MAKERERE UNIVERSITY BUSINESS SCHOOL

MONETARY POLICY AND PORTFOLIO ANALYSIS

BBA YEAR THREE

SEMESTER TWO

ASSIGNMENT II

NAME REG.NO SIGNITURE

NAGAWA DAISY OLIVAH 17/U/15052/PS
GEENO OBBO SAMUEL
NAKIRANDA MARIA
NAMUBIRU HAWA
KATONGOLE ADAM

QUESTION
DISCUSS THE EFFECT OF CORONA VIRUS ON THE MONETARY POLICY OF
CHINA AND THE U.S.A

Corona Virus also known as Covid-19 is a viral infection that broke out late 2019 in China.it is
believed to have originated from the Huanan seafood wholesale market in the center of Wuhan
city.it has however continued to spread all over the world with cases reported in the U.S.A, Italy,
the United Kingdom and others.

This disease is highly contagious due to its airborne nature and it has registered a high mortality
rate within a short time of its existence. Many countries are channeling funds into protecting
their territories from outbreak of this epidemic. Many have undertaken quarantine programs
where people coming from infected areas are secluded from the outside world for a period of 14
days which is the incubation period of the virus. Schools and work places have also put their
operations on hold. Other nations have gone ahead to deny people from infected areas access to
their countries which has in turn affected the level of trade.

How the viral outbreak has affected the monetary policy of China and the U.S.A

The outbreak has caused the People’s bank of China and the Federal Reserve to undertake an
expansionary monetary policy. Due to fear of infection most firms have put a halt to production
and this has become a disruption to trade and thus negatively affecting the amount of money in
circulation. The central banks therefore decided to interfere and increase money in circulation to
prevent the economy from falling into a recession.

The People’s bank of China and the Federal Reserve have had to make the following adjustments
in their economies to protect it from the side effects of the outbreak.

 The People’s bank of China has ordered banks to disinfect and quarantine bank notes
especially those from the heavily infected areas such as Wuhan. The bank notes are
disinfected and then stored for 14 days after sterilization before being returned to the
market. The virus is believed to possess the ability to survive on surfaces for a period of
two weeks, its incubation period, and any one that comes in contact with such surfaces is
at a high risk of contracting the disease.it is inevitable for money to circulate as long as
there is any degree of trade, therefore China has undertaken the extra step of preventing
 the money in circulation from aiding the spread of Corona Virus by ordering banks to
sterilize it.
 The central bank of China and the federal reserve have decided to cut interest rates to
support their economies after the outbreak of the virus. Lowering the rates is aimed at
.making the cost of borrowing cheaper in order to encourage households and businesses
to take loans which will in turn boost domestic consumption that has gone down due the
standstill in business caused by the outbreak.
 The central bank of China has decided to inject more money into its economy to soften
the blow of the outbreak. This is through purchasing of securities from the public as a
way of increasing the amount of money in circulation. More so, the government has
undertaken giving reliefs targeted at businesses and facilities most affected by the corona
virus outbreak such manufacturing firms of essential medical equipment and banks. The
People’s bank of China released extra yuan into the economy to ensure there is enough
liquidity in the banking system.
 The Chinese yuan has fallen in value as a result of the outbreak. Since the outbreak of
corona virus, the level of trade between China and other countries has declined and this
has negatively affected the level of demand for the Chinese yuan. This is due to the trade
restrictions other countries have put in place to protect their citizens from the outbreak.
Many countries are limiting the amount of Chinese products and people they let into their
economies. These hindrances to trade have caused a reduction in the value of the Chinese
currency.
 The outbreak of the virus has caused many businesses to shut down due to the highly
declining sales. Most people live in fear of leaving their houses and this has affected
multiple businesses such as restaurants and hotels .With the reducing level of sales, these
businesses need alternative sources of finance to keep in operation. More so in the U.S.A
and worldwide, many businesses have China as their sole supplier and the cramp in the
supply chain has greatly affected the profitability of these firms. The central bank of
China and the Federal Reserve therefore have reduced their bank rate to reduce the cost
of borrowing for commercial banks. If the commercial banks can access funds at a lower
cost, they too will be able to lend to customers at lower rates. This will increase
accessibility to loans for the public.
 The central banks of China and U.S.A have also lowered the legal reserve requirement.
This is also an effort to increase the funds available to commercial banks for lending. If
there is more money to lend, then more loans will be given out by the banks. If the people
can access loans, then they will be able to run their businesses and also carry out
transactions and this will stimulate the economy.
 The central bank of China has also extended debt maturity dates of securities to help
companies affected by travel restrictions and business closures. Instead of paying loans,
the money can be re injected into business to continue production.
 Decline in China’s stock markets. Chinas stock market is made up of mainly of retail
investors. These investors dominate the money invested to up to about 75%.with many
people either sick or under quarantine due to the Corona Virus, it is likely the traders are
not trading as normal.
 Increased hoarding in the economy due to a high level of uncertainty among the affected
countries. Many Chinese and Americans are resorting to hoarding not only products such
as food and household items but also money. People are currently living in fear and this
is forcing them to keep as much money as they can since trade is declining and their
ability to generate money in the future is not certain. This has greatly reduced the amount
of money in circulation.
 The outbreak of Corona virus has led to increase in inflation. The cost of living has
increased due to the high rate of hoarding among people that is creating shortages in the
economy. Prices of goods such as food, medicine, household items, masks and hand
sanitizer have drastically increased. This has resulted into inflation in China and the
U.S.A. However the government of China and U.S.A are fighting this by providing
monetary help/subsidies to firms producing essentials especially for the medical sector
such as masks and sanitizers that are on extremely high demand so as to ensure continuity
of production as a way to control inflation arising from shortage.
 The People’s bank of China and the Federal Reserve have adopted a preferential loan
policy to ensure continuity of struggling firms as a result of the outbreak. Low rate loans
are being provided to the affected firms to help them keep in business since the sales have
gone to due to reduced demand in both countries as a result of the outbreak.
  The People’s bank of China and the federal reserve have had to undertake Quantitative
easing to provide assist to the industries affected most by the outbreak.

Conclusion

In order to protect their economies China and the U.S.A have adopted an expansionary monetary
policy to deal with the economic side effects of the outbreak and it is therefore essential for other
countries to do the same to ensure they don’t fall in a recession.