
The coronavirus and financial contagions demand a joint response. Can China and the US deliver?
- As the public health crisis spreads to global markets, recovery will depend on two factors: whether China seizes the chance to pursue economic reform, and whether the US and other major economies take coordinated action, like in 2008
The second quarter should see a level of recovery, but not large enough to dig the Chinese economy out of a deep ravine. As for the second half of the year, no amount of Chinese stimulus can make up for lost activity in the first half of the year – not least because of the double effect that China will suffer from as export orders collapse and China’s major trading partners go into recession themselves because of the coronavirus.
Efforts at boosting demand through classical Keynesian stimulus will be complicated by the fact that the current crisis at its heart is a public health crisis that cannot be stimulated away until health responses have an objective impact on international transmission and mortality rates. Therefore, as a matter of logic, preserving private firms with crisis-induced cash-flow problems is a central task, given that they are the major source of employment.
Three ways Covid-19 could trigger a global financial crisis
Boosting private or public demand will help cash flow to some extent, but the immediate burden of dealing with solvency needs will fall on banks. Governments will therefore need to determine early what support to provide banks with.
How the coronavirus is exposing the ills of the China model
How China responds economically to these challenges matters to the rest of the world. But at the same time, the international community – including China – must also marshal a coordinated public health and financial response to manage the outbreak and calm markets.
As prime minister of Australia during the global financial crisis of 2008, I saw the financial carnage spill over one national border after the other to destabilise economies and political systems across the world. That catastrophe demanded that the major countries of the world come together to stop the bleeding and devise a coordinated set of policy responses to right the global financial ship. We did that by deploying the G20 to deliver fiscal and monetary stimulus, prevent recourse to protectionism and bring about necessary regulatory reform.
The twin public health and financial contagions we are now witnessing require a similar response. Yet there remains an alarming lack of coordinated global action. World markets need to know that governments are acting to address the crisis in unison.
The last Republican president played a key role in bringing together G20 leaders in late 2008, at the start of the financial crisis. President Trump would benefit from doing the same now, including bringing China and the other major economies to the table. For example, an emergency virtual meeting of G20 health and finance ministers, and in time leaders, with a solid and agreed agenda of work, would provide the dose of confidence that both the people of the world and the global economy so desperately need right now.
Kevin Rudd was the 26th prime minister of Australia and is president of the Asia Society Policy Institute in New York
