Thread by @MacroPoloChina

As #covid19 becomes a global pandemic, how do countries manage economies & withstand the impact?

In this new analysis, economist @hzsong assesses the effectiveness of China’s economic policies during #covid19 & offers some recommendations.

Thread below: macropolo.org/coronavirus-ec…

1/ We argue that in the case of a pandemic, the return to normalcy hinges on a healthy demand. That means people have the confidence to consume.

The key to policy effectiveness, then, is to prevent business from bankruptcy or laying off workers. macropolo.org/coronavirus-ec…

2/ Here’s what Beijing did:

1) reducing employers’ social security contributions;
2) delaying loan payments;
3) cutting interest rates;
4) increasing fiscal expenditure.

We use one test to measure these policies’ effectiveness: credit spread. macropolo.org/coronavirus-ec…

3/ Credit spread gauges the extent to which a specific response has helped to reduce corporate default risk.

Wide spread = higher risk of corporate default.

For China, we look at the spread between private firms & state-owned enterprises to assess policies’ effectiveness.

4/ In this graph, @hzsong examined 9 cases of large credit spread movements since Feb 3.

Only one case on Feb 19 in which a significant reduction in default risk was the result of a policy response.

That’s when Beijing decided to cut employer social security contributions.

5/ In contrast, increasing financial borrowing & cutting lending interest rate didn’t have as big of an impact on the private-SOE spread.

This implies that while fiscal spending stimulates headline growth, it does not offer much help to private firms.

6/ Our policy takeaways:

- When dealing w/ #Covid19, fiscal policy is more effective than monetary policy.

- Targeted cuts are more effective than a major fiscal stimulus.

Ultimately, policy priority should be preventing failure among the most vulnerable parts of the economy.

7/ Read the full analysis & methodology here: macropolo.org/coronavirus-ec…