Global Financial Market Volatility and the Implications

Research Series

Introduction

Recently, the global financial market and commodity market have witnessed major fluctuations, in order to analyze the causes of the fluctuations, predict the future trend, analyze the market impact and provide decision support. Asian

Financial Cooperation Association Think Tank Office has invited AFTT experts to provide suggestions and completed a research series about “Global Financial

Market Volatility and the Implications”. The series offers 6 articles for your reference. [email protected]

March 30th,2020

Content

Vishnu Varathan: Teetering on the brink of a bear market...... 3

Yin Jianfeng: The economic impact of global pandemic: compared with previous global financial crises...... 9

Hubertus Vaeth: COVID-19 is a global crisis, don’t make it worse by making it a crisis of globalization...... 14

Guan Tao: Weakness of current international governance system: viewed from the global outbreak...... 21

Andrew Pal: The Global Economic and Environmental Impact of “Novel Coronavirus Pneumonia”...... 23

Evgeny Vinokurov: COVID-2019 and the Future of the Belt and Road Initiative...... 25

2 March 30th,2020 Teetering on the brink of a bear market

Vishnu Varathan Asian Financial Think Tank Fellow Head of & Strategy for Asia ex-Japan of Mizuho Bank

Of Bears & Brinks

“Well, some go this way, some go that way. But as for me, myself, personally, I prefer the shortcut”

– Cheshire Cat, Alice in Wonderland

Global markets were teetering on the brink of a bear market, led and amplified by the sharp drop in crude oil prices, which prompted 7-8% sell-off on Wall Street; setting off circuit breakers, and more encouragingly, eliciting an emphatic fiscal response.

President Trump has proposed “very substantial relief” with payroll tax cut, promising “major” economic announcements. And hopes of a fiscal fillip have sent US equity futures up (partly retracing steep losses).

Justifiably so as a strong and targeted fiscal response complementing monetary policy in response to COVID-19 risks is a huge step-up in coordinated policy efficacy.

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3 March 30th,2020

But even coordinated policy responses are not tried and tested panacea; and by no means guarantee the ability to durably pull markets back from the brink of bear territory.

For one, the alarming COVID-19 contagion in Italy that has the entire nation in lock-down, insofar that it may proliferate elsewhere in subsequent waves, is a looming risk that may not be put to bed so easily. And may entail further episodes of sell-off.

What’s more, and Saudi digging their heels in on the effective price war between these titans of OPEC+ means that bottoming in oil prices lack conviction. And make no mistake; oil bears are every bit as contagious, and a little bit more.

Oil’s negative ripples, working via commodity, equity and most worryingly, credit channels; and the reach of this should not be underestimated (more to follow in Part 2).

Upshot being, upping the odds of unequivocally pulling back from the brink of a bear market will require a coincidence of backstops from;

1. coordinated (between monetary and fiscal, as well as across countries) policy response;

2. calm being restored in oil markets and;

3. COVID containment on the ground.

Nonetheless, it is imperative that policy-makers hasten and collaborate to roll out coordinated measures that are emphatic, coherent and timely; leaving no doubts about the constructive solidarity of the global response.

This is to ensure that self-feeding frenzy of fear does not hijack markets that are perilously to a bearish spiral.

To be sure, even with fiscal response forthcoming, sentiments remain fragile; and consequently, no less susceptible to “fear of fear”, regardless of interim relief.

The jury is out on which way markets will go. But “shortcuts” advocated by the Cheshire Cat require knowledge (of coronavirus, oil, etc). And the warning is that the path of least resistance on the brink of a bear market may not be pretty. Meanwhile, the onus on policy is heavy, and uncertainty from oil elevated.

Crude Contagion

“When you look at the dark side, careful you must be. For the dark side looks back”

4 March 30th,2020 – Master Yoda, Star Wars

The irony of the adage “(pouring) oil over troubled waters” cannot get richer.

In any case, despite the relative calm the morning after (today), it is worth looking at the motivation and mechanics of the sell-off to understand the underlying risks.

Oil’s monumental collapse, spilling all over already nervous market has amplified intense “risk off” trades and accentuating the free-fall in UST yields off (Chart 2).

2.

Admittedly, the depth and the brutality of the drop in crude prices (Charts 4 & 5 overleaf) influenced the speed and amplitude of the self-fulfilling panic of a crash. But this was more an “accelerator” than a standalone driver of Oil and wider markets.

Whereas, inflation, geo-politics, asset/financial markets and risk re-allocation are the transmission channels rendering oil shocks exceptionally pervasive.

1. Inflation

While the correlation between oil and UST yields (via inflation expectations) is well established, it would be bordering on negligence to suggest exclusive inflation-yield mechanism behind the synchronised nose-dive in oil and yields.

Instead, crude’s collapse invokes far more safe-haven demand (not mere dis-inflation reflex); a part of which acknowledges the geo-political provenance of Crude’s crash.

2. Geopolitics

5 March 30th,2020 While demand deficit worries triggered by COVID-19 pandemic risks initiated the earlier (albeit more measured) decline, it took the defacto Russia-Saudi price war (in a quest for dominance) to unleash the brutal >30% drop in crude prices.

So, yields, following oil’s slump, baked in elevated and more complex geo-political uncertainty; with the interaction of Russia-US/Russia-Saudi/Shale-OPEC dynamics obfuscating the outlook.

3. Asset Market/Financial Channels

But asset and financial market echo chambers amplifying oil-inspired uncertainty impose far more ominous downside risks.

Specifically, equity, commodity and (especially) credit market channels are culpable for most of the “resonance”, resulting in self-perpetuating feedback loops that amplify and hasten the drop in yields, risky assets and oil.

Equities: Energy and oil-related counters in a deep sell-off (given prospects of revenue and margin squeeze) have a knock on impact on equities across the sectors given the linkages through indexes and benchmark funds, and above all, sentiments.

Commodities: Oil’s drop could also have corresponding sympathetic weakening in other energy and non-energy commodities with negative cash-flow, balance sheet and collateral repercussions; all of which accentuate cashflow/credit squeeze.

Credit: But the credit channel is perhaps the most pernicious. Despite falling UST yields, proxy of safe returns, high yield credit spreads have blown out (Chart 3).

3.

6 March 30th,2020 This reflects worries that the free fall in oil prices will severely impair on the ability of Energy firms, which making up ~14% of all outstanding US HY issuers, to pay.

And it takes very little in rattled markets to spark fear of credit crunch contagion.

In the worst case, acute, unrelenting, energy sector-led sell-off in HY bonds may inadvertently set off wider liquidation and consequent cross defaults; perversely ending up validating the “flight to quality”, which exacerbated the sell-off.

4. Risk re-allocation

Finally, in a market where risk retrenchment is underway, investors may be prone to actively reallocate away from risky assets to safe haven assets exaggerating the drop in UST yields in tandem with equities/commodities/credit.

All said, Yoda-style contagious feedback is an offending and frightening concept. And crude contagion is particularly nefarious with its “long reach”; potentially fueling more panic, and feeding fears of lurking bear market swings.

4.

7 March 30th,2020

5.

8 March 30th,2020 The economic impact of global pandemic: compared

with previous global financial crises

Yin Jianfeng Asian Financial Think Tank Fellow Chief Economist at Zheshang Bank Co.,Ltd

The COVID-19 has spread around the world turning to a global pandemic, which is a major shock to both supply and demand side in the global economy. Before the outbreak, developed economies with severe population aging problem have already suffered long-term stagnation pressures on both supply and demand side, and the impact of the pandemic could turn this pressure into a "perfect storm" like the Great Depression.

1.The economic impact of global pandemic: supply- and demand- side global shocks

Starting in the last week of February 2020, the COVID-19, with its outbreak in South Korea, Italy, Iran, Japan and other countries simultaneously, rapidly evolved into a global Pandemic. In term of the involved regions, except Iran, most of the countries where outbreaks occurred are developed economies with problem of population aging, including Japan, South Korea, the and North America. Given that most of critically ill patients in this outbreak are among the elderly, developed economies are likely to face tougher challenges than emerging and developing economies with relatively young populations.

The economic impact of this global pandemic must also be global. The global economy has suffered three similar shocks in the past 100 years which, apart from the recent one, were the Great Depression in 1929 and the Great Recession began with the global financial crisis in 2008. The Great Depression and the Great Recession is derived from financial crisis, although the important differences between those two will be seen later, their impact on the economy are concentrated in the demand side, but in term of economic impact, COVID-19 outbreak is profoundly different from the Great Depression and the Great Recession: the epidemic terminated most of human consumption and production activities at the same time, as a result, there has been a double shock to the economic aggregate demand and supply side, namely the simultaneous decline of demand and supply.

Supply and demand declining at the same time means that the global pandemic will cause some totally different results comparing to the Great Depression and the Great Recession, as reflected in the price level, the Great Depression and the Great Recession which influenced demand side

9 March 30th,2020 caused significant deflation, while the global pandemic is unlikely to cause a decline in prices, on the contrary, attention needs to be paid to the possibility of stagflation.

To compare the difference between global pandemic impacts and pure aggregate demand shocks, we take China, where the epidemic has stabilized, as an example. Affected by the epidemic, the growth rate of China's total retail sales of consumer goods, fixed assets investment and real estate development investment in February 2020 were -20.5%, -24.5% and -16.3% respectively. In contrast, in February 2009 when the global financial crisis began to hit the Chinese economy, the three indicators were 11.6%, 26.5% and 1% respectively. In other words, the impact of the outbreak on aggregate demand in the Chinese economy is much greater than in 2009. However, the price level during the epidemic did not experience the same severe falling as in 2009 (Figure 1). In 2009, under the impact of aggregate demand, CPI, core CPI and PPI all experienced negative growth in each month, with the largest declines of -1.8%, -1.6% and -10% respectively. But from the data up to February 2020, the core CPI was 1%, the PPI was only slightly negative (-0.4%), and the CPI has risen more than 5% due to the rapid increase in food prices. Therefore, in the case of China, although the impact of the outbreak on aggregate demand is much greater than that during the 2009 financial crisis, the change in the price level indicates that the impact on the supply side is no less than that on the demand side.

CPI Core CPI PPI

Figure 1 China's CPI and core CPI (left axis) and PPI (right axis) in 2006.01- 2020.02 Source: CEIC. The "core CPI" is the CPI that excludes energy and food prices.

2. The impact of secular stagnation: the case for Great Depression

As a double shock to both the supply and demand of the global economy, the current outbreak of the global pandemic is concentrated in developed economies with severe population aging problem. Therefore, it must be made clear that even without the shock of the outbreak, developed economies are facing a collective dilemma: secular stagnation. Secular stagnation is not a common phenomenon of short-term economic cycle fluctuation only occurring on the aggregate demand side, but a long-term deterioration on both economic supply and demand side caused by population aging, deterioration of income distribution, and decline of education quality.

10 March 30th,2020 As for developed economies, population ageing has weakened the physiological capacity and drained the medical resources to fight outbreaks, while from the economic aspect, secular stagnation has weakened the economic capacity to fight the epidemic. In this case, the wrong response made it worse. For example, in the United States, the policy response to control the epidemic is quite slow. In the face of the economic impact of the epidemic, it relies excessively on the aggregate demand policy, especially the more massive quantitative easing monetary policy and the zero and negative interest-rate policy. Even If aggregate demand policies can cushion the aggregate demand shock of the Great Depression and Great Recession, the policies cannot prevent consumption and production from stagnating at the same time. So it was witnessed that since the last week of February, the U.S. stock market has collapsed, along with the oil price plunge, which in turn has caused global capital markets in turmoil.

In the current situation, the continued decline of U.S. stocks and its impact need close concern. One of the worst analogy is the Great Depression in 1929. It is important to note that the Great Depression in 1929 and the Great Recession in 2008 were two vastly different crises from the origins of the crisis, the transmission mechanism and the macro policies of each country. In terms of the origins, the Great Depression was caused by a prolonged and deep decline of U.S. stocks and the Great Recession is mainly due to the collapse of U.S. real estate market. In terms of the transmission mechanism, the Great Depression was the debt deflation process caused by the high debt of non-financial enterprises in the United States, while the Great Recession was the forced deleveraging of the household sector and the financial sector in the United States. In terms of policy cooperation and policy space after the crisis, after the Great Depression, major developed countries adopted beggar-thy-neighbor policy measures (such as competitive currency devaluation as well as tariff and non-tariff barriers to restrict imports). After the Great Recession, China and the United States acted hand in hand with other major economies to adopt adaptive macro policies.

Figure 2 U.S. sector debt/GDP (%) in 1951-2019 Source: based on fund flows of the federal reserve statement

From the rising momentum of the stock market and the balance sheets of U.S. non-financial companies, this pre-pandemic situation was very similar to 1929 Great Depression. From the perspective of the rising momentum of the stock market, they were both relying on liquidity to

11 March 30th,2020 support the stock market. Two of the biggest driving forces in the United States over the past few years have been listed companies' repurchase and ETF, both of which smacks of ponzy-style financing: for the former, listed companies used cheap debt to buy back shares and boosted share prices. For the latter, ETF was the most important financier of U.S. stock market in the past decade (the net stock financing balance of U.S. non-financial companies is negative). ETF issues funds to buy stocks, which promotes a positive feedback loop between stock prices rising and ETF financing. From the perspective of main indebted sector in the economy, they all showed the characteristics of high leverage in the corporate sector. As can be seen (figure 2), the leverage ratio of the U.S. household sector and the financial sector has been adjusted back to the 2000 level after 2008, but the leverage ratio of the U.S. corporate sector has continued to climb to the highest level in the past 70 years. Since February, U.S. stocks have fallen at a rate "matched" that of the 1929 Great Depression, which coupled with the collapse in oil prices has left the highly indebted U.S. corporate sector, especially small- and medium-sized companies in the energy area, facing rapidly deteriorating balance sheets. As the rise of U.S. stocks originates form positive feedback loop driven by buybacks and ETFs, when the market winds shift, the positive feedback loop is likely to turn to a continuous decline in prices and a sustained drying up of financing.

If the Great Depression in 1929 returns, the international policy co-operation prospects would be grim. The trade dispute initiated by the United States since 2018 has seriously damaged mutual trust among countries, and after the outbreak, there may be a new round of "beggar-thy-neighbor" for political reasons. In Europe, where the outbreak has been severe, Brexit has already torn a rift, and the response to the outbreak has further exposed the lack of policy cooperation and coordination among European countries. Some measures are even self-serving.

2008

2018 E D o E J A F G I C I B R t n a a p r c m m r e h u e d a a p l i o v i s y n r i e e n n z a a m n e s g r r c i a n l i o l g i a a o e c E m i n a p n c y i e g e o d & n s D o m e v i e e s l - Figure 3 Generalized government debt /GDP (%) of each country Source：IMF

From the perspective of policy space, in the post-2008 Great Recession, the government leverage ratio of developed economies has risen significantly (figure 3), and the policy space has been greatly compressed. The sustainability of government debt is always worrying, and the epidemic will further exacerbate such concern. Beyond the relatively fragile emerging economies, in the developed economies, the first concern is the Eurozone's government debt problem. The typical characteristics of the Euro Area are adopting unified monetary and different fiscal policy. Meanwhile,

12 March 30th,2020 the government leverage ratio is unbalanced among regions, and member countries (such as Italy) which are relatively backward and also suffered more by the epidemic have higher government leverage ratio now. As for U.S. government debt, it can be easily monetized as the dollar's status as a key reserve currency has not been changed yet. But if the scenario evolved into another “Great Depression”, the high reliance of U.S. Treasuries on overseas investors, U.S. Treasuries may lose its status as a global safe asset, -- in which case gold could resume its upward trend. Unlike the United States, the investor of Japanese government bonds is mainly domestic because of its high savings rate of private sector, so although the Japanese government has the highest leverage, it is probably safer than the United States.

Finally, we have consistently emphasized that this outbreak shocks both the demand and supply side of the economy, and as a result, the effectiveness of aggregate demand policies has decreased significantly. What's more, the supply-side shocks on the prices of tradable goods requires close attention due to the risk of disruption of the global industrial chain. Simply put, stagflation may occur, despite the sharp fall in oil prices.

13 March 30th,2020 COVID-19 is a global crisis, don’t make it worse by

making it a crisis of globalization

Hubertus Vaeth Asian Financial Think Tank Fellow Managing Director of Frankfurt Main Finance

Abstract: An exceptionally long period of ever-growing prosperity is seemingly drawing to an abrupt end. Is COVID-19 ending globalization as a model of wealth creation? A model already challenged by a trade war and growing national assertiveness. As a result, the world economy is grinding to a halt and growth is going into reverse. What we are seeing has the potential to become the “mother of all recessions”. Losses of 12 trillion USD are expected, 1/6th of which will fall on a financial industry that is much better capitalized than in 2008, but clearly not sufficiently strong to digest a crisis of such proportions.

COVID-19 is a crisis of a global dimension and responses have been mainly national ones. It’s the time to cooperate on a global response. A multilateral approach is needed for an economic response on a truly global scale. In this respect, five areas of global cooperation are necessary to be implemented:

Global information system

Global cooperation on tackling infections

Stabilization of economic activity

Medical provisions against “Black Swans”

Maintaining global supply chains by alert and contain chains

The current Corona crisis makes us aware of the interconnectivity of our globe. The world needs a framework to learn as fast as possible from those that had to deal with it early on, medically, economically or financially. The world has collectively to become more agile to cope with COVID-19 and to be hopefully better prepared for the next virus certain to come, if that one is going to be defeated, as it sure will.

An exceptionally long period of ever-growing prosperity is seemingly drawing to an abrupt end. Globalization since 1990s has lifted hundreds of millions from poverty and led the world to unique prosperity. This was made possible by lowering the barriers and opening the borders to multi-national

14 March 30th,2020 enterprises. These enterprises have successfully been working for decades on optimizing their supply chain systems to reduce costs, minimize inventories, speed up deliveries and increase resource utilization. In their wake they created productive work around the globe and thus produced prosperity widely dispersed.

Emergency Brakes pulled

Is COVID-19 ending globalization as a model of wealth creation? A model already challenged by a trade war and growing national assertiveness? One could jump to this conclusion as the properties of the virus make its spread around the world the easier the more open the borders are.

These crucial properties are:

A varying and a up to two weeks long incubation.

Easy spreading like a flu.

Asymptotic in an uncomfortable high number of cases.

No vaccine yet.

No proven treatment yet.

A significant mortality rate; at the very least 5 times of a severe influenza, strongly rising if medical facilities are insufficient.

These properties are making the virus mortal for too many people to be socially acceptable to run its course, as severe cases of influenza usually do. And it is equally hard to contain and to isolate those effected, particularly in todays globalized world, where interconnectedness helps to spread a virus fast and wide.

The response was long to belittle or even deny the risks. Followed by public warnings with little or no sanctions attached to them. Policy responses such as expanding facilities to test, stockpiling crucial equipment to protect medical and otherwise systemically relevant staff, expand capacity of medical facilities and retrain medical staff, establish safeguards for the weakest were implemented - with some noteworthy exceptions - often too late. What followed didn’t come easy and again mostly too late: Disrupting the links through which the virus spreads such as mass gatherings or mass transport. Time, being so crucial, was waisted despite early and sufficient news came from the front line of the fight against the virus.

After all those measures didn’t slow the spread, major economies pulled the emergency brakes on individual life and economic activities. Ever more leaders effectively closed the borders to travelers directly or made a quarantine obligatory for travelers from ever more countries of origin. The EU and US were particularly slow to respond and now try to catch up, as medical services reach the limits in ever more countries. Hard to bear: Doctors are being forced in some places to prioritize medical

15 March 30th,2020 treatments, a decision they are not equipped to make in peace times, least of all in such numbers.

Faced with such stark choices, country after country banned events, flights, tourism, restaurants, bars, clubs and even hairdressing. What usually starts with a fortnight of restrictions, already is or is likely to be extended, who knows how often and how long. In a way it’s a race and a bet. A race with human ingenuity to come up with a faster test, a vaccine and/or a treatment. It is also a bet that the virus follows seasonality patterns, much like influenza. Some characteristics point to that, but we can by no means be sure about it. But most of all, it is to flatten the curve of infections to maintain an infection rate more in line with medical capacity, which of course is being expanded at the same time, simply because beyond that capacity limit, lethality rates jump.

As a result, the world economy is grinding to a halt and growth is going into reverse. What we are seeing has the potential to become the “mother of all recessions”. Economists more or less only differ in their view whether the economic shock by COVID-19 will become the biggest slump since the Great Depression or even exceed this around 90 years old traumatic experience. The International Monetary Fund casts doubt on traditional views of a V-shaped recovery and shows that all types of recessions — including those arising from external shocks and small domestic macroeconomic policy mistakes — lead to permanent losses in output and welfare.

Losses will exceed 12 trillion USD, which is the estimated loss in the Global Financial Crisis 2008/09. Applying same proportions as in 2008/09, 1/6th of the losses will fall directly on a financial industry that is much better capitalized than in 2008, but clearly not sufficiently strong to digest a crisis of such proportions. Losses will be very unequally distributed. The weakest will suffer the most and existentially. Food shortages, a loss in education and health provision will take a hard to measure toll. Potential political disruptions as a result should not be underestimated.

However, Philip Thomas, professor of risk management at Bristol University, already warns that measures could “do more harm than good”. There is indeed a clear link between GDP and life expectancy, not least due to being able to spend more on healthcare and safety. The measures taken, leading to massive losses of GDP, will clearly impact live expectancy for many in yet unknown but substantial proportions.

How long can the world sustain a near close down? One, two, three months? Most certainly not much longer. And what is the path like, when it becomes evident that relaxing leads to an increased number of infections whilst eventually the losses to human lives due to closures exceed the those caused by the virus? Navigating between a rock and a hard stone has never been harder and politicians have to gain nothing but the blame for whatever evil they choose.

Rapidly spread around the globe

COVID-19 is a crisis of global dimension and responses have been mainly national ones. Risks are high that we are making it worse now by making it a crisis of globalization.

16 March 30th,2020 Traditional measures to cope with major disruptions to supply chains or monetary transmission won’t work. How are monetary or fiscal policy going to translate into economic activity in an economy shut down? The remedies of the past, such as sourcing widely to avoid supply chain disruptions, such as after the Fukushima Nuclear Disaster in 2011, or central banks opening the taps, which worked wonders, following the financial crisis in 2008, are obviously insufficient.

In contrast to previous pandemics COVID-19 has spread around the globe within a few weeks. But there is another side of the coin, and that one is positive: Never before in history, scientists from all over the world have identified crucial elements of the disease in a coordinated or competing manner. Knowledge on the pandemic begins to spread like the virus itself from those on the front line of being affected and seeing some success coping with it.

So, doctors and politicians around the world already know a lot on ways to reduce the risk of an infection, on incubation times, on risks for specific - especially elder - people, and on how to take care of the sick. This definitely will save the life of a large number of infected despite the fact that an effective immunization will only be available in a hopefully not too distant future.

Interconnection is not only cause but cure as well

COVID-19 shows both the risks and the chances of an interconnected world. Even though Governments clearly have to act by restricting free movement to protect human lives, but at the same time better interconnectedness holds the key to a long-term solution. In an ideal world Europe and the U.S. would have had more than two months of time to prepare, if, and that is a big if, there were proper systems and processes in place. Those precious weeks used to stockpile testing material, expand treatment facilities, retrain medical staff, enabling quick testing at the borders, isolate those infected fast and efficiently, would result in a lot of pain, lives and economic damage being avoided.

Now is neither the time for if’s and but’s nor for trading accusations. It’s rather the time to cooperate on a global response. A multilateral approach is needed for a medical and an economic response on a truly global scale. It is time for the G 20 to revive its leadership by providing a framework to share best practice and medical resources in the short term, and to put in place a future alert and containment framework.

Five steps for international cooperation

In this respect, five areas of global cooperation are necessary to be implemented.

Firstly, global information system. Comprehensive, resilient and comparable information is key for decision makers. In the current crisis, numbers differ among countries that are hard to reconcile. The world wonders e.g. how rates of spreading or mortality rates can vary so widely. Do these deviations hint at solutions (e.g. effectiveness of measures or social norms) or are they only due to differences in the methodology? Information on a pandemic should therefore be standardized. Data origin, time lags,

17 March 30th,2020 intensity and respective triggers of testing or the attribution of a lethal case to a cause all play a big role in understanding the vary numbers.

All those factors can be working either way. Data can mislead people and either create a panic or a delusion of safety, neither of which is desirable. Only a unification of definitions would create a data base that would enable proper decision making. In addition, clear criteria have to be met when an infection should be declared a pandemic.

Secondly, global cooperation on tackling infections. Epidemiologists, like the Imperial College London in its recent study, expect that “more intensive interventions could interrupt transmission and reduce case numbers to low levels. However, once these interventions are relaxed, case numbers are predicted to rise. This gives rise to lower case numbers, but the risk of a later epidemic in the winter months unless the interventions can be sustained.” The same is true, if there are still undetected cases in places that lack a health sector able to cope.

The decades of struggling for the eradication of smallpox and measles around the globe show how difficult and long lasting this approach will be. Some countries will need practical and financial support to cope with these challenges.

Thirdly, stabilization of economic activity. Like any system in intensive care, the world now faces a severe threat to stability that needs immediate attention. The key challenge now is business continuity, otherwise insolvencies will rise, and lasting damage is done to the productive stock and hence to prosperity and live expectancy as a result. In order to control the development and spread of the outbreak, temporary measures can pose challenges to the global supply chain and thus affect business continuity, which poses a dilemma for governments in controlling the outbreak and maintaining the economy and supply chain. Thus, Supply Chains need to be more resilient, to allow fast shut-downs, that are likely to have milder consequences.

Authorities were however quick to respond to the wider economic fall-out of their measures. First and foremost, the global financial system is affected, the canary in the coalmine. It must be ensured that the financial system will be able to maintain to productive stock through the shut-down and then provide the liquidity needed to restart the economies thereafter. Monetary policy, widely applied by almost all central banks, has however already shown that it is a painful inappropriate tool in the wake of the current pandemic, at least yet and left on its own. It is not enough to having central banks lowering rates, buying bonds or otherwise pumping money into the system. Financial Institutions are needed to disburse and allocate the money to those with a fair chance to survive the storm. To enable them to fulfill this scope, a government backed special risk absorption mechanism - call it for the sake of convenience simply “state guarantee” is needed. Otherwise every loan risk assessment in today’s world can only lead to calling loans, rather than giving new ones.

That instrument should mainly aim at SME’s and key industries. This can realistically only bridge a limited period of time, such as the famed German Kurzarbeitergeld, that allows a temporary lay-off of

18 March 30th,2020 staff, subsidized by social insurance’ unemployment benefits.

In that respect institutions like AFCA and others have a new role to play. They should research on the impact of fiscal and monetary policy responses, advise on how to allocate the money to those companies which are not fatally wounded and to individuals losing their income. The findings should allow the international community of states to come up with a proven set of measures to avoid structural disruptions and thus maintain economic, social and financial stability on a global basis.

Fourthly, ,medical provisions against “Black Swans”. Many countries have been overrun by the virus - lacking capacities in hospitals, ventilators, masks and medicine. Pandemics are “Black Swans” that need a coordinated response. Hence it is important that the community of states provides for a sufficient stock of critical equipment and establish a dedicated fund which allows affected countries - based on the principles of an insurance - to get additional help within a short period of time. Very much like stocks for oil and other strategically important resources.

Lat but not least, maintaining global supply chains by alert and contain chains. Business continuity can only work if the global supply chains are stress resistant. Any supply chain is only as good as its weakest link. Any alert chain is only as good as the willingness and ability to listen. Therefore, COVID-19 calls for the global supply chain being supported by an equally global alert, contain and coordinate mechanism for such a crisis.

Not even the lessons of Fukushima, with its impact on global supply chains, were fully implemented. For some mass medicines the active pharmaceutical ingredients were only produced in one or a few near-by places, with COVID-19 induced disruptions leading to production shortages in a lot of generic medicaments.

The community of states has to find solutions for a sustainable supply system flagging essential products that need more than one source, ideally as independent from each other as possible. The decisions should be based not only on pure geographical aspects but also on aspects such as covering specific risk like natural disasters, civil unrest or pandemics.

A wake-up call for global coordination

The current Corona crisis makes us aware of the interconnectivity of our globe. The world needs a framework to learn as fast as possible from those that had to deal with it early on, medically, economically or financially. This will become important in the coming weeks, as we all need to have a plan on how the economies get back to work, rather sooner than later. A lack of coordination will expose those who go it alone and create a dilemma leading to inaction or resource absorbing off and on decisions.

Getting back to work will only happen as and when the risks to human live are under control. Younger and elder people, younger and elder nations will differ in their views on when that is. But a debate is unavoidable, the choices will be stark. The world has collectively to become more agile to cope with

19 March 30th,2020 COVID-19 and to be hopefully better prepared for the next virus certain to come, if that one is going to be defeated, as it surely will.

Failure to cooperate however should not be an option.

20 March 30th,2020 Weakness of current international governance system:

viewed from the global outbreak

Guan Tao

Asian Financial Think Tank Fellow Dong Fureng Chair Professor of Wuhan University

“Coronavirus may be ‘once-in-a-century pathogen we’ve been worried about.,” Bill Gates wrote op-ed on February 29th, 2020 for the New England Journal of Medicine. "There is no time to waste," he was sounding the alarm to world leaders to try to help slow the spread of the virus.

With the current development of COVID-19 epidemic, according to Cannikin Law which means that a bucket's capacity is determined by its shortest stave, if globe cannot quickly band together to support each other to prevent and control epidemic, the epidemic will be prolonged and its impact will be amplified. So, eventually 60 to 70 percent of the population could be infected, and Bill Gates' prediction that an epidemic would kill millions of people could come true. They are real lives, not just cold numbers!

However, the defects of the current international governance system are not only reflected in the lack of sufficient leadership of WHO itself in the handling of major international public health emergency, but also the lack of adequate coordination at the international level for the package of epidemic response policies, which are mainly based on public health policies and supplemented by economic hedging policies. The post-war system of global governance may not be up to the task.

On the one hand, the WHO and the International Monetary Fund (IMF), the World Bank, the World Trade Organization (WTO) and the Bank for International Settlements (BIS) are independent and professional international institutions. There is no doubt that the WHO has a central role to play in the response to this outbreak, but it is difficult for the WHO either to exert decisive influence on member governments or to coordinate the support of other specialized international institutions for public health emergencies. Each institution acts on their own with the conscience, it is difficult to form a quick response and policy synergy.

On the other hand, the United Nations, the G7 and the G20 are comprehensive international organizations or platforms that could have played a more active role in the global response to control the spread of the epidemic. But so far, they have done little.

Because the United Nations has too many members and carry on the one-country, one-vote

21 March 30th,2020 mechanism, it is difficult to coordinate policy stances. Therefore, it is generally silent on similar occasions, and mainly participates in related activities through its specialized agencies.

G7 has the meeting of Finance Ministers and Central Bank Governors, as well as Leaders’ Summit. It has already made or will make further statements on the response to the COVID-19 epidemic. However, as G7 has lacked representativeness with the changing economic strength of countries, it is also inadequate to contain the global spread of the epidemic by them. The G7 Finance Minister and Central Bank Governor's joint statement on March 3 was considered to be vague and perfunctory, putting the stock market under pressure for a time.

Founded in 1999, the G20 emerged from the 2008 global financial crisis as an important platform for international policy coordination. With the meetings of Finance Ministers and Central Bank Governors and Leader’s Summit, G20 gathers developed countries, major emerging markets economies and developing countries. It has broader representativeness and authority. However, the G20 has been rapidly marginalized in recent years due to the divergence of economic trends and policy orientations, especially the serious damage to strategic mutual trust caused by trade disputes among major members. Moreover, the G20 has not developed an institutionalization, but instead the presidency of the G20 rotates between member countries every year. This year coincides with Saudi Arabia holding rotating presidency, it is reasonable that it is hard to lead the way in the face of the outbreak. As, the Saudi oil market suffered an historic collapse, triggered by the it's surprise announcement of raising production following the breakdown of price-fixing talks, which was also a major factor of global stock markets plunge in last week.

As for the Asia-Pacific Economic Cooperation (APEC), it is a regional international economic organization with the lack of regional representativeness and it has many members. The organization for Economic Co-operation and Development (OECD) is a cross-regional international economic organization with 36 members, but as a "rich man's club", the G7 is actually its ambassador and spokesman.

To be frank, this article only raised the questions, not the answers. But it is believed that the outbreak will not be the last pandemic to hit humans. The “shortest stave” and the shortcomings of the global governance system exposed in response to this outbreak should arouse people's attention and consideration. Given that the outbreak is not going to end soon and time is life, perhaps we can learn by doing and begin immediately to improve the global emergency response management system. Of course, even if it may be too late to catch up the “train” to respond to this outbreak, it will not prevent us from carrying out further research afterwards to catch another one.

22 March 30th,2020 The Global Economic and Environmental Impact of

“Novel Coronavirus Pneumonia”

Andrew Pal Asian Financial Think Tank Fellow Chief Strategy Officer (APAC) of Stock Exchange Group

At present, global economies and markets are facing extreme stress, which will continue to permeate for a long time to come, at least till the end of the year. Quantitative policy easing has restarted on a large scale to help support fixed income markets, as witnessed by the US Federal Reserve announcing a range of measures on Sunday night (March 15th), including purchases of hundreds of billions of U.S. government bonds over the coming months, as well as cutting interest rates. For China, whilst domestically things may be improving, three (3) key questions will remain, which will affect the current demand shock for Chinese goods and services:

1. Some American politicians associate the“Novel Coronavirus Pneumonia”with certain country and stigmatize it. For example, President Trump labeling the coronavirus with certain country in his tweets, which will continue into the election year.

2. Continued supply chain diversion away from China, starting with countries domestically manufacturing masks and medical supplies. The UK and Australia has already announced such measures, and some countries deploying the army to help with the manufacture of masks. Granted this is but a drop in the ocean, however it will snowball along with other policy measures, such as border protection and travel bans.

3. An emerging view that China’s production shut down was good for the global environment. Please see the image below, which has been taken up by western environmentalists as a virtuous outcome and will no doubt start to become part of the global narrative. China may face international criticism akin to that currently faced by the Trump administration, in withdrawing the US from the Paris climate agreement. Despite this being an unreasonable ask for China to limit production to such an extent, from a western perspective, such economic rationalism is not seen as a valid argument by the ever-growing environmental movement. The impact to China may be a medium to longer term decrease in demand for Chinese manufactured goods by those following ESG - Environmental, Social and (Corporate) Governance principals.

23 March 30th,2020

To conclude, the world is at a precipice. Central banks need to ensure the demand shock does not lead to the failure of good companies. Should this happen, this would lead to a further demand shock, when people start to lose jobs, which would continue beyond the fear of the virus and the release of a much anticipated vaccine. Therefore, though there is evidence that China’s economic rebound has begun, the international demand shock of fear of the virus may well be a drag on growth.

There is always a silver lining: China should take the lead in rallying the G20 in forming work groups to consider the abovementioned points. Though Saudi Arabia has the chair for 2020, a pro-active China in such a forum, would allay to an extent negative sentiment and more importantly limit the effect of the global demand shock.

24 March 30th,2020 COVID-2019 and the Future of the Belt and Road

Initiative

Evgeny Vinokurov Asian Financial Think Tank Fellow Chief Economist of the Eurasian Fund for Stabilization and Development

Abstract: The Belt and Road Initiative (BRI), a very large-scale Chinese initiative supported by more than 130 countries around the globe, is by its very nature a cross-border phenomenon. Thus, it is easily affected by the coronavirus-induced economic crisis. In this article, I analyze various challenges of COVID-19 on the BRI for cross-border movement of goods and people, debt and fiscal sustainability of recipient countries, risks of diminishing availability of financial resources, risks for the emerging multilateralization of the BRI, etc. Based on that, I formulate a number of policy recommendations. I end up with a plea to look beyond the immediate effects and limitations faced in the heat of the battle against the coronavirus-induced crisis. The BRI community should perceive and treat the BRI as a truly long-term policy.

As a cross-border phenomenon, the BRI faces challenges in the COVID-19-induced crisis

The rapid spread of COVID-19 has led to uncertainty and loss of confidence unseen since 2008. The market volatility has also risen extremely fast to a level unseen over the last decade. Even against this unfavorable environment, there are sectors that have taken a disproportionate hit, including tourism, passenger transportation, airlines, hotels – practically everything that has a built-in key cross-border dimension.

Infrastructure, as a rule, is not among the most vulnerable sectors, quite the contrary. It has an inherent long-term dimension. While a cross-border component is important, most basic infrastructure is strictly national. However, the 2020 trends for the Belt and Road Initiative might not fit this general pattern. The BRI intends to build up basic infrastructure across the globe, with a particular focus on Greater to the South, West, and North of China. Under the helm of this very large-scale initiative, hundreds of billions of dollars are mobilized and disbursed. A notable percentage of BRI projects possess an explicit cross-border nature – mostly automobile corridors and railroads, but also electric power generation and distribution projects. The BRI is by its very nature a cross-border phenomenon. Thus, there are challenges in the coronavirus-induced economic crisis.

25 March 30th,2020 132 countries that are partners in the Belt and Road Initiative account for 35% of global GDP, 43% of global trade in goods, and 60% of the world’s population. A recent comprehensive study estimates the amount of disbursed FDI at $100 bln, and that of committed and disbursed loans $600 bln. Loans to low-income and lower-middle income countries are often concessional – e.g., for Kyrgyzstan and Tajikistan, two low-income countries immediately bordering China, a typical repayment period of around 20 years, an effective interest rate of 2% per annum, and a grace period of 5–12 years.

Effects of COVID-19 on the BRI

There are a number of direct and indirect consequences that the current crisis might exert on the flawless and efficient implementation of the Belt and Road Initiative’s projects. Let us try to compile a tentative list.

First, cross-border travel and transportation currently face multiple constraints. Since the BRI is, to a large extent, about the expansion of cross-border movement of goods, services, and people, it will take a direct hit through multiple channels, including the contraction of trade, investment, and passenger transportation. A heavy damage currently done to the global value chains adds to the impact of the cross-border movement of goods.

Second, there are reasons to be concerned with the countries’ debt and fiscal sustainability. Many of the recipient countries are low and lower-middle income economies with unstable economic growth. For this reason, China’s plans, announced at the Second Belt and Road Forum in Beijing in April 2019 to analyze the debt sustainability of each country in cooperation with international financial institutions, deserve applause.

Third, there is the worry that there will be less financial resources available to finance the BRI projects. BRI projects are not only capital-intensive but also require concessional financial (‘long and cheap money’), in particular in the low and lower-middle income economies across Eurasia and the world. Since the relevant countries needs much of its financial might to stimulate its own national economy in the short term, will the financial resources be there for the long-term BRI projects? These worries are still to be addressed.

Fourth, many BRI projects involve Chinese contractors abroad and, consequently, tens of thousands of Chinese workers working abroad. Such a large external working force would now face multiple hurdles in terms of their deployment and cross-border movement.

Fifth, the multilateralization of the BRI had only begun to unfold in 2019, with the first material results to be expected in 2020 and 2021. Under the multilateralization process, many well-funded international financial institutions were expected to enter the game (e.g., the World Bank, ADB, IsDB, AIIB, NDB, IADB, EFSD). International financial institutions provide project financing based on signed and ratified international treaties that do not depend on local legislative changes, which helps to mitigate certain risks. Under crisis conditions, the international financial organizations deploy both

26 March 30th,2020 their financial and human resources to fight the crisis, thus stripping much-needed resources from long-term infrastructure projects.

Fighting against the ‘common microbial market’ calls for closer international cooperation rather than anti-globalization

Globalization and economic integration are multi-faceted phenomena. Even their sincere and active proponents, myself included, should realize that everything is a ‘double-edged sword‘. Globalization can also create opportunities for illegal activities, such as drug or human trafficking and the movement of people across borders for the spread of diseases. Compare the spread speed of early infectious diseases with the rapid spread of avian flu and the most current example of COVID-19 turning pandemic within two months. In order to contain the global microbial market, international cooperation is called for. However, in practice it can be used in this context to restrict economic linkages between countries and as justification for protectionism.

In our 2012 book, ‘Eurasian Integration: Challenges of Transcontinental Regionalism’, we put forward a main hypothesis that advancing towards continental Eurasian common markets, based on the development of common infrastructure, brings significant economic benefits. At the same time, we highlighted that the fight again common threats, most importantly, drug trafficking, human trafficking, and trans-border epidemics (under the nametag ‘a common microbial market’) should accompany a positive integration agenda.

Overall, the ‘double-edged sword’ of globalization raises important issues for the region and challenges a number of key policies. Much attention has been devoted to emerging problems; after the 9/11 terrorist attacks, for instance, drug and arms trafficking became areas of relentless public debate, and there have been several epidemiological threats in Eurasia in the last decade – from SARS to EHEC. Nevertheless, decision-making by public agencies has often been hampered by misconceptions and lack of appropriate information. Very often, the line between actual and potential threats is a very fine one. The degree of international cooperation is often inadequate; although all countries recognize the importance of these issues (at least, rhetorically), they are often unable to respond appropriately because their administrative bureaucracies fail to function efficiently. A very typical reaction to trafficking, illegal migration, and epidemics is to tighten border controls. This, however, restricts economic ties, with potentially disastrous consequences. The problem is not only that a potential factor for growth has been restricted, but also that by limiting the economic links between Eurasian countries, the prospects of successfully tackling the ‘darker side’ of regionalization, of fostering economic development and alleviating poverty in the poorest parts of the continent, become ever more distant. The COVID-19 crisis demonstrates very vividly that it is time to strengthen this dimension of international cooperation, both within the World Health Organization and in smaller formats.

Policy recommendations to the PRC and its partner countries

27 March 30th,2020 Let us formulate several applied suggestions that might be considered by the PRC and its partner counties in defining their attitude towards the BRI projects facing the current crisis.

First, look past 2020. The BRI is a very long-term and a truly strategic initiative. In order to build basic infrastructure in a consistent and efficient mode, one has to stick to a long-term vision that can weather multiple crises along the way. The Belt and Road has a chance to become a classic initiative of this sort: It intends to qualitatively raise the level of infrastructure around the globe and, in particular, to connect the Greater Eurasian landmass in a way it has never been connected before. This view is particularly pertinent for cross-border infrastructure. Apart from long-term financing, it entails a shared strategic vision of international economic cooperation. Such a vision is difficult to formulate and very difficult to negotiate. Once agreed upon, it should be durable long-term.

Second, China, its partner countries, and partnering institutions should pay great attention to the issues of debt and fiscal sustainability. In fact, the current crisis will already test the limit of sovereign debt sustainability around the globe. In some BRI partner countries, 40 – 45% of their external public debt is accounted for by BRI-related financing (granted, much of which comes on concessional terms, which in most cases alleviate sustainability concerns). We applaud the 2019 decision, announced at the 2nd BRI Forum in Beijing, to improve debt sustainability analysis in cooperation with the multilateral financial organizations. In the extreme case, should the COVID-19 crisis prove to be longer and tougher than currently expected, some restructuring might be necessary for some recipient countries.

Third, keep the export-related railway subsidies for trans-Eurasian transit and do not slash them, at least in the active phase of the current crisis. Since 2013, the formerly negligible volumes have mushroomed to more than 400,000 containers a year. This spectacular rise is based on the interplay of three factors: Chinese subsidies for the outbound container trains from central provinces; serious efforts by Kazakhstani, Russian, and Belarusian railways and authorities to streamline procedures and eliminate bottlenecks; and realization of the land-based routes’ advantage of delivering goods from central China to Central Europe within 15–17 days, as against 35–40 days by sea. The first factor was probably the decisive one, at least to jump-start the trans-Eurasian routes. However, it would be advisable to start moving towards lower levels once the current crisis is past its acute phase and the durability of trans-Eurasian transit is restored. In the longer term, my recommendation would be to at least partially retain export subsidies and, importantly, to provide more transparency about their level. In the absence of such guidance, infrastructure, transportation, machine-building producers, and logistics companies would face uncertainty about underlying conditions, and, thus, refrain from investing.

Fourth, and perhaps, most importantly, BRI partner countries would be well advised to contain the expression of negative sentiments. Facing a crisis, it is very tempting for national governments to revert to protectionist policies and to slash long-term initiatives that feature a low margin and will

28 March 30th,2020 reveal most of their positive effects in the long-term future. This recommendation might concern the recipient countries more than China itself.

I end with a plea to look beyond the immediate effects and limitations faced in the heat of the battle against the coronavirus-induced economic crisis. The BRI community should perceive and treat the BRI as a truly long-term policy. Let us look past 2020 while assessing the impact and effectiveness of the BRI. It is too valuable to be discouraged by the coronavirus hit.

About AFTT:

AFCA was founded in May 2017. It is the first international financial social organization initiated by China. The think tank (AFTT) under AFCA is composed of more than 100 domestic and foreign experts from 49 countries and regions. Currently, there are 57 domestic experts and 100 foreign experts. With the philosophy of "market location, global perspective, problem orientation, in-depth observation, and smart solution", AFTT has developed AFCA working paper, Asian Financial Observation, Financial Development Report for the Guangdong-Hong Kong-Macao Greater Bay Area, and other bilingual products, conducted Quarterly Seminars, AFTT Annual Forums and other high-level financial activities, sending a strong Asian message constantly on the international stage.

Wen Jun, Liyang liu, Guo Shu, Zhu Yuanqian | Think Tank Department Asian Financial Cooperation Association Site: http://afca-asia.org | Address: 11F, Building No.2, Yard 1, Yuetan South Street, Xicheng District, Beijing | Zip:100045 Tel: +86 10 8113 9529 | Mobile: +86 186 2001 0394 | Email: [email protected] | Fax: +86 10 6806 6907

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