(Yicai Global) Feb. 7 -- Chinese regulators were "very correct" to reopen the nation's stock exchanges after the Lunar New Year holiday despite the new coronavirus epidemic and resulting selloff, according to UBS's chief China economist.

The ChiNext Price Index, which tracks growth stocks in Shenzhen, reached a more than three-year high today. That was after major mainland benchmarks plunged on Feb. 3, the first day of trading after the extended holiday, as the death toll from the epidemic climbed.

Panic has ceased as the virus has been priced in, Wang Tao told Yicai Global in a recent exclusive interview. But it may not be an upward journey from here, she added, saying that investors need to keep track of how the epidemic affects China's economy.

The outbreak that started in central Hubei province has restricted traffic flows and work schedules more than the Severe Acute Respiratory Syndrome epidemic did in 2003, which could majorly affect industrial production and exports, said Wang. 

The government's first priority should be to encourage companies to deleverage while easing their tax burdens, she said. It could also increase subsidies to help those people who are most severely affected by the outbreak, she added.

Furthermore, China should boost infrastructure funding to build more public health facilities as soon as possible, Wang said. It could issue government bonds and policy bank bonds to finance such projects before releasing its annual budget. It would be alright for the country's fiscal deficit to exceed the earlier limit of 3 percent of gross domestic product under these special circumstances, she added.

Wang, who heads up the Zurich-based investment bank's economic research on China, thinks growth could rebound strongly, though the expansion in national GDP may be slower than expected this year. But next year, it should climb back to around 6 percent, which is higher than earlier expectations, she added.

The most urgent task for the People's Bank of China, the central bank, is to provide liquidity to the financial system, said Wang. "We predict that the PBOC will cut the reserve requirement ratio and interest rates again this month."

UBS predicts that the bank will slash the interest rate on its medium-term lending facility by 20 basis points this year, with a 10-bip cut coming this month or next.

Editors: Tang Shihua, Emmi Laine