COVID-19 is intensifying outside China, causing chaos in the global financial markets

COVID-19 is intensifying outside China, causing chaos in the global financial markets. Markets had their worst month in 11 years as investors sell off risky assets.

The COVID-19 death toll has increased to 3 100 at 8 March 2020 in China alone, and 484 outside China since the virus was first reported in Wuhan in early December 2019. To date, 101 countries have reported new cases of the virus. While the origin of the virus remains unknown, the economic impact is starting to show up in the disruption of global value chains and markets. The Chinese government has now urged businesses to return to work after the extended shutdown that spurred fears on Chinese growth. The Caixin China Manufacturing Purchasing Managers Index declined to 40.3 index points in February, from 51.1 points in January 2020. This has been the lowest level since the survey began in April 2004 and it is all due to the outbreak.

In response to the outbreak, the People’s Bank of China has cut the 1-year loan prime rate by 10 basis points (bps) from 4.15% to 4.05%. The bank also reduced the 5-year loan prime rate by 5 bps from 4.80% to 4.75% to lower borrowing costs and to ease financial strains on companies hit by the virus epidemic. The bank vowed to continue to support the local economy during this difficult period, while the Chinese government is reportedly set to ramp up the fiscal stimulus measures.

The United States Federal Reserve (US Fed) implemented an emergency cut in rates of 50 bps because it views COVID-19 as an evolving risk to economic activity. The US Fed argued that in light of this risk, they are in support of achieving maximum employment and price stability goals. They will closely monitor any developments as well as implications to the economic outlook and will use financial tools to act appropriately to support the economy.

Within Asia, after the US Fed’s surprise move, Hong Kong cut interest rates by 50 bps to counter risks fuelled by the outbreak. The move by the People’s Bank of China, the US Fed and Hong Kong will strengthen support from major central banks, although monetary policy cannot address the underlying issues.

ENDS