By Wu Lejun
The recent outbreak of the new coronavirus in China has raised concerns about the development of the disease and its impact on China and the global economy.
Stephen Roach, a senior fellow at the Jackson School of Management at Yale University and a former chairman of Morgan Stanley Asia, told the People’s Daily that the Chinese government has enough monetary and fiscal space to deal with the economic impact of the outbreak and he expects an economic rebound in the second half of the year.
China’s Central Bank pumped 400 billion yuan (about $57 billion) into the banking system on Feb 4, after an injection of 1.2 trillion yuan into the system via reverse repos on Feb 3. Roach said the Central Bank’s move significantly demonstrates determination and commitment to address financial anxiety caused by the outbreak, and also provides an important liquidity backstop for banks that have been hit hard by disruptions in commercial and industrial activity, at a time of exceptional preparedness and containment.
Roach also noted, however, that the Central Bank’s efforts to inject liquidity into the market were necessary but not sufficient to deal with the growing pressures of the current outbreak.
“At the same time, control of the rapidly spreading 2019-nCov disease is less a task for the Central Bank and more a responsibility of China’s public health authorities. Curtailment of inter-city travel, coupled with multi-city quarantines in Hubei Province and rapid construction of two new virus-dedicated hospitals in Wuhan, are likely to be far more effective at prevention and control of this virulent disease,” Roach said.
On Feb 3, the IMF and World Bank issued statements that China has sufficient fiscal and monetary space to cope with the economic downturn caused by the outbreak and expressed confidence in the resilience of the Chinese economy. Roach agrees, arguing that China has ample fiscal and monetary policy ammunition to deal with downside risks, whether from the coronavirus outbreak, the early impact of the first phase of the China-US trade conflict or more than three years of deleveraging.
Roach said it is difficult to predict with any accuracy the short-term and medium-term impact of the outbreak on the Chinese economy. Just before the outbreak, the latest data on the Chinese economy, such as the Purchasing Managers’ Index for January, were actually fairly stable. But now, a combination of strict segregation of Chinese cities and travel restrictions in some countries has hit economic activity. For now, the problem with countercyclical stimulus is that the Chinese economy lacks a vigorous growth cushion that would enable these policy actions to be most effective.
He cites the impact on the economy after the SARS outbreak in early 2003. SARS hit the Chinese economy hardest in the second and third quarters of that year, reducing nominal gross domestic product growth by about 2 percentage points from 13.4 percent in the second quarter of 2003 to 11.5 percent in the third quarter. The short-term downside risks to growth are all the more worrying because China’s economy is now growing much more slowly than it did that year, and GDP growth slowed to 6 percent by the end of 2019 before the new coronavirus hit.
“The logic of the lack of a growth buffer also applies to the world economy,” Roach added. According to the IMF’s latest estimates, the world economy grew by just 2.9 percent in 2019. That is just 0.4 percentage points above the 2.5 percent threshold for a global recession, which is likely to heighten financial market fears. And many multinational companies, such as Ford, Apple, Siemens, Honda, McDonald’s and Disney plan to suspend operations in China, so further downward pressure has weakened the global manufacturing, retail, entertainment and travel industries. Moreover, industrial activity in other economies, from East Asia, Latin America and North America to Europe, could be severely damaged as China plays a key role in many global supply chain centers.
Roach believes that, as with SARS 17 years ago, any coronavirus-related damage is likely to be temporary, followed by a sharp economic rebound. After the SARS outbreak in early 2003, nominal GDP growth rebounded sharply in late 2003 and early 2004, accelerating by about 4 percentage points over the next four quarters to 15.3 percent (q3-q4).
“Assuming the outbreak control measures in the next 2-3 months, China’s combination of monetary and fiscal stimulus, coupled with rapid public health policy reforms, would ensure a rebound and recovery in the second half of 2020,” he said. The public health component is particularly important to highlight China’s commitment not to allow such outbreaks to happen again, he added.