Zhu Jun, head of the International Department of the People's Bank of China. (Photo: China Daily)
International cooperation and macroeconomic policy coordination can mitigate the unprecedented economic impacts of the novel coronavirus and preserve financial market stability, and governments should take more proactive actions 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 central bank, shared that opinion in an exclusive interview with China Daily on Thursday, a week after the G20 Extraordinary Leaders' Summit on COVID-19.
At that special 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 falling into a recession.
The G20 finance ministers and central bank governors are now developing the Action Plan in Response to COVID-19 per agreement reached at the Special Summit. The G20 counties are injecting over $5 trillion into the global economy as part of targeted fiscal policies, economic measures and guarantee plans to counteract the impacts of the virus outbreak.
As the outbreak continues around the globe, with 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 the lockdowns. Aggregate demand also has dwindled due to the closure of factories almost across the global supply chain.
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 revised downward its global growth projections several times and expected to see negative growth figure this year.
The uncertainties and recession risk have rattled financial markets, prompting sell-offs across asset classes and causing a shortage of US dollars on international financial markets.
Many economies have taken aggressive monetary easing measures. About 40 central banks cut interest rates in a total of more than 50 moves in March. These measures did not immediately stabilize the market.
"Monetary policy measures, even adopted in a rapid and very aggressive manner, cannot directly control the virus spreading. More powerful epidemic prevention and control measures, and more proactive fiscal policies are needed to stabilize market confidence," said Zhu.
The PBOC 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. In case of further bad news, financial market turmoil may be re-triggered, Zhu said.
The PBOC official listed some potential risks, including stock price adjustments in developed countries, structural liquidity shortage, which may cause cross-market risk contagion, and rising non-performing loans of banks and corporate bond defaults.
As the US 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, comparing with 6.3 percent drop of euros and 12 percent decline of pound sterling against the US dollar.
The overseas market volatilities have a spillover effect on developing countries, through channels such as weak market confidence, she said.
Amid uncertain prospecst of 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 found 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 opinions from the market compared the impact of the pandemic with that of the Great Depression (1929-1933). "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 coordinated global response are needed."
The PBOC supported joint actions under the G20 mechanism and global financial safety net to work out a policy mix, in particular those measures targeting small and medium-sized enterprises that would help address the impact of COVID-19 in the short term, and bolster long-term economic recovery, said a statement on Wednesday.