Workers wore protective clothing last week at a sportswear factory in eastern China that has switched to production of apparel to guard against the novel coronavirus.
Photo: str/Agence France-Presse/Getty ImagesSHANGHAI—China has pumped billions of dollars into its financial system, raised expectations of an interest-rate cut and pledged to cut red tape in a bevy of emergency responses to the economic hit of its coronavirus outbreak.
But there is nothing typical about China’s coronavirus challenge, which economists say defies traditional prescriptions for dealing with an economic shock. None of the measures announced so far, they say, can offset the abrupt drop in consumer spending and disrupted business activity in China.
When an economy suddenly stumbles, as China’s has in recent weeks, governments typically spend money to spur demand and keep growth going.
Slashing interest rates, one government tool, works to relieve stressed corporate balance sheets and spur borrowing for investments in property, factories and equipment. Tax cuts and state subsidies aim to boost spending on consumer goods and hiring. Earmarking government funds can inspire confidence.
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But money won’t end the work stoppages and material shortages now hobbling the Chinese economy.
Workers are hunkering down to avoid contagion, so goods aren’t being produced or delivered. Traffic is backed up at city and provincial borders as authorities enforce health checks. Travel is limited countrywide, most severely around Wuhan and central China, the hub of the outbreak and home to tens of millions of people.
The problem, experts say, is that regardless of consumer and corporate demand, a shortage of supply renders traditional stimulus measures powerless to address the problems weighing on the $14 trillion economy.
“Expansionary fiscal and monetary policies, which are mainly aimed at resolving insufficient demand, cannot stop deceleration of GDP growth caused by the epidemic,” China Finance 40 Forum, a government-backed think tank in Beijing, warned on Sunday.
“If companies aren’t open, and workers are hundreds of miles from workplaces, lower interest rates and fiscal spending won’t do much good,” said Mark Williams, the chief Asia watcher at Capital Economics.
President Xi Jinping and China’s governing State Council, or cabinet, on Wednesday underlined the core problem in a spray of get-back-to-work directives.
The State Council said that while the province of Hubei, where the coronavirus first emerged, still needs to focus on controlling the epidemic, other parts of the country should “promote the resumption of production and production in an orderly manner.”
Not everyone is heeding such calls. The obstacle to any quick restart: Workplaces risk spreading the disease. White-collar workers are doing their jobs largely from home, damping demand for many goods. Many blue-collar workers are unable to leave their home villages for faraway factory jobs.
Industrial outages remain widespread as a result of a hodgepodge of local regulations aimed at containing the virus, the American Chamber of Commerce in Shanghai said. Other hurdles remain, too.
“A big question is whether the factories have enough masks, hand disinfectant and other supplies to help protect their employees from the coronavirus infection,” said the chamber’s president, Ker Gibbs.
Daily industrial output figures tracked by China International Capital Corp. illustrate the slow return to business. The firm said steel transaction volume one day this week was 23% lower than the same day last year, though improved from 59% down on the previous day.
Coal consumption by power producers, an indication of industrial activity, was 39.6% below the year-earlier level on the same day, even worse than the previous day’s year-to-year amount of down 37.1%, CICC found.
The overall pause in business activity has prompted economists to repeatedly mark down their expectations for Chinese growth. The gross domestic product may contract in the first quarter from last year’s fourth quarter, more economists say, and sag toward 2% on a year-on-year basis—a rate that just two weeks ago appeared overly pessimistic to many.
Assuming lockdowns in central China are lifted in April, most economists expect the damage to Chinese growth to be limited, with GDP growth falling to around 3% to 4% from a year earlier in the first quarter, from earlier forecasts for above 5% growth.
The sudden pause in growth casts doubt on Mr. Xi’s political goals for 2020, which include eliminating poverty and doubling overall GDP from a decade earlier. China needs to maintain growth near 6% for 2020 for Beijing to claim victory in its target of doubling GDP since 2010, though anything below last year’s 6.1% would be about a three-decade low.
Mr. Xi reaffirmed those targets on Wednesday, state media reported, urging top policy makers to “strive to achieve this year’s economic and social development goals and tasks.”
Short of declaring the outbreak contained, authorities have few policy tools to address the near-term economic challenges.
They have told banks to extend loan terms and requested that commercial landlords consider rent reductions. Premier Li Keqiang said authorities would cut red tape and the State Council this week prominently signaled government attention to small enterprises and jobs.
The central bank has pledged more than $40 billion in special bank lending and in the past two weeks pumped $380 billion into domestic money markets, part of a broader effort to keep the financial system from seizing up. Stocks stabilized as a result.
Even so, the challenge was underscored on Thursday when health officials in hard-hit Hubei reported a one-day, ninefold jump in new infection cases, pushing the cumulative nationwide tally to around 60,000, with nearly 1,400 deaths. The government in Hong Kong nodded to sustained risks by delaying the resumption of school classes until March 16.
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In 2008, China was also dealt an economic shock when the global financial system nearly collapsed. Beijing responded with a $586 billion spending package that wowed the world and soon had China driving almost half of global economic growth. When domestic stocks crashed in 2015, authorities again threw money at the problem—some $1 trillion.
But those actions were directed at keeping business humming by underpinning confidence, especially in financial markets—as in a traditional crisis.
Despite seeing its gross domestic product slide to repeated almost three-decade lows, Beijing has consistently in the past few years avoided wholesale economic stimulus.
When the outbreak ends, Beijing may hold back from heavy stimulus. The fear is worsening a debt burden that Mr. Xi has spent the past two years campaigning to whittle down. The Washington-based Institute of International Finance pegs China’s domestic debt at around 310% of GDP, one of the highest ratios among emerging markets.
—Grace Zhu and Liyan Qi contributed to this article.
Write to James T. Areddy at james.areddy@wsj.com
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