China Daily Global / 2020-02 / 20 / Page013

Orchestrated response required

By Yang Panpan

International policy coordination is both necessary and urgent to limit the impacts of the epidemic on the global economy

Three events in the past two decades had notable impacts on the Chinese economy, including one epidemic (the 2003 severe acute respiratory syndrome outbreak) and two natural disasters (the 1998 floods and the 2008 Wenchuan earthquake). On these three occasions, China accounted for 6.8 percent (1998), 8.7 percent (2003) and 12 percent (2008) of the global economy respectively in terms of purchasing power parity, but now its share is nearly 20 percent. So the current novel coronavirus outbreak may affect not only the Chinese economy but also the world economy.

After the outbreak of the virus, major research and financial institutions share the view that the Chinese economy will slow by 0.3 to 0.6 percentage points against previous expectations. Since China has become an engine for the world economy, in this scenario the global economy will slow by 0.06 to 0.12 percentage points against previous forecasts, so long as nothing big happens in other economies.

The impact of the current epidemic on the world economy is being largely felt in such aspects:

Since China is a major global consumption market, the consumption demand for other countries is reduced. The sector that will bear the brunt is cross-border tourism, other tradable consumer products industries will likely to be impacted too. Take Thailand for example, China, as its largest source of tourists, contributes 30 percent to its inbound tourists. The National Tourism Bureau of Thailand estimates its loss in the tourist sector at $3 billion. So Thailand has already cut its 2020 growth forecast and its central bank has lowered its policy interest rate to 1 percent, a record low.

The effects of the slowing Chinese economy will cascade through global value chains. As the time to resume work in China after Spring Festival has been delayed, production industries will be affected, so will investments in the manufacturing sector. As a result, China's import demands for overseas commodities and intermediate products will drop. At the same time, production, assembly and the manufacturing of intermediate and final products in China will all be delayed due to the epidemic, so consumption in both Chinese and other markets will all feel the blow.

The automobile and electronic industries are the first to feel the pain in the value chains. Take the auto industry as an example. Hyundai announced on Feb 4 that due to broken supply chains, its South Korean factory, the largest among all its factories, will halt production, making it the first automobile company outside China to do so. Considering the fact that the auto and electronic industries are key categories for the economy to recover, their slowdown and weak demand will make a dent in global manufacturing.

The impact of the epidemic on key regions should be closely followed. The Association of Southeast Asian Nations and Latin America are two such regions. The ASEAN countries are suffering a direct negative impact because of the close value chains and personnel exchanges in East Asia. Although, from a longer-term perspective, the outbreak may speed up the industrial chain transfer and thus benefit regional growth and investment. But in this process, the interaction and connectivity between China and the ASEAN countries are essential.

As for the Latin American countries, the spillover effects are mainly negative. China accounts for one-fourth of the exports of Peru and Brazil and one-third of Chile's. What's more, countries in this region are relatively reliant on bulk commodity exports. So if commodity prices remain low due to the epidemic, these countries' exports and growth will be stressed.

To deal with the effects, China's economic policies are the main ones to rely on.

The central tasks of China in addition to epidemic prevention and control, are resuming production and ensuring people's livelihoods. Governments at various levels have issued policies to support production industries and companies. In terms of monetary policy, on Feb 3 and Feb 4 the central bank of China, the People's Bank of China, conducted open market operations beyond expectations, accumulatively putting 1.7 trillion yuan ($242.7 billion) of liquidity into the economy to stabilize it. In terms of fiscal policy, as of Feb 8, a total of 71.85 billion yuan of earmarked funds for epidemic prevention and control have been arranged through public finance, a package of policies have been rolled out, and the Ministry of Finance and the central bank have joined hands in "special refinancing and interest discount" policy, the first of its kind.

Such policies can all help China enhance resilience against the shocks produced by the epidemic, and thus provide basic support to reduce to the minimum the epidemic's negative impacts on the global economy.

However, since the global economy is experiencing a weak recovery, international policy coordination is both necessary and urgent.

To be specific, study or work groups on the epidemic should be established within the G20 or other frameworks for international cooperation to fully evaluate its impact on the world economy and work with international organizations to assess the fragility of each economy and financial market. By so doing, macroeconomic policy coordination and collaboration could be enhanced, and the black swan event could also be prevented from escalating into a local or even systematic crisis.

At the same time, international mechanisms for emergency materials distribution, transportation and customs clearance should be put in place. Countries should not take excessive or beggar-thy-neighbor measures. Instead, they should all work together to ensure reasonable flows of personnel, materials and funds and strengthen cooperation on vaccine R&D.

In the long run, global economic policy coordination mechanisms should include responses against public health emergencies and other black swan events. Such responses should have a package of recognition strategies, specific measures, work tools, relevant planning and source of funds in order to help global economic development in such scenarios.