Asia Coronavirus Watch: Stronger fiscal and monetary policies amid an unprecedented global halt

• The coronavirus outbreak is having a tremendous impact on the global economy. While China’s cases are now close to zero, except for a few imported cases, other areas in Asia have seen their relatively moderate numbers by now surge quickly, also mainly due to imported cases. This is the case of Hong Kong, Singapore, Taiwan and even Korea.
• As for the Chinese economy, although the data on transportation pointed to economic activity getting back to normal, the high-frequency economic indicators looked still worrisome, especially as regards the demand of durables and housing. In fact, car sales and home transaction remain sluggish.
• Given the high exposure to global trade and financial markets, Korea has so far faced headwinds. The PPI declined in February, raising the fear of being dragged into deflation. In Japan, companies have become very cautious, which is having a toll in the spring wage negotiations. With a lower increase in wages expected and the consumption tax hike from last October having already eroded disposable income, the recovery in private consumption will be further delayed. In the same vein, deflationary pressures in Japan will remain strong, as shown by the recent, even lower, CPI growth (0.4% YoY in February).
• More generally, the pandemic has clearly reduced risk appetite. Asian equity markets experienced a sharp fall on the first four trading days of the week and rebounded on Friday thanks to the additional swap lines announced by the Fed, which now cover Australia, New Zealand, Singapore and South Korea in Asia and beyond the existing one for the Bank of Japan. As for forex performance, Asian currencies, including the RMB which has been quite resilient recently, are still pressured by a strong dollar. Notably, AUD and IDR plunged by 9.2% and 10.8% respectively last week. This results largely from the high exposure of these two markets to a dollar credit crunch.
• Central banks have stepped up their efforts to mitigate cash flow problems from such a hugely negative demand shock. Following the Fed’s monetary policies and weak economic data in China, central banks in Asia have mostly adopted emergency expansionary monetary policies with Australia stepping into an uncharted territory of quantitative easing (QE).
• The People's Bank of China (PBoC) looks conservative in keeping the loan prime rate (LPR) unchanged in March, but this was only after a series of easing measures in February. The Bank of Japan (BoJ) also kept its policy rate unchanged at -0.1%, which is in line with our expectations as a rate cut would be counterproductive. Still, BoJ did expand its target on ETF purchases, which equates to additional QE. The Bank has also introduced measures to support firms affected by coronavirus.
• All in all, the world is heading towards an unprecedented time of a global halt. Lower rates and expansionary fiscal policies are helpful but the resumption of business activities can only be supported with lower coronavirus infections. Furthermore, international cooperation on the sanitary front and coordination of economic policies is a must. The presidency of the G10, Saudi Arabia, called for a meeting this week. Expectations are high on coordination. Key topics can be fiscal policies but also exchange rate intervention and the provision of additional swap lines by the FED as well as the role of the IMF on liquidity provision.

Full report available for NATIXIS clients.