At present, the top priority is to encourage a return to work and production in an active and orderly manner while exercising precise control over the epidemic, so as to stabilise and reinforce market players and strengthen the momentum of the economic recovery, writes Zhang Henglong, Professor at Shanghai University.
The uncertainties caused by the COVID-19 pandemic destroyed our expectations
As the world is still emerging from the economic crisis caused by the financial turmoil of 2008, the world economy remains sluggish, with many problems remaining unsolved despite efforts to stimulate its growth; this is the so-called “new normal”. Even if the pandemic had never happened, the world economy would still experience weak growth, with many issues at its core. The pandemic just dealt another blow to the world economy, which has been weakened by challenges and risks such as weak demand, excessive debts and anti-globalisation policies.
The severe impact of the outbreak on the global economy can be seen in the strong fluctuations of the capital market. The declines in both risky assets and risk-averse investments indicate that the market is no longer concerned with foreseeable risks like inflation, but rather with uncertain risks. The panic these caused has further shattered market expectations and has led to drastic fluctuations. That is what the market has experienced recently. More importantly, the response to the epidemic among some national governments has prevented the market from having any chance of containing the spread of the virus. That might be worse than the epidemic itself. Human life is of greater value than anything else. Will asset devaluation matter if human lives are lost? Holding cash is most important in the event of an emergency. So, although gold, the traditional asset to own when averting risks, has plummeted, the dollar continues to rise. This sends us a clear message that the global public health crisis triggered by COVID-19 is evolving into a world economic crisis, which is also widely expected in the market.
Where will the market go in the future? In the short run, the market will experience an adjustment, which is mainly driven by the panic that is subject to the development and control of the epidemic. There are two core indicators to judge that, one is the number of new confirmed cases and the other is the effectiveness and timeliness of control measures. Apparently, neither indicator has shown a positive trend so far. As a result, it is challenging to rise above the market panic in the short term.
So, is quantitative easing a promising solution to the volatile market? Quantitative easing was introduced to tackle the financial crisis in 2008, which was caused by factors within the financial system, where some important financial institutions were trapped addressing challenges. Yet, the market fluctuation is not the same this time. From our previous analysis, the market volatility is not due to a number of important financial institutions in the US declaring bankruptcy, but rather caused by the rapid spread of the epidemic throughout the world and the uncertainty of its development. After the US Federal Reserve announced an interest rate cut and quantitative easing, the continued decline in the stock market has indicated that the market’s expectations for the epidemic and its impact remain unchanged. To improve market expectations, we must prioritise saving lives rather over rescuing the market, to begin with.
The damage caused by the epidemic to the world economy differs from that caused by the 2008 financial crisis
The worldwide outbreak of COVID-19 has worsened the situation for global production, threatening the industrial chain with the risk of a breakdown. Collectively representing two-thirds of the world’s total GDP, the EU, the US, Japan and China are right at the centre of the global industrial supply chain. While the landscape characterised by tripartite confrontation takes shape, regional industrial clusters have gradually evolved. China, the US and Germany, as the centres of Asia, America and Europe, respectively, form a closed-loop value chain within their respective regions. Moreover, China serves as a hub connecting the value chain in developed countries with those in developing countries. The pandemic has had a huge impact on global production, which was never seen in the financial crisis of 2008 and must warrant sufficient attention.
The game between oil producers alone cannot account for the slumping oil prices; the weakened market demand for crude oil matters as well. On March the 30th, international crude oil prices collapsed again, falling below $20 per barrel for the first time since February 11, 2002. As the world’s biggest energy importer, China saw its economy halted for almost three months, which severely impacted the global crude oil market. In addition, market expectation tends to be pessimistic. That will result in less investment and weaken the demand for crude oil, making it hard for oil prices to return to a high level in the short run.
Can China’s economy be immune to the impact of COVID-19?
While China’s economy has bottomed out and gradually returned to normal, European and American countries have reached the peak of the epidemic, at which both consumption and production are heavily impacted. That will slow the recovery of China’s economy in the context of globalisation. For example, China’s foreign trade industry has been disrupted since domestic production was resumed. Export-oriented manufacturers in many places reported that some brands have, one after another, cancelled or reduced orders for exports as consumption expectations dropped due to the fast-spreading epidemic in Europe and the Americas. This constrains foreign trade, where production was just recovering, which has come to a halt again. Most surveyed foreign traders felt helpless. Hence, no countries, especially key countries like China, can be immune to the impact of the pandemic, which has spread to every area of the world economy.
The nature of China’s economy remains unchanged; China still enjoys the same position in the global value chain, which is why its economy is so resilient. Let us compare the BRICS countries first. They are viewed as representatives of the emerging economies, but cannot technically be grouped together as they are not at the same level of development. An economy’s position in the world market is related to its export structure, or what it exchanges with the world. A comparison reveals that Russia, Brazil and South Africa rely mainly on raw materials exports ranging from crude oil to gold. The pricing of bulk commodities is not fully controlled by their exporters. As soon as there are fluctuations in the economy, these countries are the first to bear the brunt, which is evidenced by the financial crisis of 2008. In India, raw materials account for half of its export structure and manufactured goods lie in the low end of the industrial chain. China has an export structure that is completely different from the other BRICS countries: its leading export commodities include computers, integrated circuits and communication devices. This reveals China’s position in the global division of labour, and indicates China’s huge economic capacity and gradually improving industrial structure.
China is currently the world’s largest manufacturer, with a complete modern industrial system. Twelve of its 16 manufacturing industries have the longest value chains in the world. China’s position in the global value chain has both pros and cons. On the one hand, the spread of the pandemic in developed countries will affect China’s import of intermediate products, which will further impact the manufacturing of final products and foreign demand for products made in China, such as computers, automobiles and electronic products. On the other hand, as the global value chain is path-dependent, it is hard for the short-term impact of the pandemic to change a country’s position in the global value chain. So, the highly competitive value chain and the huge demand add to the resilience of China’s economy.
The pandemic severely impacted public health systems across the world, tested worldwide governance systems, and threatened the belief in a “big market and small government” that has been popular since the 1970s. While Spain is nationalising medical institutions, France is considering a more positive attitude towards the reform of its economic structure. In China, government officials at all levels are not only working to render needed assistance, but also using different fiscal and financial means and increasing public investment to boost the private sector’s confidence in investment.
Since the outbreak of the pandemic, bailout policies have been rolled out to accelerate counter-cyclic regulation. Proactive fiscal policies have started working and are expected to boost the construction of a new type of infrastructure, speed up the economic transformation, improve the operating efficiency of the economy and drive social development. Local financial resources have been strengthened to secure people’s livelihoods, as well as ensure the payment of salaries and normal operations. It is foreseeable that “blue” (technology), “green” (environmental protection) and “white” (healthcare) infrastructures will become the key fields of public investment, as they will not only increase the operating efficiency of the economy as a whole, but also make up for the deficiencies in the development of the society and people’s livelihoods.
At present, the top priority is to encourage a return to work and production in an active and orderly manner while exercising precise control over the epidemic, so as to stabilise and reinforce market players and strengthen the momentum of the economic recovery. Furthermore, China remains committed to building a “community of shared future” for mankind, and has provided assistance to the international community at proper times and to appropriate degrees, honouring its responsibility as a major country in the era of globalisation and contributing to the recovery of the world economy.