(Yicai Global) Feb. 13 -- There is a consensus that globalization brings not only benefits, but also negative derivatives, viral connectivity. Addressing a problem like climate change would indeed benefit from sensible global cooperation, Nobel Prize winner Lars Peter Hansen told Yicai Global in an exclusive interview.

But global cooperation "is much easier said than done," he added. "I can say that I do wish my country [the United States] was more willing to take a leadership role in this situation to set a good example for the rest of world." 

Global financial markets have been quite stable although a clear turning point has yet to come.

"It is wrong to kill the messenger," Hansen said after the novel coronavirus outbreak moved global stock prices.

"When market valuations change, they're in response to news with important consequences," said Hansen, who is also professor of economics at the University of Chicago. "Price swings should not be blamed on the market. The market is merely the bearer of the bad news."

Though valuations may be fragile, Hansen does not expect US and European markets to see major declines without more evidence of widespread adverse health consequences.

In addition to fiscal and monetary policy, Hansen said the Chinese government needs to encourage a fast response to short-term demands and needs during the epidemic outbreak. "Did you note the price of protective face masks spiked to USD20 each? That is the market mechanism at work ... Businesses in China and worldwide with related assembly lines should be quickly retooling to meet this increased demand and relieve the shortage."

Hansen is optimistic that with continued vigilance and prudence, the costs of the epidemic will not be permanent.

Extracts from the interview appear below.

Yicai Global: Chinese mainland stocks slumped on Feb. 3, the first trading day after the extended Chinese New Year holiday, but recovered and stabilized over the following days. What is your take on that?

Lars Peter Hansen: Market price movements reflect investors' knowledge and beliefs regarding the future values of stocks. Investors buying and selling reveals their best guesses at these future values and adjustments for overall uncertainty. When the market valuations change, they are in response to news with important consequences. Price swings should not be blamed on the market. The market merely is the bearer of the bad news, but it is wrong to kill the messenger.

In the case of this new infectious virus, the markets accurately assessed that virus and the resulting strong preventive measures will have real economic and social costs. However, I am optimistic that with continued vigilance and prudence, these costs will not be permanent. 

YG: The US and European equity markets all seemed to shrug off the impact of the virus. What are your thoughts about the global market reaction?

LPH: I see that investors in the US and in the EU equity markets are waiting for more information about broader adverse consequences to the world economy, rather than over-reacting to incomplete news. The current valuations may be fragile as there is a small possibility of more global catastrophic consequences of the coronavirus outbreak.

But I see a definite possibility that it can and will be contained through well-considered, timely, and cooperative measures being taken both within China and worldwide. I do not expect the US and EU markets to see major declines without more evidence of widespread health adverse consequences.

YG: How much impact do you expect to see on China's economy in the first quarter as well as for the whole year?

LPH: Unfortunately, we have already witnessed some rather negative outcomes from the virus.  I expect this outbreak to continue to have substantial detrimental impacts for the next few months, and quite possibility longer. As medical and scientific research gains insights into how to stop this virus, new cases will level off and start to decline. While this may take a while to play out, down the road, I am hopeful that economic activity can get back on track, without long-run damage to China's productive abilities.

YG: What should be China's short- to long-term policy mix and reform agenda be to help support the economy?

LPH: I continue to take a longer-term perspective. Creating an environment that nurtures creativity and rewards ingenuity should remain a priority. Excessive planning can be counterproductive. In financial policy, I believe new enterprises outside the public sector should be assured of access to financial support.

Regarding economic policy, I think cultivating new ventures is key to finding ever more productive uses of investment. Therein lies the secret to future sustained growth.

As for challenges of dealing with negative effects of growth, such as climate change, air pollution and environmental degradation, I think these are best approached through some form of tax policy that gives incentives for designing and using earth and societally-friendly activities. That is a more efficient and reliable way to encourage societal change, rather than dictating behaviors that are both hard to monitor and equally difficult to enforce.

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

LPH: This will definitely have a short-term impact, but prudent measures will most likely stem the spread of the coronavirus outbreak. I very much hope that this will not lead to a further decoupling of the economies of China and the US, and I suspect that businesses will not rush to terminate productive relations long-term.

YG: What kind of global cooperation is needed?

LPH: Now here is a really hard question. Addressing a problem like climate change would indeed benefit by sensible global cooperation. This, of course, is much easier said than done. I can say that I do wish my country were more willing to take a leadership role in this situation to set a good example for the rest of world.