The China Virus*

The China Syndrome Virus

China has been a breeding ground for all types of unpredictables. China’s yearning for exotic foods, its history and culture, and its wild economic trajectory have made it a veritable petri dish for of all sorts of health, economic and political viruses. From a healthcare perspective, there was SARS in 2003 – Severe Acute Respiratory Syndrome. SARS spread swiftly from country-to-country, mutating into a global health-scare that devastated a number of local and regional economies. At the time, China accounted for a small part of the global economy. Today, it is the equal of the U.S. It used to be said that when the U.S. sneezes, the world catches a cold. We are now seeing what happens when China sneezes … and wheezes.

The most recent reports from China – and its fallout on the rest of the world – indicate that Coronavirus/COVID-19 is spreading rapidly. According to official Chinese government reports, China has more than 70,000 confirmed cases and, according to unofficial sources, there are many more – with pessimists guessing perhaps more than 200,000 in China alone. Projections based on historical analogues suggest that the epidemic soon will peak …, the assumption being that Coronavirus/COVID-19 will follow a growth-and-peak pattern similar to the one exhibited by SARS. The first SARS cases were reported in late 2002. SARS peaked in April 2003 and was considered by the World Health Organization (WHO) to be under control by July. However, past results are not necessarily indicative of … the future spread of a new virus. Medical experts caution that making predictions about the spread of Coronavirus based on the pattern of SARS is purely a guess, and that the fact that the current rate of increase appears to be tracking the growth rate of SARS does not mean that either the data being used is accurate or, even if it is, that the rate of increase will continue to track. (At least one commentator has questioned whether the reported cases are being manufactured to “near perfect” by the Chinese government to “curve-fit” to SARS and the WTO’s quadratic model.) Current data from China (and elsewhere) remains noisy and suspect, there are many reporting delays and those whose symptoms are minor or isolated most likely are going untested and undiagnosed …, especially since existing medical resources are inadequate to test for Coronavirus/COVID-19. China is not alone is not having a first-world medical system. As the number of cases has surged, China’s repressive autocratic government has banned travel to and from afflicted areas (making it impossible to assess the accuracy of government-reported numbers), mobilized army units to deal with the epidemic, and clamped down on the news, barring discussion on social media in an effort to control a narrative that had become critical of the government, generating both political and economic fallout …, as well as a medium for broadcasting fear. This has made the dissemination and confirmation of information even more challenging.

The Coronavirus very much is a healthcare emergency …, but it also has the potential to evolve into something more impactful. The WHO has warned that the Coronavirus may become a health pandemic, something the world has rarely seen. Such a healthscare fear all-too-often gives rise to severe non-health consequences. A health-scare can be a prelude to earthshaking economic and political fallout that could spread faster than the disease itself. It could shape a fear that could go viral and trigger crises of a different sort. Fear can become contagious and breed pandemics of … almost anything – anti-government action or a panic or an economic disruption that could feed on itself. People-in-fear close their doors and seek shelter, crippling commerce and discourse. The 21st Century has been labeled by some as “The China Century.” Having the world’s largest consumer population, being an indispensable link in the global manufacturing chain, and acting as a center of innovation, China is indeed a petri dish, a place where both good and bad can originate … and quickly spread.

Since the SARS outbreak in 2003, China has made itself into a major global resource for labor, parts and supplies that for the past decade have been major drivers of global growth and commerce. China is now an indispensable link-in-the-chain of global trade, manufacturing and consumption. The world depends on Chinese manufacturers to produce products and parts, and on the Chinese population to buy and consume both raw materials and finished products. However, the Coronavirus has caused China to virtually close for business in an effort to slow down its spread … and that has forced both Chinese companies and foreign ones that rely on Chinese commerce to close as well. Major Chinese cities’ streets are deserted, meaningfully so. Factories and stores have closed. Travel is restricted and, in many areas, banned. People have locked themselves in their homes, neither working nor frequenting retail or online shops. More than one-third of flights to and from China’s airports have been canceled, with China’s neighbors and trading partners prohibiting Chinese visitors – as well as visits from citizens of other countries who recently visited China –, and urging their own citizens to return from China …, and be placed in isolation until they have been proven free of contagion. As a consequence, global delivery companies like FedEx and UPS have reduced pick-ups and deliveries into and out of China, Disney has shut down its theme parks in Shanghai and Hong Kong, Imax has postponed the release of films intended to be showcased in China, Nintendo has delayed shipments of game consoles to customers all over the world due to a shortage of parts from China, Tesla and other automobile manufacturers have shut down any number of their plants inside and outside of China, vacation, cruise and tour companies have canceled innumerable trips around the world, and retail and restaurant chains, including Levi Straus, McDonalds and Starbucks, have closed their Chinese outlets. A great many laborers no longer are laboring and a great deal of manufacturing no longer can be manufactured. How long this will continue is unclear.

Since China is the world’s biggest oil importer, the China lock-down has had its most obvious effect on crude oil prices. The city of Wuhan, where the virus originated, is one of the world’s key oil and gas hubs. The corrosive economic energy fallout from the Coronavirus forced China’s refineries to significantly reduce capacity. The international price of crude oil accordingly has dropped by almost 20{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}, motivating Saudi Arabia, the leader of the Organization of Petroleum Exporting Countries, to convene an emergency OPEC meeting, one of the more apparent ripples of the Coronavirus wave. The reduction in China’s energy use and supply is only now beginning to ripple through the international economy. It’s not yet possible to gauge the non-short-term effects of that reduction in energy demand … and on global prices.

The economic ripples of the Coronavirus have been spreading from China to its local trading and manufacturing partners and, from them, on to the rest of the world. Those ripples have quickly become small waves that are eroding lapping at the shores of global suppliers and trading partners … which waves, however, have not yet impacted global stock markets. Those markets continue to rise, largely ignoring the potential for significant economic chaos fallout. Wall Street’s armchair epidemiologists appear to have opined that, like SARs, AIDS, the 2009 H1N1 swine flu, and Ebola, the Coronavirus soon will be brought under control. They most likely are right.

The current health-scare follows a period of steadily slowing economic growth. Global GDP in 2019 grew by only 2.9{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}, its lowest since 2009, the year of the Great Recession. Before the Coronavirus struck, China, like most of the rest of the world, had recorded slowing growth …, in fact, its slowest GDP growth in decades as a combination of a maturing economy and American economic sanctions bit into China’s centrally-managed economy, emulating the slowing growth experienced at the same time in the EU, Great Britain, and Japan. As a leading economic indicator, global car sales fell by an estimated 3.1 million in 2019, a bigger drop than in 2008. Even prior to the Coronavirus, 2020 was expected to be worse. Economists have been blaming the global slowdown largely on the massive accumulation of public and private debt. Ayhan Kose, director of the World Bank’s Prospect Group, has stated that “The history of past waves of debt accumulation shows that those waves tend to have unhappy endings.” No surprise there! The Institute of International Finance has estimated that total global debt now exceeds $257 trillion, spurred by low interest rates and loose financial conditions. What effect will the Coronavirus have on continued unsustainable debt accumulation and global growth? The history of economic cycles shows how difficult it is to pick a cycle end-date …, although each such date has been triggered by an event, often an unexpected one.

It’s too soon to attempt to predict either the healthcare outcome of the Coronavirus or its health-scare economic consequences. Too little is known about the virus itself or about how widespread it may become. That hasn’t stopped analysts from touting their guesses predictions. Oxford Economics, an economic consultant, has predicted that the Chinese economy will grow by less than 4{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} in Q1 and at a 5.6{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} clip for the 2020 year as a whole which, although impactful, does not differ all that much from its pre-Coronavirus forecast of 6{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} annual growth. At the bearish extreme, Beijing-based Plenum research has forecast a plunge in Chinese growth to -2{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} in Q1. Both forecasts are based on the assumption that China and the world will avoid a worst-case scenario. As far as America is concerned, Goldman Sachs has said that it expects the Coronavirus to reduce U.S. output by up to half a percentage point in Q1, a minimal impact. With questionable data and limited Coronavirus experience, the fact is that no one really knows.

Governments and healthcare providers already have taken and will continue to take the steps necessary to avoid a healthcare pandemic. Although they should be able to bring the Coronavirus under control, they cannot control the spread of fear or the economic and political fallout that fear-of-contagion may bring. Healthcare professionals and economic bulls have good reason to believe that the Coronavirus will be brought under control …, and they likely are correct in their evaluations. Prudence, however, dictates caution. Although it’s wisest to hope for the best, it’s equally wise to have a plan for the worst.

Finally (from a good friend)

*┬® Copyright 2020 by William Natbony. All rights reserved.

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