(Yicai Global) Feb. 18 -- Conquering the Covid-19 epidemic will be China's best opportunity to prove to the world that it is a responsible global partner that takes into consideration not only its own interests, but also those of the world, the former chairman of the Hong Kong Securities and Futures Commission told Yicai Global.

This crisis will show that China is far better prepared than many other countries to deal with a pandemic, said Andrew Sheng, who is now a distinguished fellow of the Asia Global Institute at the University Hong Kong.

But there is no room for complacency, he added. The world must realize that the common enemy is the Covid-19 virus. It does not differentiate between rich and poor, white, black, brown or yellow. So blaming and criticizing others cannot solve the problem and will only complicate the solution.

The only way forward is to unite and work together, and this must be reflected in open, inclusive attitudes from all, Sheng said.

Below are excerpts from the interview.

Yicai Global: The coronavirus outbreak is still not under control as we had hoped. However, after heavy losses on the first day of trading after the extended Chinese New Year holiday, mainland stocks have recovered slightly. Do you think China made the right decision to not delay reopening the stock markets? 

Andrew Sheng: It is one of the rules of prudent regulation to keep the markets open, even in times of crises or shocks, because putting it off would mean a lack of confidence. Think of the millions of investors who are confined to their homes without the ability to trade.

Maintaining liquidity in the markets even when there is a crisis going on is a good measure of confidence building. You can see from experience that the markets will recover and gradually regain confidence after the crisis subsides.

YG: Equity markets in the United States and the European Union all seem to be shrugging off the impact of the virus. Do you think the impact has been fully priced in? Are the markets too complacent?

AS: The markets do not know the full implications of Covid-19. No one does. There have been a lot of guesses but the predictions are all over the place, because no one can predict how the virus will spread at the global level and where it will have unexpected effects. For example, flooding in Bangkok a few years ago caused the supply of vital parts in the global supply chain to be disrupted. So far, smart investors around the world are still trying to figure out the implications. 

The most recent experience is Severe Acute Respiratory Syndrome in 2003, but that was contained fairly quickly. Remember that advanced countries have not had much experience with epidemics. The H1N1 virus was treated as influenza and related deaths were considered 'normal.' Ebola, Middle East Respiratory Syndrome and SARS did not have a psychological or a direct effect on rich countries so the response is to shrug it off. 

Advanced markets have not paid 'panicked' attention to Covid-19, because there is so much liquidity around with low and negative interest rates. Large pension and asset funds have to keep on investing. Quantitative easing by central banks has changed the nature of the game, because the liquidity of markets now depends on these policies rather than the fundamental behavior of the real economy. Investors now have real moral dilemmas, just like politicians. If things go wrong, they expect central banks to take market action.

YG: What is your take on the short- and long-term impact on the global economy and markets including equities, bonds and commodities, and especially oil? Should investors be prepared for volatility ahead?

AS: The downside is that there will be real losses at almost all levels, but this is not all negative. Crises are also opportunities to get rid of incurred losses, clean up and change direction. You cannot carry on with 'business as usual' because business is no longer usual.

At the real economy level, businesses and governments will have to rethink priorities, just as individuals will need to change their consumption patterns. Health becomes a top priority because no one can worry about investment if their health breaks down. So healthcare and pharmaceutical companies will have greater revenue opportunities.

Conventional businesses like cars may find people investing less, because they do not need to travel as much. More personal consumption may be done online, rather than visiting malls and supermarkets in order to reduce human contact. 

What this implies is that business may become even more online than before. Less people-to-people contact, more clicks. This is an investment opportunity. Investors therefore need to plan their investment strategy accordingly.

YG: How badly will this outbreak continue to hurt the global value chain and lead to further decoupling of China and the US?

AS: The last two years have shown that the difference in values and worldviews across the Pacific is wider than previously thought and cannot be narrowed quickly. I do not see decoupling, but reconfiguration, with more firewalls in specific areas.

The global supply chain will adjust to these megatrends. This is already happening. For instance, China is relying less on foreign trade as an engine of growth and more on domestic consumption and production of higher quality, healthier, more green services and products. Those who can adjust faster through self-strengthening and reforms will be the big winners. Those who cannot and are unable to handle the new challenges will be marginalized. This is a Darwinian 'survival of the fittest' competition. In short, eat bitterness today or tomorrow may be even more bitter.

YG: How much impact do you see this having on China's economy in the first quarter and even the whole year?

AS: I cannot predict the future, but from experience drawn from past crises you will see the main impact within the first six months of the outbreak of the crisis. After that, it depends how successful the policies implemented to deal with it are. 

Recovery is a process. It requires diagnosis, damage control, allocation of losses and rectifying the underlying reasons that led to the crisis in the first place so as not to repeat history. Like an earthquake, it is possible that there are after-shocks, and so crises need to be monitored for a second or third wave of after-effects.

For example, it is now clear that public health prevention as well as education on personal and public hygiene is critical to social stability and well-being. 

We should never panic, but rather use the best information we have to deal with what is coming. We should remain realistic and calm, neither too optimistic nor too pessimistic. Prepare the population and get everyone to work together. Move resources where they are needed. I am confident that the Chinese government is well prepared to do this, but in every crisis, you cannot avoid mistakes because surprises will come from areas you do not expect.  

What I am worried about is that internationally, many countries are simply not prepared, nor do they have the resources whether financial, human or political, to cope with pandemics. The recent Global Health Security Index has found that national health security is weak around the world. The US is placed in first place and China in 51st place out of 156 countries surveyed.

Actually, this crisis will show that China is far better prepared than many others, but there is no room for complacency. Such indices are flawed in many ways, such as comparing China and India, which have populations of over 1.3 billion, with countries the size of Qatar with under 3 million.

Basically, the economic impact will be felt by those countries least prepared for such outbreaks, and because they cannot cope, the problem could spread to other regions. There should be more modeling of such feedback mechanisms to look at possible outcomes.

YG: What kind of financial, fiscal and other policy tools can the Chinese government use to minimize the damage of the coronavirus outbreak?

AS: China has both the financial, fiscal and human resources needed to deal with this. In my view, now is the time for all hands to be on deck, nationally as well as globally. It is the experience, values and perspectives that are most important.

The views of Huang Qifan, a senior Chinese politician best known as the former mayor of Chongqing in Sichuan province, are in my opinion spot on, because he has firsthand experience of dealing with issues at the level of large municipalities and he also has international perspective that is not common even amongst global-level bureaucrats.

The emerging crisis is an entangled systemic crisis that needs a system-wide perspective for resolution. But you have to know where to intervene to get the best effects, and that comes only from deep professional experience.

YG: What is the best mix of policies for China in the short-, medium- and long-term to help lift the economy out of this shock to growth?

AS: We are increasingly aware that all crises have their systemic dimension through their inter-connectivity and reflexive interactions. The idea that issues are self-contained is out the window. To think that the simple free market model will solve this type of crisis is nonsense. In any crisis, the immediate individual reaction is fight, flight or unite. We must realize that the common enemy is the Covid-19 virus. It does not differentiate between rich and poor, white, black, brown or yellow. So fighting among ourselves, blaming and criticizing others cannot solve the threat, only complicate the resolution.

But the outbreak has also revealed that flight is not a solution. The racist element raised in many countries shows that people will treat any Chinese person at the moment as a potential Covid-19 carrier. This is completely irrational and comes from ignorance and prejudice. Where can a Hong Kong person flee to without being considered another potential carrier?

Thus, the only way forward is to unite and work together. This must be reflected in open, inclusive attitudes from all, including welcoming foreign offers of help. We must conquer the threat, the panic and the fear together.  

YG: In an increasingly interconnected world, those of us who enjoy the fruits of globalization must also bear its risks such as climate change, resistance to drugs and emerging epidemics. As the Wuhan outbreak shows, we must work together. What forms of global cooperation are needed? 

AS: We have to be aware that there is a lot of Chinaphobia because of the growing size and speed of development. Few people understand China because of its sheer size and complexity. So ignorance can easily create fear and misunderstanding. Viral pandemics can start anywhere, but because Covid-19 surfaced in China, there is now awareness that cooperation comes from trust and transparency.

A lot of the news must now be broadcast in English, so that outsiders are able to understand what heroic efforts are being made to deal with it. Because many foreigners cannot read in Chinese, they become victims to fake news that play up all the negative, even malicious, news as conspiracies. 

Conquering the Covid-19 crisis will be China's best opportunity to prove to the world that China is a responsible global partner that takes into consideration not only China's own interests, but also those of the world. Good deeds are not always understood, so good communication in an open manner and in a language that people understand is very critical in the coming days. 

Editor: Kim Taylor