What challenges will China's economy face under the COVID-19 epidemic? What impacts will the epidemic have on international relations, global value chains and economic trends? What adjustments can the Chinese government make to ensure economic and social stability this year?

To answer these questions, China Development Forum (CDF) launched a special column, CDF Online series, in which we will talk with forum delegates on the economic and political impacts of the virus outbreak.

Edmund Phelps is the professor of Columbia University and the 2006 Nobel Laureate in Economics.
Recently, Yu Jiantuo, Deputy Secretary General of China Development Research Foundation (CDRF), had a call with Professor Edmund Phelps to discuss the impact of the COVID-19 epidemic on China's economy and the implementation of China-US phase-one trade deal.

In the past two years, Prof. Phelps expressed optimism over resolution of trade disputes between China and the United States.

During the call, he held the view that the epidemic would not affect China-US trade or the implementation of China-US phase-one trade deal.

However, he pointed out three important sectors that could be hit by the epidemic: agricultural production, employment and capital goods market.

Regarding economic policies, his advice includes adopting emergency employment subsidies, subsidizing the purchase of capital goods, and alleviating the contraction of food supplies through trade.

The economic impact of the epidemic

● Difficult to accurately predict the economic impact of the epidemic.

● May cause contraction of food supplies.

● Will not affect the implementation of the China-US phase-one trade deal

Yu: Some international organizations, such as the IMF and the World Bank, have made predictions that the coronavirus outbreak may have a negative impact on the economy, but it’s not as large. 

They also suggested that other countries should not overreact to this crisis. Whether the epidemic will affect global economic growth, including China this year？Which areas will have a serious blow?

Phelps: From my first point, we do not know how serious the impacts on production are going to be. Maybe the medical profession has some good intuition on that, but I'm sure they would say that each virus is a little different from other viruses. Also, it would be very difficult to assess the magnitude of what is going on. We don't really know.

Also, we cannot be sure that the past will be a good guide to the future. This virus is different from the previous one, maybe less severe in some respects, and maybe more difficult in some other respects.

Here I'm worried that it will cause a severe contraction of food supplies.

However, it’s fortunate that China can go on importing from the US and from the entire west, and similarly, overseas demand for Chinese exports will continue.
China is doing a lot of exporting and importing, which account for a large proportion of the total economy. Under the current circumstances, it's a very good thing.

Yu: Is there any similar situations in the United States for such kind of epidemic shock? If so, did it have a huge impact on economy?

Phelps: I'm not an economic historian, but I think there have been some flu epidemics in the past. I do think that output and employment was not severely affected by these epidemics in North America.

Maybe it's correct to say that history suggests that nations are able to manage fairly well an epidemic. It is a disaster, but it doesn't cause the disaster on economy that might be feared.

How should China deal with the economic impact of the epidemic?

● Adopt emergency employment subsidies to firms which kept their employees on the payroll

● Subsidize the purchase of capital goods to prevent sharp decline of prices.

Yu：What measures can the Chinese government take to buffer the economic impact of the coronavirus epidemic?

Phelps: I think we should focus on two points.

First, China should consider adopting emergency employment subsidies to firms so that the firms can continue to pay their employees. The subsidies would be paid only if the companies demonstrated that they kept their employees on the payroll.

Secondly, I think China might also want to subsidize the purchase of capital goods so that the capital goods sector does not become severely depressed.

The implementation of these proposals may be quite difficult. I think the Chinese will be in a better position to judge the practicality of what I'm suggesting here.

China-US economic and trade relations and the US economic situation
● The US will not worsen relations with China under the coronavirus epidemic

● The employment growth in the US has reached its limit and economic vitality needs to be restored

Yu: Some people are worrying about whether the coronavirus will accelerate the decoupling between China and the US. What’s your opinion?

Phelps： I would guess that President Trump will not wish to worsen relations with China at this time. He has survived an impeachment on him in recent weeks. I don't think he is going to be looking for new battles to start.

I think Trump wants to brag that he managed to achieve some economic peace with China. Also, I don't think that he will seize upon this challenge in China to attack China more. We'll see whether I'm right about that.

Yu: What's your expectation on the US economy of this year?

Phelps: I don't see a clear brightening of the picture in the US. I don't see further increase of employment. I think the recent employment growth has reached its limit and will fall down in the future.
I don't see continuing widening of labor force participation in the economy. I think the recent gains in this respect are all we're going to get. Some of those gains will be seen to be temporary so that unemployment will begin to rise a bit. Labor force participation may stop increasing, and productivity growth slowed a bit in the past year or two. That could continue.

I think the American economy has continued to exhibit a loss of dynamism and it will take a decade or more to get that back, if we can get it back.

Yu: Do you think the process of the election will affect the US economy?

Phelps: There’s going to be an intense political battle in the summer when the Democrats nominate their candidates. But again, I think that Wall Street and Main Street are both able to keep their heads down on their business from nine o'clock to five o'clock.

It won't have an immediate effect on the economy, but the outcome of the election may have an effect on the economy.

Right now, we don't know in which direction the Democratic party is going to go and we don't know how Trump is going to behave. There's going to be a great deal of uncertainty on the political side. But I think the economic side is not going to differ enormously. After this coming election, economy is not going to be immediately transformed.

This interview has been edited for clarity and flow.