Interview with Economists: The effect of the pandemic is an abrupt halt. More volatility ahead

Release time：2020-04-01    

On March 27, 2020, “Fudan Financial Review”, FISF and Tencent Finance joined forces and launched the “Tencent Fudan Finance Open Course”. The invited speakers were: Qian Jun, Executive Dean of FISF, Executive editor of “Fudan Financial Review” and Professor of Finance; Shi Donghui, Director of the Capital Market Research Institute of the Shanghai Stock Exchange and Guest Professor of Finance at FISF; He Jibao, Director of the Shenzhen Stock Exchange Comprehensive Research Institute; Pan Xiangdong, vice president and chief economist of New Era Securities; and Wu Chaoming, chief economist at Chasing Securities. The discussion, hosted by Prof. Qian Jun, focused on hot topics, such as: international capital markets, China’s stock market, U.S. dollar exchange rate trend, etc.

The course was broadcasted live on the Tencent Finance channel and attracted over 200,000 viewers online.

Qian Jun: China’s policy space is larger. Clear skies are ahead of the Chinese capital markets

In the first place, Professor Qian discussed the impact of the recent global trends on the capital markets. As he pointed out: the financial markets and the real economy are closely intertwined. The root of the current problem lies in the prevention and control of the pandemic. As long as the turning point of the COVID-19 pandemic has not been reached, the capital markets of many countries are still at risk.

Furthermore, most governments around the world are fully aware of the huge economic losses caused by the Coronavirus crises and have taken unprecedented measures, which would serve as a short-term firewall to shield the economies. The massive stimulus programs from central banks worldwide would likely have mid- to long-term effects. Investors should take a wait-and-see approach and follow closely.

Finally, speaking of China’s capital markets, Prof. Qian pointed out that the Chinese policy space is larger than that of Europe and America, which translates into good potential for economic development. In a nutshell, in the medium to long-run, optimistic opportunities lie ahead of the domestic stock market.

Shi Donghui: the world is still far from a financial crisis. The U.S. stock market has not hit the bottom

Shi Donghui, Director of the Capital Market Research Institute of the Shanghai Stock Exchange and Guest Professor of Finance at FISF, noted that the decline in the U.S. stocks has not been big enough− a stronger wave of callbacks is to be felt in the future. Currently, U.S. stocks plunged by around 30%, falling into a bear market. Historically, they have fallen by more than 45% after the Dotcom bubble burst in 2000, and by about 55% during the 2008 subprime mortgage crisis. This means that a financial crisis has not been reached yet, Prof. Shi added. However, the debt leverage of American non-financial enterprises should be observed with caution. Since the 2008 crisis, in an environment of low interest rates and inflation, the debt of U.S. non-financial companies has expanded rapidly: a considerable number of companies have repurchased shares, and, disturbingly, the leverage of the corporate sector has reached the highest level in history. If the pandemic spreads over a longer period of time, the ballooning corporate debt could worsen a future economic downturn.

As for the A-shares (also called domestic− the stock shares of mainland China-based companies that are denominated in RMB and traded on the Shanghai and Shenzhen stock exchanges), Prof. Shi emphasized that amid the recent global shares plunge, the Chinese stock market has demonstrated very good resilience. China’s macro and micro environments are stable, the viral pandemic is very much under control, and the large policy space provides opportunities to tackle the risks.

Besides, Shi Donghui addressed the present condition of the Science and Technology Innovation Board (STAR Market) that aims to attract both domestic and foreign tech innovators to trade in China: 93 companies have been listed already, and the total market capitalization has reached 1.2 trillion. In terms of efficiency, it takes approximately 122 days for a company to go through the entire process− this time basically overlaps with the registration period on the overseas mature markets. In addition, from an industry perspective, 3 main areas stand out (3/4 of all listed companies belonging to these areas): IT, biomedicine, and high-end equipment.

He Jibao: Substantial fluctuations may continue. Corporate debt – the sword of Damocles hanging over the U.S. economy

According to Dr. He Jibao, Director of the Shenzhen Stock Exchange Comprehensive Research Institute, large fluctuations might persist: first, because the pandemic is not expected to end so quickly, stock market volatility is rising and the panic will take some time to recede; second, because the fall in the U.S. equity market will have a spillover effect on the money market.

However, it is too early to conclude that the dark shadows of a global financial crisis are threatening the world. Compared to the 2008 subprime mortgage crisis, the economic situation in the United States is much better− the risk and liquidity management of the banking system has been significantly improved.

Nevertheless, the collapse of the U.S. stock market exposed the fragility of the American financial system. First of all, the U.S. economy is highly dependent on its capital markets. It should be pointed out that the stock market and the national debt are large, while the credit of the banking system is relatively small, which could be a precondition for huge volatility. As a consequence, in particularly turbulent times, the huge volatility of the capital markets may considerably affect the real economy, leading to the so-called financial system vulnerability. Moreover, the swelling corporate debt is the sword of Damocles, which hangs over the U.S. economy. Due to the decade-long credit binge, the corporate debt is nearly half the size of the economy. The household debt has also inflated since the subprime crisis.

Overall, Dr. He Jibao believes that large fluctuations may still occur. In the short-term, this depends on the FED’s response policy, and in the longer-run− on the pandemic control efficacy. The real economy might get hit hard, and the global supply chains might be seriously disrupted.

Speaking of the locally listed A-shares, the recent capital inflows and the bull market trend prove the powerful rebound of the Chinese capital market under the global pandemic turmoil. The A-share market, which valuation is still relatively low, has shown abundant liquidity, strong resilience and anti-risk capabilities.

On top of that, He Jibao states several reasons for the strength of the U.S. dollar relative to most major currencies: first of all, the consistent global demand for the dollar boosts its liquidity, which promotes the rise of the U.S. dollar exchange rate; the second explanation is risk aversion; the third− the seesaw effect of other sovereign currencies, such as the Euro and the British pound; the fourth is that the dollar liquidity tension reflects a liquidity mismatch; the fifth, the capital flow to the U.S. market.

Pan Xiangdong: financial crisis was averted because of strong central bank interventions

Pan Xiangdong, vice president and chief economist of New Era Securities, said that currently a financial crisis has not erupted due to the massive interventions of world central banks. Nonetheless, it is likely that the present economic downturn evolves into a future financial crisis. The effect of FED’s announced measure of unlimited QE (the U.S. central bank declared it would buy unlimited amounts of Treasury bonds and mortgage-backed securities to ward off a credit crunch) should be evident soon, but when the market would hit the bottom depends on the pandemic control. Moreover, this future market bottom would probably be deeper than expected.

The short-term adjustment of A-shares will not be as large as this overseas. In the medium and long-run, the mainland stock market looks optimistic because, on the one hand, China already has the Coronavirus epidemic under control, and on the other hand, some risks have been released in advance due to the real economy and financial deleveraging operations carried before.

Wu Chaoming: The impact of the pandemic surpasses the effect of a financial crisis. Effective epidemic prevention and control is the key

Wu Chaoming, chief economist at Chasing Securities, vividly describes the difference in the impact of the epidemic outbreak and a financial crisis. He illustrates the greater effect of the pandemic with a driving metaphor.

Assume you are driving on the highway at 120 km/h. Suddenly, you are pulled over for inspection by a traffic police officer− immediately, the speed of your car drops to zero. This exemplifies the influence of the current viral infection− many production activities were halted.

Now, imagine you are still driving on the highway at 120 km/h, but this time there is a problem with your car and you have to slow down to 60 km/h. After all, your car is still running! The same holds for the financial crisis: despite the fact that they are reduced and less efficient, manufacturing and economic activities are still going on.

The Novel Coronavirus disease caused a shock-like stagnation, which abruptly reduced our speed from 120 km/h to 0.

Wu Chaoming concludes that at the moment there is no financial crisis. It occurs when the balance sheets of companies, financial institutions, and residents shrink in a short period of time. At present, the Federal Reserve, the United Kingdom, China and many other authorities have taken unprecedented measures to shield the 3 major economic entities: the corporate sector, the financial institutions, and the household sector.

The critical factor to test the stability of this protective wall is the length of the pandemic. If the Covid-19 crisis persists for a long time, this firewall might break down even if it is thick. Therefore, it is crucial to have the pandemic under control as soon as possible. To sum up, governments and central banks around the world are building firewalls and implementing exceptional micro and macro polies; whether companies and households would be willing to spend, whether work would be resumed, and whether investors’ panic would be relieved, relies on the prevention and control of the pandemic.