and goods.

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The second stage comes right after the spring festival, and workers have to return
to their careers, but due to COVID-19, they were unable to perform their duties.
This caused the reduction of the production of commodities; moreover, less
availability of transportation makes the transfer of the labour force impossible. So,
the industrial sector suffered a lot from social distancing initiatives. The statistics
indicate that about 50 million workers could not travel to their work due to
isolation policies. Thus, this created unemployment and diminished the standard of
living in China (Liu and Hu, 2020)
The worldwide spread of COVID-19 referred to the third stage, and the demand for
Chinese products reduced at the global level. Developed and developing nations
strictly followed the policies and precautions suggested by the WHO about
isolation. So, worldwide policies of isolation and social distancing put the borders
close, then caused a substantial negative impact on Chinese international trade. The
blowout of COVID-19 in the USA and European countries caused a considerable
decline in the demand for Chinese products (Shen et al, 2020)
In the early months of 2020, such as January and February, China’s
macroeconomic information indicated negative development since measurements
became accessible. Among these statistics, value-added to the modern industrial
sector diminished by 13.5%. The services sector recorded a reduction of 13.0%,
and absolute retail deals of social customer merchandise decreased by 20.5%. To
forestall and stop COVID-19, China has paid a hefty monetary cost.
Figure 5 presents the industrial production growth trends of the Chinese economy
from 2017 onward. The figure shows that industrial production of China
remarkably declined after mid-2019 due to the worldwide spread of COVID-19.
The demand for Chinese products declined mainly due to social distancing and the
lockdown of international borders. Then the passage of time and development of
precautions against COVID-19 positively impacted the industrial sector of China.
By the end of 2020, industrial sector performance was at its highest level.

13
 Figure 5. Industrial production of China. Source: The figure reproduced with
permission from (National Bureau of Statistics of China, 2021)
A simple illustration of growth effect and recession with a macroeconomic
model
The COVID-19 effect on GDP is likely to be through a complex interaction of
several factors discussed so far; therefore, explaining the effects with standard
macroeconomic models could be difficult and incomplete . Accepting this
limitation, a simple macroeconomic model of Aggregate Demand (AD) and
Aggregate Supply (AS) is used below to represent the likely effect of the COVID-
19 outbreak on GDP in an economy. The illustration, however, is subject to some
assumptions - first, the economy operates in full employment normally and
produces the equilibrium level of GDP determined by the long-run AS and the AD;
second, all macroeconomic effects of the COVID-19 outbreak (e.g., the macro
effects discussed so far) are eventually reflected through the AD and AS of the
economy; and third, aggregate demand and supply in an economy are
combinations of demand for and supply of essential goods (e.g., food, medicine)
and nonessential goods (e.g., cars, tourism).

14
Firstly, in figure (a), the market’s initial equilibrium for essential goods is at e1
with quantity Q1 and price P1. During the pandemic, demand for essential goods
such as food and medicine rises significantly as explained in the earlier sections of
this paper. In this figure , increases in demand for essential goods is reflected by a
shift from the initial demand curve D to D1. As a result, prices for essential goods
increase to P2 and an increased quantity of goods Q2 is traded. As demand for
essential foods like medicine and medical supplies increase, many producers may
begin switching to produce these goods from what they normally produce; for
example, in the US, companies including General Motors have joined in
producing, and in China, many companies stopped producing their regular goods
and started producing masks and other supplies. Furthermore, there could be
greater imports of such goods in an affected economy. As a result, supply could
increase slightly in response to the huge demand increases, shifting the supply
curve from S to S1; the shift however is not likely to be too large for at least two
reasons: one, producers shifting from other trade (e.g., automobile) may not have
enough technology, skill, and experience to produce essential (e.g., medical)
supplies at a bulk volume like a regular producer; and two, as the pandemic
spreads worldwide, import demand for goods like medicine and medical supplies
go up globally - which is what the world is experiencing now (e.g., import demand
for medical supplies such as mask, ventilators, testing kits, and personal protective
equipment, etc. increased in all countries across the world including Italy, UK,
Spain, Japan, Korea, and USA). Furthermore, production of many essential goods
such as growing food in a short period of time may not be too easy. An increase in
the level of supply now leads to new equilibrium of e3, where now more quantity
of essential goods Q3 is traded at a price P3; the price is yet lower than P2 - the
price attained due to huge shoot up in demand in the first instance. However, P3 is

15
still higher than P1, suggesting that if no more producer enters into the market,
prices of essential goods are likely to remain higher than what it was during the
normal times (P1 here). The good part of course is that demand for these goods are
now met at a level greater than the normal times. As discussed before in this paper,
there is evidence emerging that demand for essential goods like food and medicine
is increasing, pushing prices for these goods up in China and other countries.

Secondly, figure (b) shows the market reaction to the changes in demand for and
supply of non-essential commodities. Emerging evidence cited in the paper earlier
shows that there is a substantial decrease in demand for non-essential and luxury
goods such as cars. Panel (b) shows that the market for non-essential goods is at
the initial equilibrium e4, where Q4 quantity is traded at a price of P4. As demand
falls sharply and substantially, the demand curve pushes back from D to D1,
immediately causing prices to decline from P4 to P5 and quantity traded from Q4
to Q5. Due to temporary businesses and factory closures and permanent business
shut-down and bankruptcy over a long-lasting pandemic period, many producers
may be out of the market over time. This would push the production and supply of
essential goods down from their initial level; such production cut could also be
contributed by two other factors: one, many producers may divert resources to
producing essential goods instead of their regular non-essential goods (e.g.,
General Motors in the US), and two, a slump in global demand for non-essential
and luxury goods would result in a lower export demand. The supply cut is
represented in panel (b) as the leftward shift of the market supply curve S to S1;
this leads to a slight increase in price to P6 trading a lower Q6 quantity. However,
the increased price P6 is still lower than the initial price level P4, primarily because
the slump in demand prevents prices from going back to that level. For an
economy, aggregate demand effect depends on the total effect of demand for

16
essential and non-essential goods and similar would happen for aggregate supply
also, since the model assumes a broader classification of all goods produced in an
economy into essential and non-essential categories. In the event of the COVID-19
pandemic, evidence cited in this paper suggests that the magnitude of demand
reduction of non-essential goods offsets increases in demand for essential goods.
Under the circumstances, combining the demand effects of both essential and non-
essential goods, aggregate demand in the economy should go down from their
normal level. On the other hand, the increase in supply of essential goods is likely
to be fairly little, while decreases in supply of non-essential goods is likely to be
relatively larger, causing aggregate supply to fall. This is because supply would
tend to respond according to the magnitude of demand reductions for both goods.
The supply response is justified given the fact that the share of non-essential
industrial goods in total production is significantly larger than the share of essential
goods in most economies.

Finally, figure (c) show an initial long-run AD-AS full-employment equilibrium of

an economy at e*, where the economy produces Y* level of GDP at P* price level.
In the short-run, a reduction of aggregate demand and aggregate supply due to the
pandemic effects is reflected by the shift of the AD curve to AD1 and SRAS1. This
causes the economy to arrive at point es, where the economy is likely to produce a
lower GDP of ‘Ys’ compared to its full-employment level Y* at a lower price level
Ps from P*. This means, in the short-run an economy is likely to face a lower
national output and income coupled with a deflationary pressure, and which if
continues would lead to recession. In the long-run, if the economy is able to restore
its output but unable to increase aggregate demand, the economy achieves GDP of
Y* but the price level would fall further to P’. This suggests that restoring the

17
macroeconomic equilibrium to the full-employment level or at least closer to that
in the long-run should come with a significant and upward demand shock.

2.2.2 Economic policy and response measures implemented

After the flare-up of COVID-19, China immediately dispatched a bundle of plans.
To guarantee “hostile to plague”, the general public effectively gave cash and
materials to guarantee “hostile to plague,” and the Chinese government
immediately organized particular reserves. Simultaneously, the Chinese
government has additionally declared different approaches, including financial
arrangements, charge strategies, money-related arrangements, modern strategies,
and business strategies. Regarding monetary interpretation, a blend of duty
decrease, expense decrease, and endowments was given, and “Against Epidemic
Thematic Bond” was given. The government has given particular treatment to
businesses influenced by the plague, e.g., transportation, catering, travel,
convenience, expedited service, standard avionics, and different companies. As
indicated by fundamental gauges, the overall population spending shortage rate in
2020 may increase from 2.8% of GDP to about 3%.
Figure 6 explores the nominal fixed investment trends for the Chinese economy
between the years 2019 and2020. The figure shows that investment in China
remarkably declined due to the outbreak of COVID-19. Then the passage of time
and development of precautions against COVID-19 had a positive impact on the
investments of China. By the end of 2020, it had a negative growth rate, and
COVID-19 also had a low growth rate.

18
 Figure 6. Nominal Fixed Investments.Source: The figure reproduced with
permission from (National Bureau of Statistics of China, 2021)
Regarding the financial approach, it has additionally kept up enough for free.
Through measures like balance sheet expansion, reserve requirement ratio RRR-
cutting, and strategy loan cost-cutting, the People’s Bank of China
(POBC)guarantees adequate liquidity and no expansion in financing costs for the
real economy, simultaneously as financial strength. As of now, the focal bank's
unique enemy of scourge renegotiating has arrived at 800 billion Yuan.
Simultaneously, under the state of impeded outside interest and the level foreign
trade holds, PBOC focused on RRR–slicing to help develop all-out social
financing. A more straightforward improvement plan comes from a “new
framework.” In a request to battle the negative effects of COVID-19, as of 1 March
2020, 13 territories, including Beijing, have delivered venture plans for critical
activities in 2020 with up to 33.8 trillion Yuan. Among them, “new foundation” is
exceptionally anticipated. “New framework” is unique concerning the customary
foundation, for example, railroad, parkway, air terminal, and primarily
incorporates seven perspectives: “5G foundation, UHV, intercity rapid rail line and
metropolitan rail travel, new energy vehicle charging heaps, huge server farms,
man-made consciousness, mechanical Internet”(Chen et al, 2020).
Figure 7 presents the trade balance of the Chinese economy from 2017 to quarter 2
of 2020. Figure 4 shows that China’s trade balance declined with the outbreak of
COVID-19, such as in 2019, due to the severe conditions of COVID-19. Then, the
passage of time and the development of precautions against COVID-19 positively
impacted China’s trade balance. By the end of 2020, the trade balance had a
positive figure, showing that the implications of COVID-19 were minimized.

19
Figure 7. Current account balance. Source: National Bureau of Statistics of China
The figure reproduced with permission from (National Bureau of Statistics of
China, 2021)
2.3 China’s Macroeconomics Management Policy After Covid-19 Pandemic
2.3.1 The Chinese economy after the covid 19 pandemic
( reference : (International Monetary Fund, 2021) )
Since mid-February 2020, the government has been gradually easing mobility and
activity restrictions by giving priority to essential sectors, specific industries,
regions, and population groups based on ongoing risk assessments. Nationwide,
most businesses and schools have reopened, albeit with social distancing measures
in place, while foreign entry remains limited to prevent imported cases. In areas
where new hotspots emerged, localized movement restrictions were temporarily
reintroduced but later lifted. To track the virus and control outbreaks, testing and
individualized health QR codes are utilized. During the 2021 lunar new year
holiday, authorities encouraged reduced inter-city travel and implemented strict
testing and quarantine protocols. Following the initial lockdown in early 2020, the
economy experienced a V-shaped recovery, resulting in a positive annual growth
rate of 2.3 percent in 2020. The first quarter of 2021 exhibited lower sequential
growth, aligning more closely with China's pre-crisis pace, while the impressive
year-on-year growth of 18.3 percent primarily reflects the base effect from the
significant contraction in Q1 of 2020.

2.3.2 Government policies to turn the economy back on

( reference : (Yu Hairong et al, 2023) )
Spending boost
In the first 11 months of 2022, China experienced a 0.1% contraction in total retail
sales compared to the previous year, as the pandemic and control measures
impacted people's income. During this period, domestic consumption's contribution
to GDP growth decreased to 52.4% from its pre-pandemic level of 57.2% in 2019.
According to the National Bureau of Statistics (NBS), Chinese people's disposable
income grew by an average of 5.1% annually between 2020 and 2021, a decrease
from the 7.1% growth observed from 2013 to 2019.
A quarterly survey conducted by the central bank revealed that since the second
quarter of 2022, over 58% of respondents expressed a desire to save more,
surpassing the pre-pandemic rate of 47.6%. Economists, such as Morgan Stanley's
Xing Ziqiang, anticipate that private consumption will emerge as the primary

20
driver of China's economic recovery in 2023 as life returns to normal and income
growth resumes.
The China Economic and Wealth Creation Committee (CEWC) has committed to
stimulating household income growth and supporting the purchase of upgraded
properties, electric vehicle (EV) sales, and elderly care services. This indicates the
likelihood of additional policies being implemented in 2023. To encourage pent-up
domestic spending, it is suggested that the government increase public services,
with a particular focus on the approximately 300 million migrant workers residing
in cities who have historically been excluded from urban education, healthcare, and
welfare services, as stated by Liu Shijin, Deputy Director of the Economic
Committee of the National Committee of the Chinese People's Political
Consultative Conference.

As we can see on the graph, China's dark economic period took place between
February and July 2020 when the covid pandemic climaxed. By early 2021, when
the government has taken measures to curb the epidemic, total retail spending has
skyrocketed. But it didn't last long when, just 3 months later, the outbreak resumed
and household consumption was once again plummeting. There have also been

21
times when the amount of spending has increased again but not significantly and
then again decreased

Macro tool kit

In 2023, China is anticipated to maintain robust fiscal spending, as the China

Economic and Wealth Creation Committee (CEWC) emphasizes the need for a
more proactive and effective fiscal policy. Yang Zhiyong, a fiscal policy researcher
at the Chinese Academy of Social Sciences, suggests that achieving this objective
would necessitate an increase in government fiscal income or a substantial
expansion of the budget deficit.

To ensure fiscal sustainability and manage local government debt risks, the CEWC
plans to utilize a combination of tools, including fiscal deficits, special-purpose
bonds (SPBs), and interest subsidies. While some experts anticipate a greater
reliance on SPBs, which are off-budget debt instruments commonly used for
infrastructure projects, others caution against repayment risks due to the substantial
volume of outstanding debts.

China intends to increase borrowing through treasury bonds and regular local
government bonds to provide funds for enhancing people's livelihoods and
boosting consumer spending. This shift aims to reduce the reliance on SPBs for
infrastructure stimulus, as noted by CICC analyst Chen Jianheng.
Regarding monetary stimulus in 2023, Liu Guoqiang, Deputy Governor of the
People's Bank of China, expects it to be at least as robust as in 2022. Support will
continue to target specific areas such as small businesses and green development.
Additionally, the central bank is likely to extend some of the targeted lending tools
introduced during the pandemic beyond their initial expiration, according to Liu.

Adjust exchange rate and balance of payments

The exchange rate has been allowed to adjust flexibly. The counter-cyclical
adjustment factor in the daily trading band's central parity formation was phased
out. The reserve requirement on FX forward was reduced to zero. A ceiling on
cross-border financing under the macroprudential assessment framework for
financial institutions and enterprises was raised by 25 percent in March, but
lowered to the original level for financial institutions in December and for
enterprises in January 2021. Restrictions on the investment quota of foreign
institutional investors (QFII and RQFII) were removed and new quota for domestic
institutional investors were granted. The macroprudential adjustment coefficient

22
for overseas lending by domestic enterprises was increased by two-thirds in
January 2021, leading to a higher ceiling. The FX reserve requirement ratio for
financial institutions will be raised to 7 percent from 5 percent, effective on June
15.

2.3.3 The challenge of restoring the economy

( reference: (ADB, 2021) )
The recovery was uneven.
In the second quarter of 2020, investment, industrial output, and exports were the
driving forces behind the recovery. However, the contraction in consumption and
the slow rebound in services, which are crucial sources of economic growth,
hampered the overall progress in 2020. This can be partly attributed to the modest
consumption stimulus plan, which accounted for less than 1% of the total COVID-
19 policy package, and the severe impact of the pandemic on key service industries
such as accommodation, catering, and transportation, which faced significant
setbacks due to lockdowns and mobility restrictions. .
Financial risks increased
The government's call for more infrastructure spending and support for credit
expansion, accompanied by the rise in local government special bonds, led to a
higher level of debt. In 2020, the general government debt rose by 9.7 percentage
points, reaching 67.1% of GDP. Additionally, the relaxation of certain financial
regulations, including looser standards for recognizing non-performing loans
(NPLs), added risks to the financial sector. The central bank estimated that the
NPL ratio of banks could reach 5.49% by the end of 2021, compared to 1.84% at
the end of 2020.
Income inequalities likely widened.
The impact on income groups varied, evident from the rapid recovery of high-end
consumption, such as luxury goods and cars. High-income groups, who often work
in sectors less affected by COVID-19, such as information technology and finance,
were able to resume work quickly through remote working arrangements. On the
other hand, low-income workers, particularly migrant workers in the hardest-hit
sectors, experienced job losses during lockdowns or faced slower income growth
due to weak domestic demand. For example, the average income for migrant
workers only increased by 2.8% in 2020, significantly lower than the 7.8%
increase in the previous year.
Environmental challenges persisted.
The COVID-19 shock led to a temporary reduction of air pollution and energy
consumption with lower greenhouse gas emissions, and fine particulate matter
(PM2.5) concentration levels in 168 cities fell by 12% in 2020. However, as the

23
economy rebounded and GDP growth was prioritized, the share of green spending
in the PRC’s recovery measures was comparatively low at 12% compared to those
of advanced countries such as Canada (75%), Germany (47%), and France (38%).

2.4 Solutions and result

2.4.1 Solutions

Firstly, the relationship between disease control and resumption of production must
be handled carefully and effectively. Presently, although there are indications that
the overall situation is stabilizing, the turning point is yet to come, and there is still
a high level of daily increase of confirmed cases that demands continued high
alertness. In the next few days, as we have pointed out earlier, the risk of further
spread of the virus remains high as we approach the peak time for the large-scale
return of migrant workers. In particular, there must be no underestimation of the
risk of a second round of surge in the spread of the virus in major cities other than
Wuhan, such as Beijing, Shanghai, Shenzhen, and Chongqing. It is undeniable that
it is very tricky to manage the conflict between disease control and restoration of
production. We believe, however, in a situation where the turning point of the
outbreak is yet to come and there is still considerable risk that the virus may spread
wider, the control of the outbreak is still the number one priority, and production
and services may resume in areas where the risk is well under control, because,
should the outbreak not be effectively controlled, there would be greater
uncertainties facing the overall economic growth and the ensuing costs would be
so much the higher. It would be advisable for the decision makers to moderately
lower the target for this year’s GDP growth, for example, to 5-5.5%, in the
upcoming National People’s Congress of the People’s Republic of China and the
Chinese People’s Political Consultative Conference. Of course, as long as the
outbreak can be effectively controlled, it is also imperative to minimize the impact
of the outbreak on the economic and social orders. As we approach the dates of
large-scale resumption of work and production nationwide, different places may
adopt policies to facilitate a differentiated and staggered process of return to
normal based on the local outbreak status as well as the different characteristics of
enterprises and industries and also the business models, and should maintain
flexibility in these policies.

Secondly, adopt more proactive fiscal policies to effectively support the needs to
fight the disease. On the one hand, measures may be taken to further reduce the tax
burdens of small- and medium-sized enterprises, and provide subsidies directly to

24
severely afflicted enterprises critical to the national economy and people’s
livelihood. Considerations should be given to raising the personal income tax
threshold to increase the spending power of the people. On the other hand, major
efforts should be made to increase investments in infrastructure projects in cultural,
education and medical/health sectors to increase the overall level of demand, as
well as facilitate high-quality economic development. There is still considerable
elbowroom for the policies, given that China’s fiscal deficit, at about 3% of the
GDP, is lower than the level of many developed and developing countries. In a
major outbreak such as this, there is a lot that fiscal policies can do.

Thirdly, adopt moderately relaxed monetary policies to maintain reasonable and

sufficient liquidity, and ensure the stability of financial markets. In this
unprecedented outbreak, measures, including further lowering the deposit reserve
ratios and benchmark interest rates and continued increase of liquidity, may be
considered to reduce the financing costs and help small- and medium-sized
enterprises to survive this crisis. At the same time, actions should be taken to
maintain stability in the capital market. On February 3, China’s stock market and
foreign exchange market opened as scheduled, a demonstration of the
government’s confidence as well as its determination to maintain market rules and
orders. This move has proved to be right on the money. Although A shares fell
sharply on the opening day, they quickly rebounded and stabilized in the next few
trading days. Regulators should follow up with more efforts to restore rationality in
the market and help the investors settle down with their expectations.

Fourthly, accelerate the supply-side structural reform and increase the total-factor
productivity. To cope with the pressure of slowing economic growth, it may be
practical to resort to expansionary fiscal and monetary policies in the short term.
The room for expansion, however, be it fiscal or monetary policies, is limited, and
the long-term consequences of these economic policies must be fully considered.
In fact, there are other major ways of dealing with the slowing down of the
economy, and they have more lasting positive effects, including the stepping up of
market oriented supply-side structural reform, improving the total-factor
productivity, making full use of the decisive role of the market in resource
allocation, fully motivating the private enterprises, and providing substantial
assurance on their confidence in investments.

Fifthly, make major efforts in increasing the fiscal funding for the public health
sector, and easing the supply shortages in medical and health resources. The
outbreak has laid bare China’s insufficient investments in the medical and health
sectors, including disease prevention, medical care resources and capabilities, and
25
hospital establishments. In 2018, China’s total health expenditure accounted for
6.6% of its GDP, as opposed to more than 10% in developed countries in Europe
and the Americas. The per capita health spending, considering China’s huge
population, is far lower than the developed countries. A successful transformation
in this regard should be included as one of the key targets in China’s pursuit of
high-quality economic development and a comprehensive well-off society.
Sixthly, take serious actions to explore options and establish sound mechanisms for
emergency response. This outbreak, a major emergency event far-reaching in
impact and long in duration, has presented huge challenges to the existing social
governance model, but at the same time, also offered a great opportunity to reflect,
learn, improve and change how best to respond to and manage such a situation. In
formulating policies and mechanisms, the policy-makers and decision-makers may
study and draw on the best practices and useful experience of other countries, and
fully seek input from those specializing in relevant fields to put in place early
warning and response mechanisms that are more timely and more efficient.

2.4.2 Result

China's economic situation after the COVID-19 pandemic has made positive
developments. China has taken strong and quick anti-epidemic measures, helping
to control the pandemic and minimize the negative impact on the economy.
After a period of economic recession in the first quarter of 2020, China quickly
recovered and recorded significant economic growth. In 2020, China became the
world's first largest economy to achieve positive growth, with a GDP growth rate
of about 2.3%. This is considered a positive result, especially when many other
economies around the world are facing recession.
In 2021, China's economy will continue to grow strongly. China posted GDP
growth of around 8.1% in the first quarter of 2021. This growth was supported by
the recovery of the manufacturing industry, domestic consumption and exports.
The Chinese government has implemented economic stimulus measures, including
boosting public investment, supporting businesses and encouraging consumption.
In addition, China has also stepped up its economic structural reform, accelerating
the shift from an investment and export-driven growth model to a growth model
based on consumption and technological innovation.
However, it should also be noted that China's economic situation after the COVID-
19 pandemic still faces some challenges. A number of issues such as high public
debt, pressure from the trade war with the US and a difficult labor market situation
may affect future economic growth.

26
In short, after the COVID-19 pandemic, China's economy had a remarkable
recovery and growth. The government and related organizations continue to make
efforts to maintain stable and sustainable development in the future.

Conclusion
The coronavirus pandemic that has ravaged China since December 2019 has put its
economy to the test. China’s GDP grew 5.94% in 2019 to $142.29.94 billion.
China’s economy shrank 6.8% in Q1 2020 due to nationwide lockdowns during the
COVID-19 outbreak. It was the first decline since Beijing began reporting
quarterly GDP in 1992. Then China’s economy recovered from the COVID-19
pandemic. The National Statistics Bureau reported that China’s gross domestic
product increased 6.5% in the fourth quarter of 2020, exceeding the 6% growth
rate in late 2019 before the Coronavirus took hold. China’s economy grew by 2.3%
in 2020, becoming the only major economy to do so during a year of global
devastation. Like the United States, Europe, India, and Japan, other major nations
and geopolitical competitors are battling a winter wave. In 2020, China’s GDP will
reach 100 trillion Yuan (15 trillion USD). With the pandemic over, innovation and
digitization reignited China’s economic growth. The economy grew 18.3% year-
on-year in the first quarter of 2021. It’s the most significant GDP increase since
China began tracking quarterly GDP in 1992. China’s GDP grew 7.9% in the
second quarter and 2.3% in the third quarter compared to last year. China’s
economy is expected to grow by 5.5% in the fourth quarter and by 8.5% this year.
As low base effects fade and the economy returns to its pre-COVID-19 trend
growth, next year’s growth is expected to slow to 5.4% (Tian, 2021)
27
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