(Yicai Global) Feb. 7 -- China's novel coronavirus outbreak is likely to exert a mild downward pressure on global growth this year, depending on how long it lasts and how far it spreads, according to the former chairman of the UK's Financial Services Authority.
The crucial challenge for China's authorities is not to overreact and to take the necessary measures to try to maintain growth in the short term while focusing on the long term, Adair Turner, now chairman at Institute for New Economic Thinking in New York, told Yicai Global.
The good news is that there is evidence of deep collaboration between scientific organizations across the globe to share the genetic coding of the virus and to find a vaccine, Lord Turner added. Extracts from his interview appear below.
Yicai Global: China's stocks fell sharply on concerns over the new virus on their first day of trading after the Chinese New Year holiday. But both Chinese and global markets have bounced back in the past three days. What is your take on market reaction to the epidemic?
Adair Turner: I think the market reaction so far has been relatively predictable. We saw some sharp downward movements in Chinese domestic markets within the Shanghai exchange. And we've seen some sell off across the world, but with a bit of affirming back on Feb. 6.
I think that reflects the reasonable judgment that at some stage over the next few months, this will get under control and that by the end of the year, we will be looking back on something which will undoubtedly slow Chinese growth. In particular it will slow things like tourism growth. And I would say that unless there is a sudden intensification of it, unless it really explodes to very much bigger figures, I would expect that we will see a continuation of what we've had at the moment.
YG: What sort of impact do you see the epidemic having on China's economy?
Turner: The Chinese economy has changed. If you are essentially an exporter or if you are essentially driving your economy through a construction boom, then this sort of event is disruptive, but it's not too disruptive.
The Chinese economy has become more dependent on consumption expenditure, on inward and outward tourism, on travel, on leisure. And the more that an economy is dependent on those sort of things as well, the more disruptive this is, because it disrupts the ability of people to travel, to spend money, to go on holiday, etc.
I'm sure the measures they will take will manage to offset the downward effect. So we've already seen very short-term actions by the People's Bank of China to provide liquidity to the banking system. We may see interest rate cuts or adjustments to reserve ratio requirements, and I'm sure the leadership is thinking about whether there is some way to have a fiscal stimulus. But my anticipation is that the economy will still grow significantly this year.
Even if it's below 6 percent it will still meet the target of making sure that by 2020 there is a doubling of gross domestic product per capita and the moderately prosperous target is met, which I think broadly speaking, has been met already.
YG: Will the virus outbreak drag down the already slowing global economy?
Turner: I think what's interesting about this development, is that it is one more factor multiplying a set of structural factors which are leading to a slowdown in the global economy. We live in an environment, and we have for 10 years, where outside of the developing markets like China, growth has been relatively slow, inflation has been very low and real interest rates have been very low indeed.
The impact on the global economy is sort of twofold. If China slows down, China is now almost the biggest economy in the world and I think it will soon overtake the US even in exchange rate terms. So when China slows down even from 6.5 percent to 5.5 percent, that has a nontrivial effect on the global economy. So people are running the models and realizing that. There is also, however, an impact on less travel, people being less certain to travel.
I also think we will see some indirect effects. I wouldn't be at all surprised if you start seeing that European tourism to Thailand or Vietnam goes down just because they think it's in the Asia region. Should I be a little bit cautious for now? So whenever you get something like this, there are a series of effects.
Yes, this virus, I think will have a somewhat downward effect on global growth this year. It all depends how long it lasts, whether it spreads significantly beyond China and whether within the next month or so we see the rate of infection significantly decelerating and the process reaching some sort of maturity. But at the moment I would anticipate a measurable but still mild effect on global growth this year.
YG: Which macro policy tools can the Chinese government use to boost the economy?
Turner: The Chinese authorities I think have been very successful over the last year and a half in trying to navigate a set of difficult balances. They've been trying to get some of the excesses in the shadow banking system under control, to reduce the pace of credit growth on which the previous expansions had applied a lot.
So I think they've made considerable progress, the PBOC and the China Banking Regulatory Commission, in getting control of the banking and shadow banking systems. But that tends to damp short term demand in some sectors of the economy in particular in the property sector.
I think we could probably anticipate that the next steps of monetary policy are likely to be a loosening, both via lending rates and reserve requirements.
Realistically the authorities will have to recognize that in the first half of this year there will be a downturn, not a drop, not an actual fall, but a slowdown in the Chinese rate of growth. But I think the crucial challenge for the authorities is not to overreact, to take the obvious measures to try to maintain growth in the short term while focusing on the long term. I think the long term is about the evolution of the Chinese economy to be a high tech, a prosperous economy and a high wage economy.
YG: What sort of response can the world make through concerted action and co-operation? How can we evaluate global cooperation?
Turner: The good news is in relation to the virus itself, I think the world has a very structured and professional process for international collaboration, working through the World Health Organization. And I think the good news is in a world where we sometimes feel that some of our global institutions and global cooperation are under threat, or things like climate change and America leaving the Paris climate agreement, I don't think there is any threat to the role of the WHO as a highly professional organization run by medical experts working out what is occurring.
And I think there is deep collaboration going on at the moment via the scientific community in China, in many places in the rest of the world, to work out what is the genetic coding of this virus, to work out whether we can make vaccines.
I'm very confident that there will be maximum cooperation between that scientific community, that the moment any bit of it has made progress, they will be sharing it with colleagues in other countries. I think there's also a lot of cooperation going on through the World Health Organization trying to make statements of the severity of what is going on without overstating it and panicking it.
Editor: Kim Taylor