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Coronavirus creates risk of a Great Depression, China's central bank says

Inkstone logo Inkstone 7/4/2020
a group of people standing around a table © Associated Press

China’s central bank has warned the international community to be alert to the risk of a “Great Depression” in the wake of the Covid-19 outbreak, although it said the chances of this occurring was low.

“The possibility of a ‘Great Depression’ cannot be ruled out if the epidemic continues to run out of control and the deterioration of the real economy is compounded by an eruption of financial risks,” Zhu Jun, the director of the international department of the People’s Bank of China, said last week, according to local media.

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The coronavirus pandemic has forced policymakers to balance the need to protect public health and the economic cost of shutting almost all face-to-face human activity. 

It has prompted warnings from many economists that the economic shock from Covid-19 may be more severe than the 2008 global financial crisis, or even the Great Depression.

The latter, which began with the Wall Street Crash of 1929, saw credit markets freezing up, massive bankruptcies, US GDP falling by more than 10% and unemployment rates that touched 25%.

Professor Terence Chong Tai-leung, from the department of economics at the Chinese University in Hong Kong, said he was optimistic the global contraction would not be as severe as the 1930s slump.

“Governments are likely to decide to ease off restrictions by July. They need to prevent disruptions that would cause food shortages, social unrest or greater damage to human lives and the economy than if the restrictions continued,” Chong said. “The economy will naturally rebound when restrictions are lifted.”

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But there is evidence that this crisis is already having a massive impact on US employment. US initial jobless claims of 6.65 million last week, up from 3.3 million the week previous week, highlighted fears of mass unemployment.

Currently, global markets are already down 35%. Mainstream financial firms such as Goldman Sachs, JP Morgan and Morgan Stanley expect US GDP to fall by an annualized rate of 6% in the first quarter, and by 24% to 30% in the second.

Zhu, from the Chinese central bank, said the biggest market uncertainty came from the fact that central banks’ swift and forceful actions could not directly help to control the epidemic but stopping the virus’s spread would help market confidence.

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She said the policies of advanced economies had helped stabilize stock market sentiment, but hidden risks continued to exist in the global financial system.

For example, stock markets in developed countries have been rising for many years so their valuations are under pressure.

The corporate sector, which has a relatively high level of debt, could also see an increase of defaults on banks’ non-performing assets and corporate bonds.

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Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.

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