(The original Chinese-language version of this article is penned by Liu Qiao, dean of Peking University’s Guanghua School of Management.)

Our understanding of the covid-19 outbreak’s impact on the economy has gone a long way. Before Feb. 20, many saw it as a domestic health incident and measured its economic impact in terms of the aggregate and China’s 2020 economic goals in poverty relief, GDP and other fields. While lower GDP growth was forecast, many were optimistic.

As the outbreak gradually enveloped the globe in March and the United States became the new epicenter, people started to have second thoughts. With the social and economic activities across this interconnected world grinding to a halt into the unforeseeable future, people realize this could be a severe blow to the economy.

Different from the 2008 crisis, the outbreak is directly hitting the real economy, causing production, operation and market activities based on human contacts to have gone into a shock.

While first quarter data has yet to come out, China’s official urban unemployment rate jumped in February to 6.2% from 5.1% in December, reflecting that nearly eight million people losing their jobs in the first two months of 2020. Industrial production fell 13.5%, and growthin servicesproduction contracted 13 percent.

The situation in the U.S. is similar as former Federal Reserve Chairman Ben Bernanke fittingly described the economic impact from the coronavirus outbreak is closer to a“natural disaster.”

NOT A FINANCIAL CRISIS YET

Unlike a crisis born amid the labyrinthine structural issues in the financial system, the outbreak is a black swan that is directly hitting the real economy. According to our estimates, it will hack off ten percentage points or more from the U.S. GDP.

Ensuing problems in cash flow, debts, production and unemployment will potentially affect social stability, so no wonder the U.S. and many European countries have brought out aggressive stimulus plan to shore up the economy. The 2-trillion-dollar recovery plan accounts for 10 percent of its GDP. Germany’s aid package of 750 billion euros (808billion U.S. dollars) is roughly 20 percent of its GDP.

It should be stressed that theirs are recovery plans instead of stimulus since the economy is suffering heavy losses under the outbreak and needs recovery. The U.S. plan, aimed to address companies’cash flow issues, focuses on the financial aspect. So far not many financial institutions have gone bankrupt like in the 2008, so it is currently a liquidity crisis for the capital market and not a financial crisis yet. However, if a financial crisis occurred and fed back into the real economy in a malicious cycle, the global economy would be beyond redemption. Right now, we are still feeling our way across the river.

HIGH-PRECISION MACRO-POLICY

Understanding the nature of the outbreak is crucial for mapping out macro-economy policies, which should focus on compensating outbreak-induced losses and laying foundations for economic recovery. Neither fiscal policy or monetary tools are able to solve long-term structural issues, and policy to counter outbreak impact should first lend support to hard-hit departments, groups and industries. However, one should be discreet if such policies might have long-term structural impact.

For China, such policies should take in account the country’s changes in economic structures and core logics. Last year’s data show that consumption contributed 57.8 percent of GDP growth while investment’s share fell to 31.2 percent, and service took up a greater portion in consumption. This outbreak is dealing a heavy blow to consumption.

As consumption is closely related to medium, small and micro-size business, many of them are facing the risk of bankruptcy, and since they employ more than a lion’s share of labor force, their risks will transform into a vast unemployment problem. In this regard, the U.S. has the same problem as its jobless claims hit 3.28 million, nearly two percent of the country’s entire labor force, in the week ended March 21.

All this goes to show that the mechanism of the transmission of the outbreak’s economic impact has been verified by real-life data and it is worse than economists previously thought.

If the lockdown continues for more weeks, the figure will be hard to imagine. Some estimate that the U.S. jobless rate will be as high as 20 percent, and it is possible. The recovery plans of China and the U.S. share the same clear spirit in supporting firms and shoring up employment.

STOP OBSESSING OVER GROWTH TARGET

Macro-policy must have a clear goal, and this goal should not be unrealistic. We should know better by now than obsessing with a high economic growth target and focus efforts on aspects that are directly hit by the outbreak.

The U.S. recovery plan comes early, fast and aggressive. As for China, we should reevaluate the impact of the outbreak on the country’s economy. As January and February data revealed, the country’s market was basically in a coma. More people are coming back to work in March but the real performances will only be clear after the first quarter data comes out in mid-April. The first quarter data will serve as a basis for us to forecast the 2020 economic growth. Until then, it is anyone’s guess.

BROKEN SUPPLY, DEMAND

As China started to focus on economic recovery and aim for rebound later this year, exterior environments began worsening with the pandemic extending to more and more countries, affecting supply and demand. It is very likely that the U.S. and Europe will suffer at least a ten-percentage-point decrease in second quarter growth.

A global lockdown is forcing social and economic activities to a halt and breaking down the global supply chains, in which China is deeply involved as a result of decades of globalization.

The situation is grim. Resumption of work does not mean resumption of production. Without demand, there are no orders. On the other side, a finished product is out of the question when a factory lacks key opponents or intermediate goods. Stuck between the absence of both supply and demand, how will the country’s economy fare this year is a question that begs rational evaluation. As the whole world is deep in the war against covid-19, China’s economy won’t be able to keep its own peace.

STRUCTURAL REFORMS

What is China’s policy options then? Neither fiscal or monetary tools are able to solve long-term structural issues. In order to do that, we need structural reform measures.

This round of macroeconomic policy rightly targets medium and small-size businesses and consumption and ultimately aims to stabilize employment. New infrastructure such as 5G networks and data centers is a hotspot topic. However, it is worth pointing out that, despite its value in solving the China economy’s long-term structural problems, its effect in coping with the huge short-term economic losses caused by the outbreak will be very limited. It cannot solve urgent issues such as unemployment and business bankruptcy.

INEFFECTIVE POLICY TRANSMISSION

Monetary tools-wise, China’s central bank has already resorted to measures including the cutting of interest rates, RRR and extending loans to boost liquidity. Different from the U.S. market, China’s financial market does not have a liquidity problem. However, how much liquidity and bank loans are actually benefiting smaller businesses given the country’s less-than-effective policy transmission mechanism should be our concern. It is likely that these monetary tools cannot effectively help smaller firms increase credits and cash flow.

China’s central bank has its reason not to follow its American counterpart to further cut rates and boost liquidity. The unlimited QE and near-zero rate in the U.S. will cause some pressure on China, but China still has room for rate cuts and can always adjust its moves accordingly. Meanwhile, it is of significant importance to offer cash support and lower costs for smaller businesses. In the long run, improving a market-oriented interest rates mechanism is undoubtedly the most crucial part of China’s structural reform for its financial system.

NEW INFRASTRUCTURE NOT PRIORITY

Despite all the hype around new infrastructure and its huge potential in upgrading China’s economy and boosting the total factor productivity (TFP), it is not a solution to the country’s short-term problems and its current scale is far from enough. In a joint research conducted by professor Yan Se and me, the investment volume in China’s 5G infrastructure in 2020 is estimated at only over 200 billion yuan ( 28 billion U.S. dollars).

There were media reports that infrastructure projects worth more than 30 trillion yuan had been planned across China and most of them were in new technology infrastructure. That was utter nonsense. The country’s entire infrastructure year-on-year growth in 2019 was only 3.9 percent, an extremely low record over the past four decades since the reform and opening-up. That’s because most of the country’s large-scale infrastructure projects ( high-speed railway,roads,airports,subway…) have already been finished, and there’s limited space for new ones. Still, more efforts should be made to develop new projects of similar caliber to counter the outbreak’s impact and accelerate economic recovery.

There is one question though: how much effect can infrastructure have on employment, consumption and medium, small and micro-sized businesses?

SMALLER BUSINESSES ARE KEY

My advice is simple: support medium, small and micro-sized businesses, boost consumption and shore up employment. To that end, fiscal policy should further reduce taxes and cut fees, and it is worth considering the possibility of making these measures permanent.

Last year China rightly cut its value-added tax rates. Now how about reduce enterprise income tax? Let’s say, from 25 percent to 20 percent? China has now nearly 30 million medium, small and micro-sized firms and 90 million individual businesses. In combination, they are the country’s biggest employer. Without them, there will be no tax to collect.

What about providing direct loans to smaller firms via fiscal policy? For instance, set up a special fund from which financial institutions give smaller firms loans and divide the credit risks between the country’s treasury (which shoulder a bigger share) and financial institutions. It should be noted that some 367 billion U.S. dollars out of America’s two-trillion stimulus is directly handed to businesses with no more than 500 employees each.

Many of these smaller businesses might only need 100,000 to 500,000 yuan each to get through this covid-19 ordeal. They are the foundation for the country’s economic recovery and should be preserved at all cost.

RAISE INDIVIDUAL INCOME TAX-FREE THRESHOLD

As for consumption, China should consider cutting marginal tax rate and raising tax-free threshold for individual income tax. Right now the threshold is 5,000 yuan and the taxpaying population is over 70 million. If it rises to 6,000 yuan, only 50 million will pay taxes. Given the country’s severe income inequality, these tax payers are the pillar of consumption and it is crucial to maintain their confidence in spending.

Meanwhile, a marginal tax rate of 45 percent for the country’s salary-earning class is just too high. Bigger cut will mean consumers’stronger confidence.

CASH & COUPONS

Professor Yan and I previously recommended issuing cash or coupons for spending. According to our calculations, Hubei Province, the center of China’s outbreak, has more than 30 million people with jobs, and 1,000 yuan per person will amount to a total of 30 billion yuan.

Meanwhile, the low-income population accounts for over 20 percent of all people with jobs. In total, the country might spend 260 to 270 billion on coupons for them.

The aforementioned groups basically spend all they earn to maintain daily living, and most of their coupons will go into spending as well, unlike high-income groups. If all this money goes into consumption and a combination of other stimulus measures take effect in sync, a huge amount of smaller and individual businesses will recover and market activities will be likely to recover after the outbreak.

INVESTMENT DONE RIGHT

Last but not least, investment is important, but the country should not overly rely on its effect. With a low return on capital rate, investment cannot effectively translate into demand in the short run but the leverage ratio risks rising sharply. In addition to new technology like 5G, the country should guide investment to more fund-starved, livelihood-related aspects such as residential community upgrades and rental housing. The country has 13 million new urban residents every year as well as 290 million migrant workers. Their housing problem will not be solved by commercial houses and rental is bound to play a big role. Guiding the market toward these areas will greatly relieve fiscal pressure. Reform of the country’s housing fund mechanism and Real Estate Investment Trusts (REITs) should also keep going.

With China’s urban planning system, more people will flow into central urban areas, and infrastructure investment in these densely-populated areas will be highly rewarding as it will stimulate consumption and the service industry along with the development of more sectors.

This year’s economy is still under huge downward pressure and it is necessary to boost the role of investment. However, investment must be done right. Projects that are developed hastily without clear plans or goals will only contribute to financial risks and not effectively convert to demand.

Based on new evaluations of the outbreak, it is time to present more aggressive macroeconomic policy that focus on consumption, employment and smaller businesses. Instead of giving perfect answer to a wrong question, we should first find the right question to ask and then try to come up with a good answer — however imperfect it is at the moment.