Tuesday, February 18, 2020

Emperor Xi Gonna Force "Containment" By Any Means Necessary

nakedcapitalism |  We’ll focus on China, since the immediate economic concern is how the progress of the disease and efforts to manage it hurt their citizens and companies, which affects the West directly (supply chain disruption, loss of critical supplies, damage to companies that do a lot of business in and with China) and indirectly (the hit to global demand).

So forgive me a US aside before returning to the China front. Even though the plural of anecdote is not data, I see signs of concern even in the currently low-risk US (my scenario for how things might get troublesome here is that coronavirus winters in the global South, particularly Africa and Australia, and is primed to become US health risk during the 2020-2021 flu season). For instance, a friend in Dallas supplied me with several products, including a hand sanitizer used in operating theaters that supposedly kills nasties for five hours. Interestingly, she didn’t view coronavirus as a current risk but felt it was important to establish protective habits and routines well in advance of a potential threat. This suggests that not only will Americans stay well away from China for some time, but some may already be considering foregoing travel not just to Asia, but potentially even non-essential US trips.

Back to the main event. The fact that gas prices at the pump in low-fuel tax states are increasingly at or below $2.00 a gallon ought to be a wake-up call that serious deflationary forces are at work, even if cheaper fillups provide a short-term boost to consumers.

The apparent reason for continued peppy stock markets is that too many investors are mistakenly comparing the coronavirus to China’s 2002-2003 SARS outbreak. There are plenty of reasons why this is wrong-headed. SARS was easier to contain because China was much poorer then, so Chinese traveled less. Its high fatality rate (nearly 10%) also likely resulted in citizens taking social distancing measures of their own, in addition to official ones. Experts in China also claim the government was faster to address the contagion then. One result was the successful identification of “supertransmitters,” which was a considerable aid in containment. 

Economically, China was vastly smaller in global GDP terms. It had just been admitted to the WTO and thus was only beginning to become integrated into global supply chains. And the timing of SARS worked out to be better too. Its major outbreak took place later in the year, as opposed to during a peak travel time. 

And the coronavirus has already surpassed SARS in number of deaths and number of confirmed cases.

China has been fragile for some time. It has managed to avoid a downturn but to a significant degree, that has occurred by virtue of increasing risk, particularly private sector leverage. That might not be such a cause for concern if the additional borrowing were going into productive activities. But China bears have been pointing out for years how borrowing is producing less and less incremental GDP growth, as evidenced by often shoddily built ghost cities. China has been trying to curtail bank lending, but the government has engaged in stop and go tightening, relenting and loosening liquidity when growth flags.

China has already taken damage from the swine flu, with more costly pork hitting consumer budgets, and from the Trump trade wars, where many small and mid-sized Chinese companies reporting considerable delays in getting paid, forcing them to belt-tighten to conserve cash.