The COVID-19 pandemic is sweeping the world, posing huge challenges to global economy.

Where will the global economy go? How should China, the United States and Europe respond? When will another round of financial crisis come?

On March 17, 2020, China Development Forum held a webinar on "Global Economy and Financial Market" to provide valuable insights and promote international information exchange and cooperation in this critical period.

The first speaker was Mr. Zhu Min, Chair of National Institute of Financial Research, Tsinghua University.

Mr. Zhu has served as Vice President of the Bank of China and subsequently the People's Bank of China, and Deputy Managing Director of International Monetary Fund.

Mr. Zhu has a profound understanding of China and has sharp insights on the international macro-environment. And he also has rich experience in economic and financial theories, practices and management.

In his view, the recent turbulences in the world stock markets are not result of panic selling and reflects rational judgements. Going forward, the financial market will continue to adjust, and a global economic recession is very likely to happen.

The Chinese economy has bottomed out last week. Hit by the pandemic, consumption and export have had slower growth. If China wants to reach a 5.5% growth in 2020, it would have to rely heavily on final capital formation.

Zhu Min admitted that he experienced several economic and financial crisis, and the current situation is the most complex and uncertain, with the pandemic curve going up exponentially, an economic recession a foreseeable future, the financial turmoil not yet ended, oil price declining, geopolitical tension intensifying, and populism on the rise.

The following are excerpts from speech by Zhu Min.

How will the global pandemic evolve?
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·The pandemic has not yet reached its peak

·A global pandemic is coming

In general, the epidemic is heading towards a global pandemic, and the peak has not yet arrived.

At present, China has managed to flatten the curve with the number of confirmed cases reached a plateau of just over 80,000. But the world is still undergoing a typical uptick period. The number of confirmed cases is exponentially growing and the average mortality rate is hitting 3.3%.

Usually when epidemics occur, governments will flatten the epidemic curve through isolation, healthcare and other policy measures to avoid grave shortages of medical resources at times of peak demand. The potential repercussions, however, lie in the pressure for economic recovery.

Will the global outbreak lead to grave shortages of medical resources?

There are three sources of uncertainty: the U.S., the U.K. and Sweden.

The official case number by the US is far below the actual number, and its future development deserve concern. And if the U.K. and Sweden adopt the policy of herd immunization, hundreds of thousands of people might get infected, which will exert huge impact on the global economy.

China has mobilized unprecedented forces to combat the pandemic, yet many other governments are lagging behind in their responses. They have no specific measures and the public lack awareness on the severity of the pandemic.

For example, in Europe, the aging demographic and the high mortality rate are straining medical resources. The cumulative number of confirmed cases in Italy has reached over 20,000, and according to our estimates the infection rate in northern Italy has reached 6.6 per 10,000 people. Its healthcare system is getting overwhelmed.

All these indicate that a global pandemic is coming.

The Chinese economy
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 ·The Chinese economy has bottomed out

· Chinese economic growth depends heavily on new infrastructure investments, meanwhile export has become a challenge

China's economy bottomed out last week and began to rebound this week.

It’s estimated that the loss in consumption caused by the epidemic in January and February reached RMB 1.38 trillion, accounting for 1.2% of China's annual GDP.

When the pandemic subsides, restoring consumption would become a real headache. After SARS ended, China's investment, infrastructure, real estate and other fields saw a 10% rapid growth, while consumption only grew by 7.35% that year. Currently, due to the pandemic, there is limited room for export growth. Therefore, future economic growth will mainly rely on final capital formation.

In the past two months, our government has introduced a series of policies to support the economy.

It has been roughly estimated that China has approved investment projects worth of nearly RMB 6 trillion, among which UHV, inter-city high-speed rail, 5G, new energy and other "new infrastructure" would become drivers of economic growth.

The scale of investment and the efficiency of project approval in February are rarely seen in the past five years. This change will stimulate economy and promote technological upgrading.

In addition, the Chinese government has made efforts to stimulate consumption on both the supply side and the demand side.

On the supply side, the government has issued a series of policies to promote consumption upgrading, smart consumption and other measures to increase the supply of high-quality consumption needed by residents. Local governments have also timely introduced, on the demand side, policies to boost the tourist industry, and provide welfare subsidies, and subsidy for buying cars.

At present, the biggest challenge posed to China's economic rebound lies in export sector. The global pandemic continues to develop exponentially, while Germany began to restrict exports, and more countries and cities are expected to go further to lockdown. It is predicted that the global trade would plummet and suffer negative growth.

Currently, Yangtze River Delta and Pearl River Delta have a resumption of work rate of over 90%, but the overall production capacity remained at a low operational level, because export-oriented enterprises lack overseas orders.

I believe that in the future, China needs to constantly adjust its macroeconomic stimulus policies according to the global situation of pandemic and international trade.

The World Economy
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· There is a narrowing space for macro policies

· A global economic recession is highly probable

I believe that there is a high probability of a global recession in 2020.

Our case study of Italy shows that, from February to May, the shock to consumption would be €58 billion, accounting for 2.5% of Italy's GDP. It is only a static analysis.

In the face of recession, we need to continue to adjust our policies.

For example, we need monetary policy tools to ensure liquidity flows to where it’s needed, we need fiscal policies to support businesses, household consumption, employment and training, we need structural reform to improve efficiency. We also need global cooperation, especially in economic and financial policy making.

At present, macro policies in many countries have little room of adjustment to aid economic rebound.

First, there is little room to support the economy by cutting interest rates. The U.S. Federal Reserve cut interest rates to zero in one move, which means that they’ve used up all their ammunition. Second, countries have limited fiscal space. 

Put 2007 as the base year, debt in developed countries has increased by 50%, that of the emerging countries by 30%, and the developing countries by more than 20%.

In the past 20 years, the global economy has been undergoing a medium-speed growth. The average growth rate of global economy from 2008 to 2019 is lower than that of 30 years before the 2008 crisis.

In 2019, the world economic growth rate stood at 2.9%, and, affected by the pandemic, the economic growth rate will continue to decrease this year.

Growth in international trade remains low since the 12.3% dive in 2008. Last year, we saw a mere 0.9% growth of global trade. It appears that the global trade will turn into a negative growth this year.

Financial Market Adjustment
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· The financial market adjustment is not yet completed

· Corporate debt and sovereign debt are the risk zone

Recently, the sharp decline in financial markets in the United States and around the world has attracted attention.

People have question markson whether the stock market will continue to fall this year.

Taking January 1, 2020 as base, it can be found that in three major stock markets in China, its GEM and SME has barely held out above the benchmark of 2020.

On the other hand, the US stock market has fallen by 20% to 30% this year, and European stock market 40%, which made the overall decline substantial.

In my view, the three rounds of huge declines in global stock market this year are all rational responses, rather than panic selling caused by information outside the market.

The first decline was resulted by the epidemic in China and Asia, which was at time only regional, and remained a relatively low volatility; the second decline was caused by the energy market; the third decline was due to the rapidly spreading virus, which aroused changes in the expectation of global economic adjustment.

Generally speaking, after a stock market crash, if the risk premium is high, that means a rebound is very possible.

However, opinions vary concerning the risk premium in the third drop. In my opinion, the risk premium is very low and mirrors exactly the influence posed by regional epidemic, plummeting energy prices and low profitability and instability faced by companies under the spread of global pandemic.

I believe that the stock market will continue to adjust as the pandemic evolves.

So, will the sharp fluctuations of stock market have and trigger yet another round of financial crisis?

To answer this question, we must first look at the weak point of our financial system.

We compared the level of financial risk in 2008 economic crisis and in 2019, and found that the risk for banks and households is minimal.

However, the risk for non-financial institutions and sovereign debt is now much higher than in 2008. Meanwhile, the risk level of non-bank financial institutions is on a par with the that of 2008.Therefore, the risks now lie with corporate debt and sovereign debt.

Whether they can endure the pressure is important indicator for evaluation the possibility of a financial crisis.

After the 2008 financial crisis, there was about $80 trillion of global debt, which has now doubled to $150 trillion, with sovereign debt rising significantly. Generally speaking, interest rates on sovereign debt are low, but when the market become agitated, it will be very volatile, and as a result, we need to be vigilant on it.

We can also use Interest Coverage Ratio (ICR) to evaluate the financial performance of a company. This indicator reflects whether the company's net income can cover the financial cost. An ICR of less than 1 implies that the company risks falling into bankruptcy. Preferably, a company should have an ICR of 3 or higher.

Now, about 15% companies in the world have an ICR below 1 and are in fragile financial situation. In this case, enterprises will bear high risks if the bond interest rate fluctuates.

Conclusion

· The world faces multiple uncertainties.

· My conclusion is that the world is facing multiple uncertainties.

The pandemic curve is still rising exponentially. The economic recession is almost a foreseeable future. The financial turmoil has not yet ended. And the oil prices fell sharply and geopolitical tensions continue to intensify.

Two things usually happen after declines in oil prices. First, the redistribution of global wealth. The crude oil exporters will suffer from financial difficulties, but importers will have extra gains. And second, the reshuffle of energy companies. It will depend on the timing and degree of the fall and the rebound of oil price.

I believe that the oil price is likely to stay low for a long period of time. And thus, the potential global concussion cannot be underestimated.

In addition to all above, we are seeing the rise of populism in the world, which has worryingly reached pre-WWII level, posing great challenges to global cooperation.

The pandemic has now become a global issue that requires international cooperation. The political ambiguity and challenge of international cooperation posed by populism is also a major uncertainty that we are facing.

Q&A

Question: Can China play a greater role in the global cooperation to fight against the pandemic?

Zhu: China has already been helping other countries like Iran, Pakistan and Italy. But we need to admit that China is still a developing country, with a per capita GDP of only about $10,000 US. The resources China can manage independently is limited, and as a result global cooperation is needed to combat the pandemic.

At this stage, what the world needs the most and what China can provide immediately is our experience and the frame of measures taken in dealing with the crisis. Other countries can refer to them and alter to tailor their own situation, though these experiences and measures might not be applicable directly to all others.

Second, China has strong medical research capacity and can continue to cooperate internationally in analysis and research on the virus, drugs and vaccines.

Third, China can share the experience of adapting technology and online platforms to locate and track patients, and cooperate with other countries in terms of this, as tracing the infected is important for controlling the spread of pandemic.

Question: Will the pandemic re-intensify China-US economic and trade frictions?

Zhu: The world is facing the uncertainty of populism, which has brought difficulties to international cooperation.

During the pandemic, which path will people take? Cooperation, contest, or confrontation? All is possible, and will be influenced by the severity of the pandemic and other unforeseeable factors.

Question: The Chinese economy has shown signs of recovery. Do you think the Chinese economy will be dragged down by other countries, or still maintain growth despite of a possible world economy crisis?

Zhu: Chinese economy is closely integrated with the world economy. Take a look at the industrial chain, for example, China imports components and parts, then manufactures and assembles, and exports downstream.

Therefore a global recession and a decrease in overall demand will have huge impact on Chinese economy, which cannot be underrated.

Previously, China has managed to stimulate investment and consumption with relevant policies. Next, consideration should be given to supporting the supply chain and the export sector.

Disclaimer – this transcript has not been reviewed by the speaker.