The United States and China are engaged in a no-holds barred attempt to salvage their economies during the coronavirus pandemic. We’re all familiar with the actions taken in the recent weeks by the United States.
The Federal Reserve and U.S. Treasury have led the largest economic response in American history to the coronavirus pandemic. The Federal Reserve has reduced interest rates to almost zero, purchased hundreds of billions in securities, and backstopped mutual funds, among many other measures.
Congress has passed the $2 trillion stimulus package which includes the CARES Act and Paycheck Protection Program worth $350 billion and direct payments to Americans. And U.S. Treasury Secretary Steven Mnuchin, as well as the White House and Congress, expect another stimulus bill.
On the other side of the Pacific, China is preparing its own stimulus package that is straight from the free market playbook. In mid-March, the People’s Bank of China enacted monetary easing for commercial banks, freeing up an estimated $80 billion (550 billion yuan). The International Monetary Fund documented further monetary measures like deferred fees and utility bills, expanding credit, and favored lending to small businesses.
These economic measures are similar to what the United States is doing: lowering interest rates, increased unemployment payments, and moratoriums on evictions. But China’s socialist market economy has an economic wild card in state-owned enterprises.
Unlike in the United States, Chinese government control of state-owned enterprises means unregulated authority and the ability to respond to pandemics that is unseen in other countries.
State-owned enterprises, or SOEs, were activated by the Chinese government in the early days of the coronavirus pandemic. President Xi Jinping ordered SOEs to step up “unconditionally, and at any cost.”
A Wall Street Journal article detailed how China State Construction Engineering Corp. propped up 20,000 construction workers to build two hospitals in ten days totaling 2,600 beds in the epicenter of the coronavirus pandemic in Wuhan, China.
In a March 27 Wall Street Journal podcast explained that Chinese power, cement, and machinery companies, all SOEs, worked overtime to provide the hospital construction sites with non-stop power, construction supplies, and more.
The podcast also noted that the Chinese government asked all SOEs to slash rents, lower interest rates (for banks), and keep unemployment low by not laying people off and even hiring more people. Again, many of these measures are similar in scope to free market measures adopted in the United States, but their delivery and method of adoption is different.
Over 150,000 small, medium, and large SOEs exist in China, according to the March 2020 research paper “State-owned enterprises in China: A review of 40 years of research and practice.”
The paper also notes that SOEs offer “social stability” like hiring excess workers, hold citizens’ retirement benefits, and keep government control of key industries. Interestingly, the paper recognizes that there is no clear conclusion about the effectiveness of SOEs, but the numbers of large SOEs have decreased over the last three decades.
Imagine if the federal government could force large American corporations to add millions of laid-off workers to their books, inheriting their paychecks and 401ks.
According to the World Economic Forum, the State-owned Supervision and Administration Commission in charge of restructuring and modernizing the main SOEs, publishes an annual list.
It lists 96 SOEs, among them the Chinese National Nuclear Corporation, the China Aerospace Science and Industry Corporation, and the China National Petroleum Corporation. The Forbes Global 500 list of the world’s largest companies includes three Chinese SOEs in the top ten – ranked two, four, and five respectively.
The 2019 Report to Congress of the US-China Economic and Security Review Commission notes that Chinese government support has generated market distortions for SOEs, through access to below-market financing and preferential access to credit compared to free market corporations.
Quasi-socialist economic practices like SOEs could give China an advantage during an economic recovery. SOEs are not a new concept. In fact the United States has one well-known SOE: the Tennessee Valley Authority.
The real difference and advantage in SOEs are their industry and how they are leveraged. China’s SOEs are global corporations, earning hundreds of billions of dollars and are concentrated in industries like defense, utilities, and infrastructure. China’s hybrid economic model means they can manipulate SOEs to quickly respond to economic problems.
Does this mean China’s economy will recover the strongest? If they leverage SOEs, maybe. China’s economic response was slow comparatively during the 2008-09 global recession and Goldman Sachs estimates the Chinese economy could shrink by 9 percent this year.
One c-suite financial executive noted that normal recessions occur to correct excesses in the system. He also noted that the stop in economic activity is more like a contraction and how fast the bounce back will be once this is all over remains unclear.
Former Federal Reserve Chair Janet Yellen thinks the final damage to the United States GDP could be as high as 30 percent this summer.
Some in the think tank world have gone as far as putting a number on what China should pay for the coronavirus pandemic. The London-based Henry Jackson Society released a report claiming that the international community could sue the People’s Republic of China for an estimated $4 trillion.
Despite the massive size of Chinese SOEs, I doubt even they could plug an economic hole that big.
Evan Harris is the media relations and outreach coordinator at PRI.
