International cooperation and macroeconomic policy coordination can mitigate the unprecedented economic impact of the novel coronavirus and preserve financial market stability, and governments should take more proactive measures to ward off a possible recession, according to a senior central bank official.
Zhu Jun, head of the International Department of the People's Bank of China, the nation's central bank, shared the opinion in an exclusive interview with China Daily on Thursday, a week after the Extraordinary G20 Leaders' Summit on COVID-19.
During that special virtual summit, President Xi Jinping called on G20 members to enhance international macroeconomic policy coordination to address the negative impacts and prevent the world economy from entering a recession.
The G20 finance ministers and central bank governors are now developing the Action Plan in Response to COVID-19 based on the agreement made during the summit. The G20 countries are injecting over $5 trillion into the global economy as part of targeted economic measures to counteract the impact of the virus outbreak.
As the outbreak continues around the globe, with its speed and intensity exceeding earlier expectations, its impact on the real economy is intensifying.
The outbreak has caused a sharp fall in aggregate demand after consumption and the service sector took a direct hit from lockdowns. Aggregate demand has also dwindled due to the closure of factories across the global supply chain, and unemployment is rising rapidly in a magnitude unseen even in the global financial crisis.
Market expectations have deteriorated as reflected in the poor purchasing managers index readings in major advanced economies. The International Monetary Fund has lowered its global growth projections several times and expects to see negative growth this year.
The uncertainties and recession risk have rattled financial markets, prompting sell-offs across asset classes and causing a shortage of U.S. dollars on international financial markets.
Many economies have taken aggressive monetary easing measures. About 40 central banks cut interest rates in March, but these measures did not immediately stabilize the market.
"More powerful epidemic prevention and control measures, and more proactive fiscal policies are needed to stabilize market confidence," said Zhu.
The central bank official noted that market sentiment worldwide has improved recently.
"Along with rapid and aggressive monetary policy responses, fiscal policies and other policies are catching up now, which have helped abate market panic," Zhu said.
But as the pandemic is still taking its toll on the real economy, investors' confidence remains weak. Further financial market turmoil may be triggered if there is more bad news, said Zhu.
The central bank official listed some potential risks, including stock price adjustments in developed countries, structural liquidity shortages that may cause cross-market risk contagion, and rising nonperforming loans of banks and corporate bonds defaults.
As the U.S. dollar index sharply rose to 103 on March 20 from 94.6 on March 9, the RMB depreciated against the greenback by 2.4 percent. "The RMB performed the best among major currencies (amid the market turmoil)," said Zhu, compared with the 6.3 percent drop by the euro and a 12 percent decline by sterling against the U.S. dollar.
Overseas market volatility has a spillover effect on developing countries, through weak market confidence, she said.
Amid the uncertain situation due to the pandemic, a steep fall in oil prices and global financial market turbulence, emerging markets are facing record-high capital outflows. Many heavily indebted countries are finding it harder to service their debts, and have applied for assistance from the IMF. Some developing countries have limited policy capacity to cope with the health crisis, and they need more support from the international community, Zhu added.
Some experts have compared the potential impact of the pandemic to that of the Great Depression, which began in 1929. "I think they are too pessimistic, but that could remind policymakers all over the world to be vigilant about the risks.
"Under the condition that countries are working together to effectively contain the virus and spur the global economy, the impact of the pandemic will be largely mitigated," she said."The international community should be fully alert to the risks of economic recession and systemic financial risks. Closer international cooperation and a coordinated global response are needed."
The central bank is supporting joint action under the G20 mechanism and the global financial safety net to work out a policy mix, in particular measures targeting small and medium-sized enterprises that would help address the short-term impact of COVID-19, and bolster long-term economic recovery, a statement said on Wednesday.
