I am hoping you all can talk amongst yourselves and not just ask me questions. I will be lurking and may jump in but collectively you all know so much more about China. To kick it off I have six questions about which I would love to hear your thoughts:
How much longer can the economic slowdown continue before we start seeing large numbers of business failures and unemployment becomes an issue?
Can the government avoid large-scale stimulus and credit expansion given the economic damage? And what happens to the supremely important real estate market? SARS hit at the dawn of the commercial and residential real estate markets in the PRC and so it turned out to be a great buying opportunity. Will the effect of the COVID-19 epidemic be different?
You know my three signs to look for to be confident the outbreak really is under control in China - Xi visits Wuhan; The announcement of a date for the “Two Meetings”; Kids go back to school. Are these the right signs? What others might there be?
Are the the positive energy and censorship efforts of the propaganda department working, such that outside observers risk focusing too much on some of the online grumbling as a sign of real political challenges to the Party and Xi?
If China really has this virus nearly under control and can get the economy restarted in fairly short order, do Xi and the Party actually come out of this tragedy stronger? How would significant outbreaks in other countries reflect on Xi and the Party?
How should the US government react to the expulsion of the three Wall Street Journal reporters?
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When does this stop being just a Chinese virus and become a world virus? Strikes me that will lead to a brief global meltdown (possibly underway?) followed by a recognition that this is just the way it'll be. For example, I'm traveling soon and people question whether that's risky but just going outside in Washington, DC is risky so why would travel be worse?
Here are my summarized thoughts...Governments and regimes don't fall easily, it will take a prolonged period (say 10 -15 years) of serious economic decline ala the Soviet Union for it to happen, and when it finally comes more often than not it comes internally from a member of the elite ruling circle (ala Gorbachev). There's no doubt that the virus has further increased the store of cynicism within the Chinese population, and done major economic damage at a time when the Chinese economy is starting to slow down and struggle. The impact of the virus is definitely causing economic damage to build up, but it will require a lot more economic stagnation over a long period of time for things to really change. So the chances of a regime change or even course correction in the short to medium term are very slim, but on the other hand, the more their economy slows down, the more China's ability to pressure and influence other countries in ways the US doesn't like go down (which paradoxically means the US will probably decrease the pressure/antagonism as China becomes less threatening and more focused on internal stability).
Very interesting remarks, imo. I tend to think it won't be a prolonged period of stagnation, but a single, deep recession that causes trouble for the regime, and this just may be the precipitating event. People can adjust to things staying the same rather than continually improving, but losing your job and your house is much more likely to cause anger.
I'd say you have the right trifecta regarding evidence of a recovery for most of China, but hot spots will be subject to different rules. As far as how quickly China's economy recovers and what its growth rate will be this year, depends on whether the virus becomes a pandemic and also on the strength of the global economy. Even if China's economy recovers quickly, if the virus becomes a pandemic the ensuing global recession will boomerang back to China (first supply chain disrupted, it recovers, but demand then weakens). How the US government should reacts doesn't matter. It won't react the way it should. That's a given. All strongmen globally will want to bolster themselves alternately praising and blaming one another for how they address or fail to address the viral threat as the virus pinballs around the globe. Stay well all. As we say in California, this may be the big one!
On the Chernobyl analogy. We should remember that Gorbachev--who had become General Secretary just a year before--adroitly turned the Chernobyl crisis to his political advantage, using it to justify his "glasnost'" campaign. By itself, Chernobyl was very far from bringing about the end of the Soviet system. It was the momentum of glasnost' that led to mounting political pressures for democratization that the Soviet system could not contain. Will Xi try to use this crisis to put pressure on local leaders by opening up channels of communication, ie combining top-down with bottom-up accountability? Not likely, of course. But I see the Soviet lesson as showing that the leader of a centralized communist state can use a crisis to achieve his desired political reforms, which may themselves have unforeseen consequences. Unfortunately, Xi only appears to want to tighten central control--but that only exacerbates system-level vulnerabilities. Thomas Remington
I think China may recover first, which will create interesting dynamics. If this becomes a global pandemic, expect air travel to stop. We will be looking at a global recession that will make 2008 look like boom times.
Will Trump continue to ban Chinese from flying to the USA once the threat eases? I suspect not. All airlines may fail.
One thing to consider is the implications of China seeing massive recurrence of the disease as they try to get the economy going again. I suspect that is quite likely.
1. No clue. I guess for any meaningful analysis of this issue it’s time to turn to some qualitative means.
And as a trader myself I still cannot fully come to terms with how the A-shares performed after the lunar new year holiday.
2. No. And for the real estate market this time it’s certainly different. Read the PBOC reports and feel their determination and take a look at what Evergrande has been doing.
6. Illiteracy of the English language, and illiteracy of the Chinese language. Pun intended but misused. I don’t believe WSJ would care to do any trolling at this moment.
It seems clear to me that the US feels ready to take-down China, not quite like the USSR in 1989-91 (completely unrealistic) but more than Japan in the plaza accords. Unlike the USSR however, China is not an economic disaster zone, and is also integrated into the global economy. So the emerging narrative is one of 'values', where we can't just close our eyes to China whilst making a buck, but must 'wake up' to the fact that it is not, nor is it likely to become 'like us'. Not being 'like us', for the US, is a problem. So we need to assert out values against the new dark empire, against whose backdrop we can burnish ourselves anew. In this dialogue there is a lot of knowledge about China but - in this forum at least - not the slightest shred of empathy. Knowledge, in a well honed western imperialist trope, is there to provide insight into the enemy entity which is to be brought down, or at least to heel. There is not the slightest thing China could do - on this virus or on anything else - which could elicit something other than 'oh, here's the Tiananmen moment' or 'oh, the propaganda department has managed to quell dissent'. The Chinese government was slow to react, a mixture of clunky top-down information systems, and a fear of rumours just before the mass exodus of lunar new year. What it did and did not do, or could have done better, is a matter for discussion. But on this (and most other western media) it is instantly turned into a symptom of totalitarian communism. And then it's all about regime change. Not reform, because that is deemed impossible in China. Only the collapse of the CCP will do. So of course we await the rise of the Chinese people, their mass protests on the street, the virus symptomatic (as the Guardian had it in a recent podcast) of 'the struggle between the Chinese people and the Chinese state'. Death or liberty. This is pure fantasy. As is this idea that if GDP grow drops below 3.679% the Faustian bargain with the Chinese people will be broken, the mandate of heaven fall, and with a few years US capital will be strolling unhindered through the streets of Beijing. Another fantasy. But after weeks of this fantasy, and the dawning sense of 'not this time, put your muskets away', it is back to 'propaganda victory'. Well it will be, but that's because the capacity to act - as noted by the WHO, though no doubt that's seen now as a Communist front organisation - is very high, and much better than the US outside its financial, corporate and military sectors (which is what maters, right?). The Chinese people are not looking to be liberated by the US, thanks you very much. They know full well what that would mean. They do want change, and a month of enforced peace and quietness and reflection (even if simply anxieties about their businesses or jobs on hold), might make them think about this. What they don't want is the sort of radical social, cultural, economic and political upheaval that goes by the name 'regime change' and which the uS slightly bandies around as if it's like a cabinet clear out at the White House. But that is not going to happen because the country is locked into a Cold War which is not about democracy but the imperial ambitions of the US and its need to break into the Chinese market. The US has no problems with authoritarian countries, which it has regularly sponsored in the last century - just ones that don't let US capital in. China is simply the wrong sort of authoritarian.
PS. Thank you to the people of Wuhan for putting up in such a patient, altruistic and civilised manner with the privations of a month's quarantine. Some parts of the world appreciate it, even if you have disappointed many by not getting out on the street with a polystyrene statue of liberty.
I believe you are conflating the support outside observers (including those from the U.S.) give to Chinese people who yearn for reform, with the those in the U.S. who are calling for what amounts to regime change (Marco Rubio, Tom Cotton, Gordon Change, Steve Bannon, etc.). The latter are in my opinion lunatics, whose prescription for change in China would bring calamity. When people speculate about the weakening of Xi Jinping's power, and an erosion of trust in the CCP, it doesn't mean they are advocating for Chinese people to violently demand Jeffersonian democracy. It's that they are wondering, along with many Chinese people (including reasonable, rational professors I studied law in China with) whether there can be a change in trajectory and how that can happen. The frustration with the failure of Deng Xiaoping's reconstruction of Communist China to endure in a form that allowed for more consensus-driven rule, smooth transition of power, and experimentation with various types of economic regulation around the country is real and legitimate and I think your comment risks stripping many Chinese people of their own agency to believe these things. It's not just the New York Times that asked these questions. Chinese people are as well. There are nuances here that I think your comment is ignoring.
Thanks, Christopher, I'm very sympathetic to what you say. I was just trying to force open a window to let some air into this discussion, and my crude jemmy did not register the nuances, that's true. There is an impasse in China, aspirations to different ways of living finding themselves checked, discussion frozen. But it is on the resources of China's civilisational past, and its revolutionary century, along with what it has learned since 1978, that it will draw not the gung-ho exhortations of the current configuration of US imperium
Regarding number 6, my first instinct was to say that the USG should just drop the hammer on CGTN and all the other Chinese state media arms operating in the US, I mean, after all there is no pretense at all that they are here for anything but to propagandize the American public and/or overseas Chinese citizens. But the more I thought about it the more I realized that this is really an area where China still has a lot of leverage.
While it would surely be a setback in terms of narrative control, losing their propaganda arm in the U.S. won't really damage any of China's core interests. Conversely, any escalation on the U.S. side would surely invite a disproportionate response on the Chinese side (of which the current expulsion of the WSJ journalists is already a prime example). China is already removing journalistic access on a regular basis and on the flimsiest of pretexts. We are not too far away from a complete ban on Western press activity in China and this would be a perfectly acceptable response from a CCP point of view if we were to kick out CGTN and friends.
So with that in mind, I would probably say that a better response would be to apply pressure in other areas. One area I think is probably appropriate is working with silicon valley firms to apply their evolving rules regarding propaganda/misinformation to the personal and public accounts of Chinese officials, in particular twitter accounts like Hua Chunying and Hu Xijin. If Mike Bloomberg isn't allowed to engage in "platform manipulation" I'm not sure why it's okay for the CCP to do so.
Kenneth do you think the aftermath of the virus will lead to a renewed focus on public health/hygiene in China? What might that look like beyond the wildlife consumption ban?
I think so, but it hasn't so far happened as much, beyond a combination of coercive measures, govt propaganda, and more concrete forms of public health education. A wise long-term approach would involve a broader public-health and educational campaign using well-known public figures such as famous Chinese citizens and celebrities. Interestingly, before Xi came to power, his wife Peng Liyuan was better know, both as an opera singer and goodwill AIS Ambassador.
On #5 - Once again I think people are giving way TOO MUCH credit to the CCP for its purportedly positive role when it comes to economic growth in the past 20 years. I believe this narrative fits CCP propaganda well but is not fully consistent with the way neoclassical growth works. IMO, the so-called "Chinese miracle" is more of a direct result from "learn foreign technology in order to overpower foreigners (师夷长技以制夷)" per Wei Yuan and "spontaneous order" per F. A. Hayek, as opposed to any industrial policies that the CCP is relying on to preserve its power via large albeit inefficient SOEs. So in the case of the coronavirus, if the CCP does NOT attempt to "control" it or print money mostly for SOEs to refinance (i.e. having little impact on SMEs but potentially large impacts on currency and debt risks), I expect that the economy will get back on its feet--on its own--pretty soon, but it will still be subject to neoclassical growth limitations such as the iron law of (conditional) convergence.
With all these being said, yes, I think the CCP can come out of this tragedy blaming a lot of the economic weakness on the coronavirus, and claim that it is the CCP--and only the CCP--that saves China from any further damages and enemies, the latter of which being, of course, counterfactual and never observed in reality, just like every other rhetoric in CCP propaganda that I listened to as I grew up.
Yes, you nailed it. This is exactly how I think things will play out. The logic of the CCPs rule always circles back to justify itself, no matter what disastrous mismanagement led to the most recent crisis. It's one of the most successful sustained propaganda efforts in human history.
No one has mentioned schools and #3 yet, so here it is my take:
As a teacher and college counselor in Xi'an, a mainland Chinese city that is NOT Beijing/Shanghai/Shenzhen, I don't think students are going to get back to school in any normal manner in the next couple weeks. I think a big determinant of whether or not schools will resume the spring semester without disruption will be:
1) whether or not there is a massive Coronavirus outbreak at a school and 2) whether or not national media is able to pick that up.
This is because Chinese schools are the perfect place for any virus or infectious disease to spread. Speaking from personal experience, Chinese schools have atrocious hygiene. Many schools lack basics like hand soap in bathrooms and disinfectant for mopping floors. Many schools in urban areas like where I am are overcrowded. It doesn't matter how many masks you have or how much disinfectant you spray because you have students on top of one another for an entire day, from morning until evening. Many of these students, while young, are overworked and likely have weakened immune systems from chronic overstress, air pollution, second-hand smoke, etc. Whenever schools resume, they will be hard-pressed to prevent outbreaks. In my city, some schools actually cancelled classes for several weeks in December due to flu outbreaks that managed to infect whole homerooms of students.
While public schools in some parts of China may be internally well-regulated in terms of schedules and following government directives, the same cannot be said of private institutions, especially training centers. There are many reports of training centers holding classes and openly flouting quarantine and other containment-related restrictions. Their hygiene situation is equally atrocious, if not worse.
I hope schools can get back to normal, but I am not optimistic.
With the paucity of good science reporting, I'm thankful that we have Laurie Garrett, a Pulitzer prize winner author on epidemics. In this article bibliography, she writes about how to protect yourself personally, having been in hot zones herself. Also if you scroll down, note her Nov 2019 article on "The Real Reason to Panic About China’s Plague Outbreak It’s not the disease that’s worrisome—it’s the Chinese government’s response to it." https://foreignpolicy.com/author/laurie-garrett/
The way Chinese policy banks keep dragging their feet, as always, when the central government issues decrees they don't like, the damage to the economy can be fundamental and short-term irreparable.
Unbureaucratic, all-out support the banks can't provide, they were not designed for it.
The uncertainty on the ground persists, quarantine or no quarantine, letting people move back to their jobs in East China or not, letting them enter rented apartments or not, primarily because grass roots cadres and neighbourhood committees are out of control.
Everybody does what he wants, no-one does what he is supposed to do, but everyone joins the action.
The general secretary's direct address to 170,000 cadres may have intended to create a more consistent, unified approach, however, an impact is not yet visible.
Supply chains are torn, transport is down, mountains of containers in the eerily quiet ports, sorting out this mess is going to be a Herculean task, even if time was not an issue.
I don't think the outbreak is under control, nor can it be. Even with the best of all intentions, the numbers have been turned into a complete pigs breakfast.
A forthcoming warmer season may not offer real hope, considering the experience with a cousin of Corona, H1N1, which continued during summer. Also, if warm temperatures were to offer hope, what about the infections in Singapore?
I am somewhat leaning towards the opinion, that the corona virus may be quite comparable to yet another cousin from the same family, the common flu.
Hypothetically, if the death-rate should be the same for both, if we assume for a moment that the count of Corona-death should be correct (fat hope), then the rate of infected people/carriers of Corona could be way above one million people already, worldwide.
Suppose this should be so, there would be no stopping it, and therefore governments may want shift gear into reverse, i.e. turn around saying after much research the "deadly virus" isn't so deadly after all, and let it run its course, just like the yearly common flu, thus avoiding the pandemic call.
That would allow a return to "business as usual" fast, as we also continue during the yearly flu.
I quite agree with Bill, that the most obvious sign for such a change would be a visit of the general secretary himself to Wuhan, and I wouldn't be surprised if it was actually imminent.
For those of you, who know German language or who want to run the text through a translation engine, this is recommended reading: http://www.drlico.com/coronavirus/
The FUD that is being spread about this non-issue is an embarrassment to human intelligence, IMHO.
On #4 - Propaganda might be working very well and is poised to be successful. a personal anecdote: We left China a few days after things really heated up local media-wise on January 27, leaving my mother-in-law behind in Luzhou, Sichuan. At the time we felt terrible, but she and her family just weren't as worried as we were. Flash forward one month and my mother-in-law is terrified for her grandkids who are in the U.S. because she is absolutely convinced, from the propoganda and things that are spreading on social media, we are in mortal danger because the U.S. can't handle this kind of crisis as well as China... There are social media posts spreading like wildfire suggesting that the CDC is essentially covering up the spread of the virus in the U.S. One thing I will say is that we had textbook symptoms within the 14-day period after getting off a packed plane from Beijing, and we were not eligible for testing for this thing. That was the week of Feb 10 that the health department of Maryland told us we didn't meet the threshold (what was the threshold? Only severe pneumonia which accounts for only 20% of cases?) if this thing creates any kind of disruption in the U.S., there are a billion ways that Beijing can point to gross mismanagement.
If said behaviour from Chinese netizens is thevresult of Propaganda, what do you call the even wilder and more wide spread horror stories about the Chinese epidemic? Truth? Lol. People are jsut people, i.e. generally gullible and cowardly and prone to panics. Not everyhting is a 'political struggle'. Funny these days more Americans need to be reminded of that than Chinese.
Good point and I don't provide any support or have any evidence for the idea that his is because of "propaganda," per se. I think if you take the two instances of the word propaganda out of my comment you can get a better idea of one point that the messaging in China, coming from state, commercial and social media sources is instilling many Chinese with a sense that the Chinese government is successful in ways that other countries aren't, and importantly that if the U.S. experiences serious disruption, due to propaganda or not, the Chinese government gets a win here.
For our VC portfolio we have surveyed over 150!companies. About 20 were raising funds and 14 of the 20 still expect to close their rounds in March. They are still receiving term sheets. 6 will require some form of bridge financing. We have issued investment docs to 3 new investments since Jan 1. So the tech sector is continuing perhaps at a slower rate than 2019 but continuing nonetheless
I suspect that XI and the CCP will come out stronger as the epidemic peaks and they collectively get better control of the situation. There are likely to be important epidemiologic and scientific lessons learned from COVID-19 and future epidemics.
My thoughts today in my latest article about this in The Hill:
3. I think it will be more meaningful when the travel restrictions around Wuhan/Hubei are lifted for ordinary people than if Xi did a drop-in visit, although i suppose it depends which comes first. From my own perspective, I don't see this being over until the fences put up around my neighborhood have been taken down.
4. I am not sure if the positive energy and censorship is working, but the fear-mongering sure is. In my white collar circles it seems people are just terrified of catching the virus, to the point of not wanting to return to work or even ride public transport. The paranoia seems to consume them far more than any anger or unhappiness with the Party.
In my neighborhood, local people have gotten past the phase of arguing with the authorities and moaning about the regulations and seem to have resigned themselves to this just being yet another 劳 to 耐. What will be interesting is if a significant number of these non-salaried workers run out of savings before being able to go back to work or reopen their small businesses. Will they just go back to subsistence farming?
Astute comments. I agree it feels like in the past two weeks, the broader rage over censorship and government messaging a la 武汉·加油！and bald nurses seems to have been replaced by worries over trying to stay afloat economically. And fear of catching the virus. I wonder when public transport, travel sector, F&B sector, and basic everyday social life will ever return to normal -- or if Chinese society will settle into some type of post-virus New Normal with less of all those things.
How is the feeling among the Chinese citizens concerning the information policy of their government? Do they believe the information the government is providing concerning the situation?
Judging from my wife, her relatives, and the few Chinese people I've been talking to on uncensored media (i.e., not WeChat), I'd say they more-or-less believe the government's statements now. More importantly, they frequently quote back at me the feel-good propaganda about this or that celebrity giving 100,000 masks for the good of China, and so on. They don't know the many stories about such masks disappearing into government warehouses or being sold on by the Chinese Red Cross at astronomical prices.
There is a broad misconception that stimulus will take the traditional form - largely fixed asset investment in structures. The industrial and service sectors are both getting hit - best guesses of an economy running at 60% of capacity this week and likely to take several months to get back up to speed in a best case. The base case is renewed outbreaks and continued disruption (not that cases ex-Hubei ticked back up to 24 today - expect more as people return to work).
Many SME's don't need loans. They will need subsidies in some form to survive - cuts in taxes, energy prices, perhaps some kind of tax credit give-away. This will be funded by govt borrowing, largely from banks who will buy most of the bond issue (call it QE if you want, but it's been going on for years in China). Central and local govt's will have to issue this debt BEFORE they fund a single bridge, tunnel or railroad.
Credit growth last year was near 12% ($3.8T in new credit) just to hold up the slowing, verge-of-bankruptcy economy. They would required credit growth of at least that just to tread GDP-growth water in the ABSENCE of disruption. Now they'll need high-teens credit growth just to counter the disruption and avoid mass layoffs. That's BEFORE they've generated any "credit impulse" which might generate growth in GDP.
If you actually expect the kind of a surge in infrastructure / building boom which the A-share market seems to be priced for you're going to need to see credit growth well in excess of 20%.
Credit-to-GDP is 260% (conservatively). If credit grows by 20% and nominal GDP grows by 7% (are last year's rate - highly optimistic), that would take credit-to-GDP to 293%, up 33 ppts in one year.
China has left itself in a very weak position financially from which to endure a near sudden-stop of the economy. The scenario above is not even a worst-case. Even if the virus subsides in China, what will be the cost to China of Europe possible shutting down for several months? How big with the SME losses become if China experiences a rash of outbreaks with people returning to work?
There is a very real risk that China's financial profile goes pear-shaped with this event. Meanwhile, credibility in the government has been dented. There is a very high risk of financial panic once the stimulus-fantasy subsides, and the RMB will head sharply lower unless China decides to effectively close its FX market.
One way of sizing the problem would be to look at increases in the accounts payable/receivable across firms. Accounts receivable are a form of credit extracted not from banks but from business partners. One form of "subsidy" would be to formalize the "suppler credit" inherent in accounts receivable with actual loans. Or the government could buy factored accountants receivable. None of this improves the country's credit profile and risks of financial crisis, but it would bridge the hopefully short run cash flow crunch.
Quote "Many SME don't need loans" Unquote. I sense a disconnect here. I think you should have a real close look at how China's SME operate, before making such bold statements.
Private industrial entities don't need more credit. Many SME's would probably prefer to close up shop than take on more credit in a highly uncertain environment. They need subsidies.
I chair an SME in China, do you? Maxing out loans is the default mode of operation. All our peers, all our suppliers can't pay their expenses anymore and stopped paying, to conserve cash. That can't go on for much longer, loans to bridge at least half a year are urgently needed.
They could write a check to every business concern in China for 20% of 2019 revenues if they wanted to. I wrote "subside in some form" - there are a dozen different structures they could come up with. They could offer a cash subsidy per employee for example. They could refund 30% of 2019 taxes paid. etc etc etc
The point, from my warm, dry perch here doing macro analysis, is that when the corp sector is already highly levered, offering more leverage to "bridge" a gap of unknown depth and duration is not likely to work. For some it may - if you're in the latter camp, good for you. For many it won't, because at best it puts them back to where they were 6 months ago in terms of revenue outlook, only that have MORE DEBT. If they were close to a sustainable leverage limit before, they are now over it, absent a subsidy.
All widely speculative as we may be in black swan territory, but here’s a shot: 1) depends on sectors (healthcare and services to help us function more independently such as ecomomerce may do fine, travel could take quarters (plural) to rebound assuming (big assumption) this is tamed in the first quarter); 2) banking sector/leverage in the US anyhow MUCH healthier than SARS time, but hard to imagine we do not see big liquidity pumped in shortly; 3) those are good signs, but also uptick in business activity from abroad (and not just in China, but Asia writ larger); 4) I have been astounded by the openness of criticism though, anecdotally, seen less of it of late and not sure the mechanism of how that criticism moves politically (in the US, of course, if the economy plummets over time the reaction will be palpable in November - but not sure there); 5) there is a meme I’m sure that will be cultivated that this could have been much worse and if even addressed slowly at first real crisis was averted — I’m not sure how people on the street will agree with this or what actions they will take accordingly. But at least in America we get very worked up in a crisis and weeks later (if it passed) it was a #hashtag and disappears as if nothing ever happened (anyone talking about World War III from killing an Iranian general lately?); 6) “should” or “will?” :)
Having watched this great adventure unfold for 37 years, since the time I first came to China, my sense has been for some time that the positive things that the government did in the early years - the 1980s and 1990s - to grow the economy turned negative, and that the decision to sweep the China 2030 recommendations under the rug when the economy was still strong enough to absorb them (and never forget every one of those recommendations was made jointly by the DRC at Bob Zoellick's insistence), the economy has been very much as Wen Jiabao so eloquently described it in about 2008. Nothing has really been done to fix that, to date, so it just rolls along with all its weaknesses and imperfections. My greatest fear is that, as so often happens in these situations, the leaders some time ago began to believe their own propaganda - always a risk. I wish I could be more optimistic about the current situation.
Something I'm wondering RE: #3: what is the converse? What are the signs that the economic fallout is truly catastrophic and the party has lost control of its ability to contain those losses?
Looking at #1, I can speak as an SME owner in Shanghai. The gov is making headlines every week regarding relief programmes for SMEs. Nearly all of these are via freeing up loan potential through banks. However, very very few SMEs (100m RMB or less in annual revenue + less than 300 employees as I understand it in Shanghai) have the fixed assets necessary to secure bank financing. SMEs are nearly by definition asset light. WFOEs are almost totally excluded by this, but a local SME owner can only benefit in this case if the legal rep puts up his own assets to secure. Crazy risk in this environment with no visibility on a return to revenue or normalcy for many businesses.
When looking at the service sector, hospitality and F&B, tourism, and retail - major employers of urban population - there is almost no relief in place for them. True relief would be in the form of government backed loans from financial institutions, a return of the company’s already paid social insurance tax direct to the employee (as many operators have already negotiated their labour cost to well below 100% pay), and direct command of rental relief for SMEs renting via sub-landlords and private landlords.
This is vital, with Caixin referencing the Tsinghua study that roughly 1/3 of SMEs cannot survive more than 1 month on current cash reserves, and 2/3 cannot survive 2 months.
The PRC’s highly restrictive criteria for bankruptcy (it is most common practice to tell applicants to go back and negotiate with creditors) and lack of approval for mass lay offs mean that we will probably not see lay offs or shut downs from larger companies, but we can expect to see a lot of zombie SMEs and in the mom & pop sector, a lot of full closures likely starting in March / April.
Many friends of mine own small businesses but they also cannot get the required paper work to apply for loans - for a couple it’s been because they have been dodgy and the business isn’t in their name. One is in Wuhan who obviously cannot get the paper work in order. Another friend is going to sell one of his apartments to get capital, which is also alarming if that is a reality facing many.
I am also wondering what the long-term economic effects will be, both of the virus and of the already quite clear nature of the stimulus. The virus impact on SMEs, particularly service sector, and their employees, particular migrants, won’t be quickly overcome. Also the virus impact on Hubei, a province with the same population as all of Italy. Stimulus impact is not only more debt and a reversal of deleveraging, it is further reinforcement of ‘the state advances, the private retreats’, an extended period of growth for growth’s sake strengthening precisely the sectors that ‘high quality development’ is supposed to be turning away from.
Hey Bill et al, any signals or comments from Liu He? His derisking campaign etc has been pretty critical in anchoring expectations regarding the trade off between targeted vs broad based/ traditional levers vs less so/ short term vs medium term goals etc as it relates to stimulus over the past three years. Don’t know where he stands re stimulus to ameliorate momentum loss/economic crash and impact on banks and financial system.
The saying used to go, "if the US sneezes, Mexico catches a cold." Well China's got the coronavirus and South America is likely to get pneumonia if this goes on for another few weeks.
On question number one, as the guy who watches Latin America, the China slowdown is likely to have a major impact on South American economies that are based around commodity exports. We're going to see business failures and governments lowering gdp estimates, which is going to exacerbate the protest movements that are already hitting a number of countries, with Chile being case number one (see my report on the protests expected in March here: https://boz.substack.com/p/protests-likely-to-increase-across ).
The coal chart in today's WSJ likely reflects a lot of other commodities that China is importing.
Another example is South American meat exporters that were exporting like crazy in the second half of 2019 to help fill the gap left by African Swine Fever. Then a bunch of importers defaulted in December and January. And what shipments were still coming to China were hit by the massive logistics problems causing the exporters to lose even more. A lot of firms in Argentine and Brazil had invested heavily in capacity expansion to serve the Chinese market and now in horrible financial shape.
Africa is facing a similar (exactly the same) situation and I think 2015 - commodity price dynamics, volatility and uncertainty out of China) lowered growth from above 5 in 2014 to 3.4 in 2015 to 1.4 in 2016. I think this situation will have same impact. Especially if global growth slows to 2.5. And that gets much worse if Coronavirus hits Africa.
I work in cross-border corporate finance law mostly. My ongoing assumption with regard to the economic/monetary policy questions (#1 and #2) is that the CCP will use all levers available (printing RMB, cutting taxes, lowering lending rates, purchasing bad debt, rolling up distressed banks etc.) to avoid an economic downturn in the short term. Remember the vast majority of debt held in China is denominated in RMB and the PBOC has substantial ability to manipulate the market to avoid a catastrophe. I just don't think they have the appetite in the short term to let enterprises fail in any significant degree. (I believe "the government will back it up" is a widely held belief among Chinese lenders of all stripes.) The book "China's Great Wall of Debt" is so useful in thinking through this phase.
Re #5 (Can Xi and the Party actually come out of this tragedy stronger?): Yes absolutely. Foreign observers greatly underestimate the reach of the Party in China. People are very pissed, that is true. But there's a huge leap between pissed off people and meaningful (and coordinated) political activism. If the western countries bungle their respective outbreaks, which I assume is likely (hard to imagine a single western country outside of Germany who has the discipline for massive collective action), the CCP could spin their response as comparatively strong in light of the struggles of other nations. They's already blamed local officials for the coverup and can press that message 24/7 until it sticks. (Especially given Xi gave several risk mitigation speeches last year which included a directive for local officials to protect against another SARS outbreak.) They can also shut off VPNs or if necessary the internet. It's going to get ugly, but the road to survival of the CCP is sufficiently broad.
I don’t think Xi and the party will come out of this health and economic disaster unscathed even if they are able to mitigate short term economic damage. For one, the cover up in late December-early January has left a bad taste in my citizens mouths, I don’t think citizens will be quick to forget that. Secondly, there will be damage done to China’s economy and although Chinese citizens have given up parts of there freedom in exchange for economic prosperity, if that prosperity looks to be decreasing than Xi and the CCP could be in hot water.
However, if other countries flounder in attempting to curb the COVID-19 (e.g Italy, Iran, South Korea) than the CCP could start a campaign in which they say these countries have poor systems which did not handle the virus well, whereas China did and therefore China’s system is better and more suited for such things. The failings of other countries in their response could be spun into praise for Xi and the CCP by its propaganda machine.
If the trend continues and China can get the epidemic under control relatively soon, I think citizens will in fact be quick to forget the initial cover-up. This could still end up very much strengthening the CCP's image inside China. I'm hopeful that if push comes to shove, the US can do a good job containing the virus despite current problems with CDC testing (see C. Scott's comment above and T Cowen's relevant post (link below, why can't I hyperlink here?)). But any failings will be exploited by the propaganda machine. Beyond the US, if this thing gets out of control in countries with less capacity to react, like Indonesia or Pakistan for example, it could get really ugly, and that will again reflect well on the CCP's overall response.
But, propaganda machine or not, they would be right. The complete lack of capacity in the US, consequent on years of disinvestment in public health for any other than the wealthy, contrasts badly with China. But this also relates to the fact that so far 2,700 (approx.) people have died in China. Last year 65,000 died in the US from flu. Disproportionately poor people. There will be a lot of questions asked of the Chinese government - about its own capacity to deal with these outbreaks (of which there will be more) and how it has disinvested in public health. The system under Mao compared more favourably in some respects. But these questions will be used to strengthen the public health system - one hopes. They are not about "China's Tiananmen moment' or its 'Chernobyl' moment, all of which are fantasies of the kinds of Cold War warriors on display on these pages. Ones for whom 'propaganda' means anything that might suggest China is not an evil empire ready for taking down by the shiny crusaders of US global righteousness.
Not to step all over your point, but the reason why there is such a huge discrepancy in reported deaths for flu in China vs. other places is that China relies on reported cases instead of using statistical modeling like most other countries. In 2017 they only officially reported 41 (yes, forty one) deaths from influenza. Since they are using reported deaths for the COVID numbers as well, you can safely assume that those numbers are equally misleading. Comparing this data to another country's data like you have done above is not really informative.
Umm...it s fairly basic. Thousands of experts agree and certainly visually to the untrained that virus data outside and inside China so far have been remarkbly consistent in terms of transmission, severity, death/patient demographic and medical condition profiles. Your supposition is not showing in stats. It might one day. But not atm.
Also u should note and read about all the different criteria different countries are using. They are as varied as there r countries, even in Europe, to my horror....rationally this is normal for a new viral epidemic...emotionally though this puts me in all kinds of doubts and suspicions as i feel perosnally more threatened in Europe by this.
Anyway to get back to China watching, all too often, when it comes to China, people lose objectivity and commit all kinds of behaviour biases, with predictably bad outcomes in terms of understanding and predicting China.
Yet, in China's case, the more people are proved wrong, the more it must be facts and China that are being 'funny', not the nice thoeries and narratives people take for granted (again for what reason i dont know as they certainly habe not done anyone any favours, apart from chicom perhaps...re my earlier point on negative biss/propaganda).
I'm not disputing their characterization of the virus or the observed characteristics of the virus. I'm just saying that doing a head count of people who have been tested positive and then died of the virus is the way that China counts and reports fatalities (or at least it was the method they used for the critical first few months until they switched gears in mid-Feb).
That is not a good method, especially for an outbreak that reached the scale it has in China. It's a known fact that the Hubei region did not have enough kits to test all patients in early months, so right away you know scores of people were certainly not counted as deaths though they likely should have been.
Comparing that method to a number yielded by statistical modeling is not useful, and like all data from China primarily serves to advance a beneficial political narrative and not to inform or guide decision making in other countries regarding the outbreak.
I have worked with employment statistics and know the limitations of these kinds of methods. The issues around counting in China, access to testing kits, the pitfalls of statistical estimates - these are all important. However, when you have a difference between a figure of 2,700 and one of 65,000, the difference is of an order of magnitude than outweighs any methodological glitches. In that sense it is helpful to compare. What we conclude from this comparison is of course open to debate. But your point ultimately was undermined by your last sentence, in which you conclude that the Chinese statistics serve a primarily beneficial political narrative. Which we all know how politicians and administrators the world over do this to various degrees, that you would dismiss the Chinese statistics in such an blanket way suggests that your analysis itself is there to serve a particular political narrative.
As I said in my original post, you are comparing apples to oranges. Here are the two sets of data that might be at least arguably comparable:
1) 2017 influenza deaths in the United States: 61000 (statistical modeling) vs 2017 influenza deaths in China: 41 (cause of death influenza and reported to NHC)
Note: If China used statistical modeling it is estimated they would report around 100,000 deaths a year from influenza using the same methods.
2) 2019 COVID19 deaths in the United States: 0 (positive test for COVID + death caused by COVID or complications) vs COVID19 Deaths in China: 2718 (positive test + death caused by COVID)
So if we use the Chinese number 102,718 to compare to the U.S. number of 61,000, taking into account the population differences, you might actually be able to make the case that China is doing a better job with healthcare than the U.S. But that would require an attempt to discuss the matter in good faith rather than re-framing reality to push your own preferred narrative.
Btw, italy in its infinite wisdom has decided to only test people by symptom not by association with the infected...and it s doing a great job spreading it around in Europe. I understand that with limited resources, one has to prioritise to deal with an emergency. But still, it s not comfortable to know that.
Erik, read up on representstive sampling. That s what any counting in the real world ever is. It s a miracle if any data compilation or indexing manages to reflect the charscteristics of underlying reality. Especially when dealing with an epidemic. Some seem to hold chicom by God's standard. Which is odd given that the same people think they are totally useless.
Yeah I'm not necessarily criticizing their decision to use that counting method, it's a crisis and you have to expect that things will be sort of hit or miss. You can see right now in the U.S. that we are facing a shortage of kits in hot spots and we have had much longer to prepare.
It's just not comparable to numbers involving seasonal influenza which saturates the entire earth every year and infects tens of millions.
I’ve been struggling to think of a framework to understand what being “in hot water” looks like for a government with this degree of control over media and even, via WeChat (obviously with caveats), a huge portion of the private conversations of its citizens. I don’t know that history provides much of a guide here. Is it strikes? Are people protesting on the street? If so how does that get organized assuming the technical means now exist to prevent people discussing these things in group chats?
Sorry for the confusion with my phrasing, I should have elaborated on this. By saying ‘hot water’ I just meant the trust in the CCP May diminish and over time it could lead to citizens demanding more accountability from the government. If the COVID-19 has really bad economic ramifications, than perhaps capital flight could also challenge the CCP.
time will tell as always. But the success of skewed media coverage and skewed analysis from China watchers mean that it s not hard for chicom to beat expectations. Afterall, all they need prove is that they are not incompetent genocidal devil incarnate. Even chicom can beat that i d say. ;). I hope propagandists on both sides understand this point. Sometimes one's zeal helps one's enemies. I doubt they would though. Zealots are ususlly so blind to facts that they can maintain their fantasy indefinitely. Well, up to a century anyway.
One point to note on the economic side and the feasibility of a stimulus--it is currently not lack of demand that is holding growth back, but supply. So adding stimulus now will not help.
Very true! And a lack of supply will result in companies looking to diversify their supply chains, which stimulus will not be able to help to the extent that it would need to.
"How should the US government react to the expulsion of the three Wall Street Journal reporters?" Yes, and how should the Swedish govt react to the recent Gui Minhai sentencing in Sweden, where the Chinese govt unilaterally stripped him of his Swedish citizenship and then gave him 10 years of prison on an absurd charge?
Both these cases amount to unilateral redefinition of what is accepted behaviour between sovereign nations — especially with the Gui case, which creates a real chiling effect for all ex-Chinese naturalized citizens around the world, including EU and US.
Unfortunately, Sweden, other European govts, and the US still act naively and in an uncoordinated manner on these kinds of issues, mostly because everyone wants to protect narrow commercial interests from retribution. It's really disconcerting how easily the Chinese govt is getting away with these acts with impunity — all because the rest of the world is so bad at creating a united front.
The Gui case is just one high-profile example of a practice that is pretty common in China, namely, ignoring foreign citizenship when the offender is of Chinese ethnicity. You are correct that this is handled in a piece-meal manner by foreign governments, in the U.S. case due to privacy laws which require express permission from the people in question to intercede in their case. The Chinese government typically applies pressure on the individual via their legal representative to reject consular assistance and/or any efforts to publicize the case in return for lighter sentencing or expedited rulings, which serves to hide the scale of the problem.
Doubt many highly leveraged developers can go two-three months at current levels of property sales without running out of cash and funding options, given that many depend on sales for over half their ongoing funding needs. If they start hitting the wall, it adds to pressure on banks that will be forced to absorb rising NPLs, which would clog up credit transmission channels even if the PBOC is easing further. And of course if no one is buying property a couple months from now it will be a sign of a deeper confidence crisis with even larger ramifications...
#3. For Shanghai at least, when the bao'ans switch from checking temps at the gates of the xiaoqu and revert their efforts back to zealously enforcing the new rubbish-sorting rules
I would like to get some reaction to the economic assessments currently going around. Few, if any analysts have come up with a negative you growth for quarter one. This is rather astonishing for anyone that has seen the available micro day to day data on transport, coal use, migrant returns, shipping etc. My back-of-the envelope would be that as a minimum you would get a minus 5 or worse in the first quarter. This would make a 5.6 percent centennial" growth for the year practically impossible. Views?
The PMIs this morning shed more light on the economic impact question. It is bad, really bad. Manufacturing at 35.7 (from 50), which is even lower than the bottom of the financial crisis. Services from 54 to 29.6
Bert, sorry, I'm late to this thread. Break down GDP by industry. Do a simple day-count on the additional days idle because of the virus in Q1. Every extra week is a quarterly fall of almost 8% as a benchmark. A 5% decline in secondary industry, none in primary and 10% in tertiary gives you a 6.8% quarter on quarter decline and 2.5% year on year rise.
With how long its taking to restart firms (at least as measured by the Baidu location data), its not hard to get a year on year decline in Q1.
The question I have is will the government publish data showing a year on year contraction (note that going into the quarter GDP was 4.6% higher than March 2019)? It's hard to make a contraction square with the story that the government is handling the crisis admirably. In the past, data releases have been seen as a means to influence behavior rather than as a means to understand current conditions. This environment would seem underline the desire to influence rather than to inform.
So, we may be back to tracking trends in Chinese trade as measured by other countries and the potpourri of alternative activity measures rather than relying on official data. GDP may be a literal and figurative victim of the "people's war".
Surely this is a great time to come clean, given that virus excuses everything and chicom is not God. Managing the outbreak and delivering great growth, r u sure that s what the Chinese public demands? If they do, they r certainly very pampered.
P.s. i never understand the GDP red herring. Do u know how much judgement IS involved in GDP calculation? Read the small prints in any country's report and weep. But overall somehow it does the job. Or are u one of those people Stil maintaining that Chinese GDP s fake, despite all these decades of actual realised history proving that Chciom GDP more or less has measured reality? Or? Genuinely puzzled.
Am not saying u r doing it, but i find the irony of some people screaming 'fake China' for 30-40 years without an iota of an inkling of who the faking party is on this issue too difficult to ignore.
Ken, no I'm not sure that high growth in Q1 is what the Chinese public demands at present. It does seem, though, that that is what the government is exhorting. One usually comes clean as part of a shift in leadership, but the consensus of the threads here is that that is not likely.
I am not "one of those people". I do know from direct experience that given the margin of error in calculating GDP (I have read the small print) Chinese officials choose figures so as to manipulate sentiment. In the incident with which I am most familiar the person choosing to alter the official estimate was in the then Premier's office.
My firm is forecasting a year-on-year contraction in Q1. I suspect the reason most are not is that -- for institutional or other reasons -- they are compelled to forecast published GDP. I very much doubt the published number will be negative.
Mark, your call of a contraction was bold but looks very rooted in reality. If the y/y Q1 GDP contracts, does that increase the odds of the hoped-for "v-shaped recovery". and mathematically what would the growth have to be for remaining 3 quarters to hit the target? thanks
So I did an assessment of a 6 percent negative shock (YoY) in the first quarter, based on an assessed days lost in q1. This would require the rest of the year to grow by 9 percent to reach 5.6 for the year.
The longer the shutdowns continue the more drawn-out any recovery becomes because the impact on incomes and employment will mount. Some people won't have jobs to return to. Others will have spent a chunk of savings just getting by and will limit their spending even after they are back at work to build savings back up. That's why policymakers are talking so much about supporting SMEs since they are key to whether shutdowns hurt workers. But as others have noted, policymakers aren't very adept at helping SMEs.
Back of the envelope, if the economy contracts 2% y/y in Q1 and gets back to 6% in Q2, it would need to grow 9% y/y through the second half of the year to hit the target. I don't think that's plausible in even a best case scenario. Policymakers can't stimulate output without limit. There's a ceiling determined by the economy's productive capacity, and China's is much lower.
CNBC had a JPMorgan talking head on yesterday talking about contraction in the first quarter and then 15% growth year on year after that. I guess it's some progress that the market watchers are actually starting to admit the virus will have some negative impact at all, but they are still embracing fantasies in order to claim the long term outlook is going to be positive.
Sorry I misqouted, he was talking about quarter on quarter. Not as outrageous given the way he explains it but still taking for granted stimulus and other measures will be effective.
Many many businesses are refusing to pay rent, and power consumption is orders of magnitude less than it normally is during this period. So while some of the economy is fixed, I think the real earnings on this “fixed” income may end up being more volatile than expected.
Hi Bill. To kick things off, I'm happy to give a take on 2. This is the last year of the Party's 10 year plan to double GDP, and I think that they need 5-6% growth not to miss the target. This will be possible with 0% growth in the first quarter only through large stimulus measures. So expect to see some of the good work of Guo in deleveraging rolled back. Perhaps again by pumping up real estate prices through local government largesse. If the epidemic is not under control soon - let's say not until May/ June - then it will be very difficult, if not impossible, to post 5-6% growth for the year. So the amount of fiscal loosening depends a lot on how quickly the Govt. feels it can loosen the shackles on movement which are holding back economic activity.
Paul, we are thinking alike, though in my view, the first quarter is decidedly negative. If it is minus 5, the ret fo the quarters would, on average, need to show 9 percent (yoy) growth. This seems rather impossible in today's world, more so now that the virus is becoming a global issue.
Why are a couple quarters of very high (9%?) rebound growth not possible? Refilling orders and inventories would mean a massive surge IF things were back to pre crisis levels. Question is whether they will be. Due to business failures, NPLs, and faltering global demand resulting from global virus. Those are my concerns. Also to the plus for china: commodity price collapse if sustained means surge in net export component, ironically, due to terms of trade. Short supply of china intermediate exports will elevate those price levels. On whole though I have a very dark view of 2020 GDP.
One related question: what are the chances that the CCP misses its 10-year plan, 5-6% GDP target for 2020? As in, will they allow a miss, or will they ensure they hit the target no matter what the real numbers say? Can they afford to miss it?
I see no reason they couldn't say "conditions have changed." It is a valid argument on business contracts in China, so why not on a social compact?
It's all going to depend on how they're feeling about public opinion as the country emerges from this crisis, and you'd better believe they're watching that closely. if the popular narrative is "The Central Government did an excellent job in the face of the Wuhan government's failure," then they will feel emboldened to sell a revision of their projections. If, on the other hand, the predominant narrative is "The Chinese governmental system caused this to happen," then, as Paul says, "they will move heaven and earth to hit the target."
My assumption is that they will move heaven and earth to hit the target. But as Bert and others have noted, this may simply not be possible if economic activity stays depressed beyond the first quarter (and is pretty challenging even if it is doesn't). And, by 'move heaven and earth' I mean flood the economy with money. See Patrick's comment above for a good explanation of how this can be done. The supplementary questions from me are: 1. what would this do to inflation? It could easily hit 10% I think with a sudden increase in printing money; 2. And the RMB valuation. Can it be kept at around 7/$? If not Beijing will run into political difficulties with Washington; 3. Can SAFE keep a lid on capital outflow? This means stopping Chinese companies from investing overseas, and from having net sales in the Chinese stock market, among other things.
One other factor to consider is the revising up of previous year’s GDP numbers. This happened most recently adding 2.1 percent to China’s 2018 economic growth. There’s much that can be done there to make it appear the growth target is met even with a dismal 2020.
Yes that is a distinct option. Also, there is a difference in what will happen and what will be reported: NBS has a tendency to smooth quarterly numbers
When does this stop being just a Chinese virus and become a world virus? Strikes me that will lead to a brief global meltdown (possibly underway?) followed by a recognition that this is just the way it'll be. For example, I'm traveling soon and people question whether that's risky but just going outside in Washington, DC is risky so why would travel be worse?
Here are my summarized thoughts...Governments and regimes don't fall easily, it will take a prolonged period (say 10 -15 years) of serious economic decline ala the Soviet Union for it to happen, and when it finally comes more often than not it comes internally from a member of the elite ruling circle (ala Gorbachev). There's no doubt that the virus has further increased the store of cynicism within the Chinese population, and done major economic damage at a time when the Chinese economy is starting to slow down and struggle. The impact of the virus is definitely causing economic damage to build up, but it will require a lot more economic stagnation over a long period of time for things to really change. So the chances of a regime change or even course correction in the short to medium term are very slim, but on the other hand, the more their economy slows down, the more China's ability to pressure and influence other countries in ways the US doesn't like go down (which paradoxically means the US will probably decrease the pressure/antagonism as China becomes less threatening and more focused on internal stability).
Very interesting remarks, imo. I tend to think it won't be a prolonged period of stagnation, but a single, deep recession that causes trouble for the regime, and this just may be the precipitating event. People can adjust to things staying the same rather than continually improving, but losing your job and your house is much more likely to cause anger.
PS Thank you, Bill, for all the news and analysis all the time!
I'd say you have the right trifecta regarding evidence of a recovery for most of China, but hot spots will be subject to different rules. As far as how quickly China's economy recovers and what its growth rate will be this year, depends on whether the virus becomes a pandemic and also on the strength of the global economy. Even if China's economy recovers quickly, if the virus becomes a pandemic the ensuing global recession will boomerang back to China (first supply chain disrupted, it recovers, but demand then weakens). How the US government should reacts doesn't matter. It won't react the way it should. That's a given. All strongmen globally will want to bolster themselves alternately praising and blaming one another for how they address or fail to address the viral threat as the virus pinballs around the globe. Stay well all. As we say in California, this may be the big one!
Thanks everyone for all your terrific comments
On the Chernobyl analogy. We should remember that Gorbachev--who had become General Secretary just a year before--adroitly turned the Chernobyl crisis to his political advantage, using it to justify his "glasnost'" campaign. By itself, Chernobyl was very far from bringing about the end of the Soviet system. It was the momentum of glasnost' that led to mounting political pressures for democratization that the Soviet system could not contain. Will Xi try to use this crisis to put pressure on local leaders by opening up channels of communication, ie combining top-down with bottom-up accountability? Not likely, of course. But I see the Soviet lesson as showing that the leader of a centralized communist state can use a crisis to achieve his desired political reforms, which may themselves have unforeseen consequences. Unfortunately, Xi only appears to want to tighten central control--but that only exacerbates system-level vulnerabilities. Thomas Remington
I think China may recover first, which will create interesting dynamics. If this becomes a global pandemic, expect air travel to stop. We will be looking at a global recession that will make 2008 look like boom times.
Will Trump continue to ban Chinese from flying to the USA once the threat eases? I suspect not. All airlines may fail.
One thing to consider is the implications of China seeing massive recurrence of the disease as they try to get the economy going again. I suspect that is quite likely.
1. No clue. I guess for any meaningful analysis of this issue it’s time to turn to some qualitative means.
And as a trader myself I still cannot fully come to terms with how the A-shares performed after the lunar new year holiday.
2. No. And for the real estate market this time it’s certainly different. Read the PBOC reports and feel their determination and take a look at what Evergrande has been doing.
6. Illiteracy of the English language, and illiteracy of the Chinese language. Pun intended but misused. I don’t believe WSJ would care to do any trolling at this moment.
It seems clear to me that the US feels ready to take-down China, not quite like the USSR in 1989-91 (completely unrealistic) but more than Japan in the plaza accords. Unlike the USSR however, China is not an economic disaster zone, and is also integrated into the global economy. So the emerging narrative is one of 'values', where we can't just close our eyes to China whilst making a buck, but must 'wake up' to the fact that it is not, nor is it likely to become 'like us'. Not being 'like us', for the US, is a problem. So we need to assert out values against the new dark empire, against whose backdrop we can burnish ourselves anew. In this dialogue there is a lot of knowledge about China but - in this forum at least - not the slightest shred of empathy. Knowledge, in a well honed western imperialist trope, is there to provide insight into the enemy entity which is to be brought down, or at least to heel. There is not the slightest thing China could do - on this virus or on anything else - which could elicit something other than 'oh, here's the Tiananmen moment' or 'oh, the propaganda department has managed to quell dissent'. The Chinese government was slow to react, a mixture of clunky top-down information systems, and a fear of rumours just before the mass exodus of lunar new year. What it did and did not do, or could have done better, is a matter for discussion. But on this (and most other western media) it is instantly turned into a symptom of totalitarian communism. And then it's all about regime change. Not reform, because that is deemed impossible in China. Only the collapse of the CCP will do. So of course we await the rise of the Chinese people, their mass protests on the street, the virus symptomatic (as the Guardian had it in a recent podcast) of 'the struggle between the Chinese people and the Chinese state'. Death or liberty. This is pure fantasy. As is this idea that if GDP grow drops below 3.679% the Faustian bargain with the Chinese people will be broken, the mandate of heaven fall, and with a few years US capital will be strolling unhindered through the streets of Beijing. Another fantasy. But after weeks of this fantasy, and the dawning sense of 'not this time, put your muskets away', it is back to 'propaganda victory'. Well it will be, but that's because the capacity to act - as noted by the WHO, though no doubt that's seen now as a Communist front organisation - is very high, and much better than the US outside its financial, corporate and military sectors (which is what maters, right?). The Chinese people are not looking to be liberated by the US, thanks you very much. They know full well what that would mean. They do want change, and a month of enforced peace and quietness and reflection (even if simply anxieties about their businesses or jobs on hold), might make them think about this. What they don't want is the sort of radical social, cultural, economic and political upheaval that goes by the name 'regime change' and which the uS slightly bandies around as if it's like a cabinet clear out at the White House. But that is not going to happen because the country is locked into a Cold War which is not about democracy but the imperial ambitions of the US and its need to break into the Chinese market. The US has no problems with authoritarian countries, which it has regularly sponsored in the last century - just ones that don't let US capital in. China is simply the wrong sort of authoritarian.
PS. Thank you to the people of Wuhan for putting up in such a patient, altruistic and civilised manner with the privations of a month's quarantine. Some parts of the world appreciate it, even if you have disappointed many by not getting out on the street with a polystyrene statue of liberty.
I believe you are conflating the support outside observers (including those from the U.S.) give to Chinese people who yearn for reform, with the those in the U.S. who are calling for what amounts to regime change (Marco Rubio, Tom Cotton, Gordon Change, Steve Bannon, etc.). The latter are in my opinion lunatics, whose prescription for change in China would bring calamity. When people speculate about the weakening of Xi Jinping's power, and an erosion of trust in the CCP, it doesn't mean they are advocating for Chinese people to violently demand Jeffersonian democracy. It's that they are wondering, along with many Chinese people (including reasonable, rational professors I studied law in China with) whether there can be a change in trajectory and how that can happen. The frustration with the failure of Deng Xiaoping's reconstruction of Communist China to endure in a form that allowed for more consensus-driven rule, smooth transition of power, and experimentation with various types of economic regulation around the country is real and legitimate and I think your comment risks stripping many Chinese people of their own agency to believe these things. It's not just the New York Times that asked these questions. Chinese people are as well. There are nuances here that I think your comment is ignoring.
Thanks, Christopher, I'm very sympathetic to what you say. I was just trying to force open a window to let some air into this discussion, and my crude jemmy did not register the nuances, that's true. There is an impasse in China, aspirations to different ways of living finding themselves checked, discussion frozen. But it is on the resources of China's civilisational past, and its revolutionary century, along with what it has learned since 1978, that it will draw not the gung-ho exhortations of the current configuration of US imperium
Regarding number 6, my first instinct was to say that the USG should just drop the hammer on CGTN and all the other Chinese state media arms operating in the US, I mean, after all there is no pretense at all that they are here for anything but to propagandize the American public and/or overseas Chinese citizens. But the more I thought about it the more I realized that this is really an area where China still has a lot of leverage.
While it would surely be a setback in terms of narrative control, losing their propaganda arm in the U.S. won't really damage any of China's core interests. Conversely, any escalation on the U.S. side would surely invite a disproportionate response on the Chinese side (of which the current expulsion of the WSJ journalists is already a prime example). China is already removing journalistic access on a regular basis and on the flimsiest of pretexts. We are not too far away from a complete ban on Western press activity in China and this would be a perfectly acceptable response from a CCP point of view if we were to kick out CGTN and friends.
So with that in mind, I would probably say that a better response would be to apply pressure in other areas. One area I think is probably appropriate is working with silicon valley firms to apply their evolving rules regarding propaganda/misinformation to the personal and public accounts of Chinese officials, in particular twitter accounts like Hua Chunying and Hu Xijin. If Mike Bloomberg isn't allowed to engage in "platform manipulation" I'm not sure why it's okay for the CCP to do so.
Addendum:
4 big things to watch (both in China and in other countries) as this epidemic evolves (and w/r to future epidemics):
1. development of a rapid vaccine against COVID-19
2. development and production of home-health testing kits for COVID-19
3. development of new antivirals similar to Tamiflu
4. robotics and telework to deal with supply-chain disruptions
Kenneth do you think the aftermath of the virus will lead to a renewed focus on public health/hygiene in China? What might that look like beyond the wildlife consumption ban?
I think so, but it hasn't so far happened as much, beyond a combination of coercive measures, govt propaganda, and more concrete forms of public health education. A wise long-term approach would involve a broader public-health and educational campaign using well-known public figures such as famous Chinese citizens and celebrities. Interestingly, before Xi came to power, his wife Peng Liyuan was better know, both as an opera singer and goodwill AIS Ambassador.
On #5 - Once again I think people are giving way TOO MUCH credit to the CCP for its purportedly positive role when it comes to economic growth in the past 20 years. I believe this narrative fits CCP propaganda well but is not fully consistent with the way neoclassical growth works. IMO, the so-called "Chinese miracle" is more of a direct result from "learn foreign technology in order to overpower foreigners (师夷长技以制夷)" per Wei Yuan and "spontaneous order" per F. A. Hayek, as opposed to any industrial policies that the CCP is relying on to preserve its power via large albeit inefficient SOEs. So in the case of the coronavirus, if the CCP does NOT attempt to "control" it or print money mostly for SOEs to refinance (i.e. having little impact on SMEs but potentially large impacts on currency and debt risks), I expect that the economy will get back on its feet--on its own--pretty soon, but it will still be subject to neoclassical growth limitations such as the iron law of (conditional) convergence.
With all these being said, yes, I think the CCP can come out of this tragedy blaming a lot of the economic weakness on the coronavirus, and claim that it is the CCP--and only the CCP--that saves China from any further damages and enemies, the latter of which being, of course, counterfactual and never observed in reality, just like every other rhetoric in CCP propaganda that I listened to as I grew up.
Right on queue: https://www.nytimes.com/2020/02/28/world/asia/china-coronavirus-response-propaganda.html
cue rather
Yes, you nailed it. This is exactly how I think things will play out. The logic of the CCPs rule always circles back to justify itself, no matter what disastrous mismanagement led to the most recent crisis. It's one of the most successful sustained propaganda efforts in human history.
Correction: if the CCP does NOT attempt to "control" it *in a way that ignores people's heterogeneous economic incentives and risk preferences*
No one has mentioned schools and #3 yet, so here it is my take:
As a teacher and college counselor in Xi'an, a mainland Chinese city that is NOT Beijing/Shanghai/Shenzhen, I don't think students are going to get back to school in any normal manner in the next couple weeks. I think a big determinant of whether or not schools will resume the spring semester without disruption will be:
1) whether or not there is a massive Coronavirus outbreak at a school and 2) whether or not national media is able to pick that up.
This is because Chinese schools are the perfect place for any virus or infectious disease to spread. Speaking from personal experience, Chinese schools have atrocious hygiene. Many schools lack basics like hand soap in bathrooms and disinfectant for mopping floors. Many schools in urban areas like where I am are overcrowded. It doesn't matter how many masks you have or how much disinfectant you spray because you have students on top of one another for an entire day, from morning until evening. Many of these students, while young, are overworked and likely have weakened immune systems from chronic overstress, air pollution, second-hand smoke, etc. Whenever schools resume, they will be hard-pressed to prevent outbreaks. In my city, some schools actually cancelled classes for several weeks in December due to flu outbreaks that managed to infect whole homerooms of students.
While public schools in some parts of China may be internally well-regulated in terms of schedules and following government directives, the same cannot be said of private institutions, especially training centers. There are many reports of training centers holding classes and openly flouting quarantine and other containment-related restrictions. Their hygiene situation is equally atrocious, if not worse.
I hope schools can get back to normal, but I am not optimistic.
With the paucity of good science reporting, I'm thankful that we have Laurie Garrett, a Pulitzer prize winner author on epidemics. In this article bibliography, she writes about how to protect yourself personally, having been in hot zones herself. Also if you scroll down, note her Nov 2019 article on "The Real Reason to Panic About China’s Plague Outbreak It’s not the disease that’s worrisome—it’s the Chinese government’s response to it." https://foreignpolicy.com/author/laurie-garrett/
The way Chinese policy banks keep dragging their feet, as always, when the central government issues decrees they don't like, the damage to the economy can be fundamental and short-term irreparable.
Unbureaucratic, all-out support the banks can't provide, they were not designed for it.
The uncertainty on the ground persists, quarantine or no quarantine, letting people move back to their jobs in East China or not, letting them enter rented apartments or not, primarily because grass roots cadres and neighbourhood committees are out of control.
Everybody does what he wants, no-one does what he is supposed to do, but everyone joins the action.
The general secretary's direct address to 170,000 cadres may have intended to create a more consistent, unified approach, however, an impact is not yet visible.
Supply chains are torn, transport is down, mountains of containers in the eerily quiet ports, sorting out this mess is going to be a Herculean task, even if time was not an issue.
I don't think the outbreak is under control, nor can it be. Even with the best of all intentions, the numbers have been turned into a complete pigs breakfast.
A forthcoming warmer season may not offer real hope, considering the experience with a cousin of Corona, H1N1, which continued during summer. Also, if warm temperatures were to offer hope, what about the infections in Singapore?
I am somewhat leaning towards the opinion, that the corona virus may be quite comparable to yet another cousin from the same family, the common flu.
Hypothetically, if the death-rate should be the same for both, if we assume for a moment that the count of Corona-death should be correct (fat hope), then the rate of infected people/carriers of Corona could be way above one million people already, worldwide.
Suppose this should be so, there would be no stopping it, and therefore governments may want shift gear into reverse, i.e. turn around saying after much research the "deadly virus" isn't so deadly after all, and let it run its course, just like the yearly common flu, thus avoiding the pandemic call.
That would allow a return to "business as usual" fast, as we also continue during the yearly flu.
I quite agree with Bill, that the most obvious sign for such a change would be a visit of the general secretary himself to Wuhan, and I wouldn't be surprised if it was actually imminent.
For those of you, who know German language or who want to run the text through a translation engine, this is recommended reading: http://www.drlico.com/coronavirus/
The FUD that is being spread about this non-issue is an embarrassment to human intelligence, IMHO.
On #4 - Propaganda might be working very well and is poised to be successful. a personal anecdote: We left China a few days after things really heated up local media-wise on January 27, leaving my mother-in-law behind in Luzhou, Sichuan. At the time we felt terrible, but she and her family just weren't as worried as we were. Flash forward one month and my mother-in-law is terrified for her grandkids who are in the U.S. because she is absolutely convinced, from the propoganda and things that are spreading on social media, we are in mortal danger because the U.S. can't handle this kind of crisis as well as China... There are social media posts spreading like wildfire suggesting that the CDC is essentially covering up the spread of the virus in the U.S. One thing I will say is that we had textbook symptoms within the 14-day period after getting off a packed plane from Beijing, and we were not eligible for testing for this thing. That was the week of Feb 10 that the health department of Maryland told us we didn't meet the threshold (what was the threshold? Only severe pneumonia which accounts for only 20% of cases?) if this thing creates any kind of disruption in the U.S., there are a billion ways that Beijing can point to gross mismanagement.
If said behaviour from Chinese netizens is thevresult of Propaganda, what do you call the even wilder and more wide spread horror stories about the Chinese epidemic? Truth? Lol. People are jsut people, i.e. generally gullible and cowardly and prone to panics. Not everyhting is a 'political struggle'. Funny these days more Americans need to be reminded of that than Chinese.
Good point and I don't provide any support or have any evidence for the idea that his is because of "propaganda," per se. I think if you take the two instances of the word propaganda out of my comment you can get a better idea of one point that the messaging in China, coming from state, commercial and social media sources is instilling many Chinese with a sense that the Chinese government is successful in ways that other countries aren't, and importantly that if the U.S. experiences serious disruption, due to propaganda or not, the Chinese government gets a win here.
For our VC portfolio we have surveyed over 150!companies. About 20 were raising funds and 14 of the 20 still expect to close their rounds in March. They are still receiving term sheets. 6 will require some form of bridge financing. We have issued investment docs to 3 new investments since Jan 1. So the tech sector is continuing perhaps at a slower rate than 2019 but continuing nonetheless
I suspect that XI and the CCP will come out stronger as the epidemic peaks and they collectively get better control of the situation. There are likely to be important epidemiologic and scientific lessons learned from COVID-19 and future epidemics.
My thoughts today in my latest article about this in The Hill:
https://thehill.com/opinion/healthcare/484174-xi-jinping-coronavirus-and-the-new-cold-war
Thanks to all for this always fascinating discussion!
3. I think it will be more meaningful when the travel restrictions around Wuhan/Hubei are lifted for ordinary people than if Xi did a drop-in visit, although i suppose it depends which comes first. From my own perspective, I don't see this being over until the fences put up around my neighborhood have been taken down.
4. I am not sure if the positive energy and censorship is working, but the fear-mongering sure is. In my white collar circles it seems people are just terrified of catching the virus, to the point of not wanting to return to work or even ride public transport. The paranoia seems to consume them far more than any anger or unhappiness with the Party.
In my neighborhood, local people have gotten past the phase of arguing with the authorities and moaning about the regulations and seem to have resigned themselves to this just being yet another 劳 to 耐. What will be interesting is if a significant number of these non-salaried workers run out of savings before being able to go back to work or reopen their small businesses. Will they just go back to subsistence farming?
Astute comments. I agree it feels like in the past two weeks, the broader rage over censorship and government messaging a la 武汉·加油！and bald nurses seems to have been replaced by worries over trying to stay afloat economically. And fear of catching the virus. I wonder when public transport, travel sector, F&B sector, and basic everyday social life will ever return to normal -- or if Chinese society will settle into some type of post-virus New Normal with less of all those things.
How is the feeling among the Chinese citizens concerning the information policy of their government? Do they believe the information the government is providing concerning the situation?
Judging from my wife, her relatives, and the few Chinese people I've been talking to on uncensored media (i.e., not WeChat), I'd say they more-or-less believe the government's statements now. More importantly, they frequently quote back at me the feel-good propaganda about this or that celebrity giving 100,000 masks for the good of China, and so on. They don't know the many stories about such masks disappearing into government warehouses or being sold on by the Chinese Red Cross at astronomical prices.
No. But then, there is a sizable group that doesn't tend to believe the information the government provides concerning any situation.
For #3, it would be significant if the US CDC is convinced that China has it under control (and makes statements and changes their travel advisories).
2. STIMULUS
There is a broad misconception that stimulus will take the traditional form - largely fixed asset investment in structures. The industrial and service sectors are both getting hit - best guesses of an economy running at 60% of capacity this week and likely to take several months to get back up to speed in a best case. The base case is renewed outbreaks and continued disruption (not that cases ex-Hubei ticked back up to 24 today - expect more as people return to work).
Many SME's don't need loans. They will need subsidies in some form to survive - cuts in taxes, energy prices, perhaps some kind of tax credit give-away. This will be funded by govt borrowing, largely from banks who will buy most of the bond issue (call it QE if you want, but it's been going on for years in China). Central and local govt's will have to issue this debt BEFORE they fund a single bridge, tunnel or railroad.
Credit growth last year was near 12% ($3.8T in new credit) just to hold up the slowing, verge-of-bankruptcy economy. They would required credit growth of at least that just to tread GDP-growth water in the ABSENCE of disruption. Now they'll need high-teens credit growth just to counter the disruption and avoid mass layoffs. That's BEFORE they've generated any "credit impulse" which might generate growth in GDP.
If you actually expect the kind of a surge in infrastructure / building boom which the A-share market seems to be priced for you're going to need to see credit growth well in excess of 20%.
Credit-to-GDP is 260% (conservatively). If credit grows by 20% and nominal GDP grows by 7% (are last year's rate - highly optimistic), that would take credit-to-GDP to 293%, up 33 ppts in one year.
China has left itself in a very weak position financially from which to endure a near sudden-stop of the economy. The scenario above is not even a worst-case. Even if the virus subsides in China, what will be the cost to China of Europe possible shutting down for several months? How big with the SME losses become if China experiences a rash of outbreaks with people returning to work?
There is a very real risk that China's financial profile goes pear-shaped with this event. Meanwhile, credibility in the government has been dented. There is a very high risk of financial panic once the stimulus-fantasy subsides, and the RMB will head sharply lower unless China decides to effectively close its FX market.
One way of sizing the problem would be to look at increases in the accounts payable/receivable across firms. Accounts receivable are a form of credit extracted not from banks but from business partners. One form of "subsidy" would be to formalize the "suppler credit" inherent in accounts receivable with actual loans. Or the government could buy factored accountants receivable. None of this improves the country's credit profile and risks of financial crisis, but it would bridge the hopefully short run cash flow crunch.
Quote "Many SME don't need loans" Unquote. I sense a disconnect here. I think you should have a real close look at how China's SME operate, before making such bold statements.
Private industrial entities don't need more credit. Many SME's would probably prefer to close up shop than take on more credit in a highly uncertain environment. They need subsidies.
I chair an SME in China, do you? Maxing out loans is the default mode of operation. All our peers, all our suppliers can't pay their expenses anymore and stopped paying, to conserve cash. That can't go on for much longer, loans to bridge at least half a year are urgently needed.
Best of luck levering up further into this. That bridge is to nowhere.
In the current situation, subsidies are a drop in the ocean, equally going nowhere.
It doesn't help you, if the social contributions are cut, if owing to stalled cash-flow you can't pay salaries at all.
For the benefitting from lower taxation, you got to turn a profit first.
It's nice to sit warm and dry in an office somewhere and theorise, while the people on the ground doing real world work are going through a typhoon.
They could write a check to every business concern in China for 20% of 2019 revenues if they wanted to. I wrote "subside in some form" - there are a dozen different structures they could come up with. They could offer a cash subsidy per employee for example. They could refund 30% of 2019 taxes paid. etc etc etc
The point, from my warm, dry perch here doing macro analysis, is that when the corp sector is already highly levered, offering more leverage to "bridge" a gap of unknown depth and duration is not likely to work. For some it may - if you're in the latter camp, good for you. For many it won't, because at best it puts them back to where they were 6 months ago in terms of revenue outlook, only that have MORE DEBT. If they were close to a sustainable leverage limit before, they are now over it, absent a subsidy.
All widely speculative as we may be in black swan territory, but here’s a shot: 1) depends on sectors (healthcare and services to help us function more independently such as ecomomerce may do fine, travel could take quarters (plural) to rebound assuming (big assumption) this is tamed in the first quarter); 2) banking sector/leverage in the US anyhow MUCH healthier than SARS time, but hard to imagine we do not see big liquidity pumped in shortly; 3) those are good signs, but also uptick in business activity from abroad (and not just in China, but Asia writ larger); 4) I have been astounded by the openness of criticism though, anecdotally, seen less of it of late and not sure the mechanism of how that criticism moves politically (in the US, of course, if the economy plummets over time the reaction will be palpable in November - but not sure there); 5) there is a meme I’m sure that will be cultivated that this could have been much worse and if even addressed slowly at first real crisis was averted — I’m not sure how people on the street will agree with this or what actions they will take accordingly. But at least in America we get very worked up in a crisis and weeks later (if it passed) it was a #hashtag and disappears as if nothing ever happened (anyone talking about World War III from killing an Iranian general lately?); 6) “should” or “will?” :)
Having watched this great adventure unfold for 37 years, since the time I first came to China, my sense has been for some time that the positive things that the government did in the early years - the 1980s and 1990s - to grow the economy turned negative, and that the decision to sweep the China 2030 recommendations under the rug when the economy was still strong enough to absorb them (and never forget every one of those recommendations was made jointly by the DRC at Bob Zoellick's insistence), the economy has been very much as Wen Jiabao so eloquently described it in about 2008. Nothing has really been done to fix that, to date, so it just rolls along with all its weaknesses and imperfections. My greatest fear is that, as so often happens in these situations, the leaders some time ago began to believe their own propaganda - always a risk. I wish I could be more optimistic about the current situation.
Something I'm wondering RE: #3: what is the converse? What are the signs that the economic fallout is truly catastrophic and the party has lost control of its ability to contain those losses?
CCP officials start showing up in the Cayman Islands wearing goofy disguises and withdrawing duffel bags full of cash.
Likely scenario.
Looking at #1, I can speak as an SME owner in Shanghai. The gov is making headlines every week regarding relief programmes for SMEs. Nearly all of these are via freeing up loan potential through banks. However, very very few SMEs (100m RMB or less in annual revenue + less than 300 employees as I understand it in Shanghai) have the fixed assets necessary to secure bank financing. SMEs are nearly by definition asset light. WFOEs are almost totally excluded by this, but a local SME owner can only benefit in this case if the legal rep puts up his own assets to secure. Crazy risk in this environment with no visibility on a return to revenue or normalcy for many businesses.
When looking at the service sector, hospitality and F&B, tourism, and retail - major employers of urban population - there is almost no relief in place for them. True relief would be in the form of government backed loans from financial institutions, a return of the company’s already paid social insurance tax direct to the employee (as many operators have already negotiated their labour cost to well below 100% pay), and direct command of rental relief for SMEs renting via sub-landlords and private landlords.
This is vital, with Caixin referencing the Tsinghua study that roughly 1/3 of SMEs cannot survive more than 1 month on current cash reserves, and 2/3 cannot survive 2 months.
The PRC’s highly restrictive criteria for bankruptcy (it is most common practice to tell applicants to go back and negotiate with creditors) and lack of approval for mass lay offs mean that we will probably not see lay offs or shut downs from larger companies, but we can expect to see a lot of zombie SMEs and in the mom & pop sector, a lot of full closures likely starting in March / April.
Many friends of mine own small businesses but they also cannot get the required paper work to apply for loans - for a couple it’s been because they have been dodgy and the business isn’t in their name. One is in Wuhan who obviously cannot get the paper work in order. Another friend is going to sell one of his apartments to get capital, which is also alarming if that is a reality facing many.
I am also wondering what the long-term economic effects will be, both of the virus and of the already quite clear nature of the stimulus. The virus impact on SMEs, particularly service sector, and their employees, particular migrants, won’t be quickly overcome. Also the virus impact on Hubei, a province with the same population as all of Italy. Stimulus impact is not only more debt and a reversal of deleveraging, it is further reinforcement of ‘the state advances, the private retreats’, an extended period of growth for growth’s sake strengthening precisely the sectors that ‘high quality development’ is supposed to be turning away from.
My friend who is in the business of advisory and intermediary 移民中介Chinese immigration to overseas just reported a surge of their buisness
Depressing to see so many online ads for emigration services.
Hey Bill et al, any signals or comments from Liu He? His derisking campaign etc has been pretty critical in anchoring expectations regarding the trade off between targeted vs broad based/ traditional levers vs less so/ short term vs medium term goals etc as it relates to stimulus over the past three years. Don’t know where he stands re stimulus to ameliorate momentum loss/economic crash and impact on banks and financial system.
The saying used to go, "if the US sneezes, Mexico catches a cold." Well China's got the coronavirus and South America is likely to get pneumonia if this goes on for another few weeks.
On question number one, as the guy who watches Latin America, the China slowdown is likely to have a major impact on South American economies that are based around commodity exports. We're going to see business failures and governments lowering gdp estimates, which is going to exacerbate the protest movements that are already hitting a number of countries, with Chile being case number one (see my report on the protests expected in March here: https://boz.substack.com/p/protests-likely-to-increase-across ).
The coal chart in today's WSJ likely reflects a lot of other commodities that China is importing.
https://www.wsj.com/articles/as-economy-suffers-xi-faces-pressure-to-lift-virus-restrictions-11582742443
Another example is South American meat exporters that were exporting like crazy in the second half of 2019 to help fill the gap left by African Swine Fever. Then a bunch of importers defaulted in December and January. And what shipments were still coming to China were hit by the massive logistics problems causing the exporters to lose even more. A lot of firms in Argentine and Brazil had invested heavily in capacity expansion to serve the Chinese market and now in horrible financial shape.
Africa is facing a similar (exactly the same) situation and I think 2015 - commodity price dynamics, volatility and uncertainty out of China) lowered growth from above 5 in 2014 to 3.4 in 2015 to 1.4 in 2016. I think this situation will have same impact. Especially if global growth slows to 2.5. And that gets much worse if Coronavirus hits Africa.
Thanks Bill, this is a wonderful idea.
I work in cross-border corporate finance law mostly. My ongoing assumption with regard to the economic/monetary policy questions (#1 and #2) is that the CCP will use all levers available (printing RMB, cutting taxes, lowering lending rates, purchasing bad debt, rolling up distressed banks etc.) to avoid an economic downturn in the short term. Remember the vast majority of debt held in China is denominated in RMB and the PBOC has substantial ability to manipulate the market to avoid a catastrophe. I just don't think they have the appetite in the short term to let enterprises fail in any significant degree. (I believe "the government will back it up" is a widely held belief among Chinese lenders of all stripes.) The book "China's Great Wall of Debt" is so useful in thinking through this phase.
Re #5 (Can Xi and the Party actually come out of this tragedy stronger?): Yes absolutely. Foreign observers greatly underestimate the reach of the Party in China. People are very pissed, that is true. But there's a huge leap between pissed off people and meaningful (and coordinated) political activism. If the western countries bungle their respective outbreaks, which I assume is likely (hard to imagine a single western country outside of Germany who has the discipline for massive collective action), the CCP could spin their response as comparatively strong in light of the struggles of other nations. They's already blamed local officials for the coverup and can press that message 24/7 until it sticks. (Especially given Xi gave several risk mitigation speeches last year which included a directive for local officials to protect against another SARS outbreak.) They can also shut off VPNs or if necessary the internet. It's going to get ugly, but the road to survival of the CCP is sufficiently broad.
Hi bill, I’m going to comment on Question 5.
I don’t think Xi and the party will come out of this health and economic disaster unscathed even if they are able to mitigate short term economic damage. For one, the cover up in late December-early January has left a bad taste in my citizens mouths, I don’t think citizens will be quick to forget that. Secondly, there will be damage done to China’s economy and although Chinese citizens have given up parts of there freedom in exchange for economic prosperity, if that prosperity looks to be decreasing than Xi and the CCP could be in hot water.
However, if other countries flounder in attempting to curb the COVID-19 (e.g Italy, Iran, South Korea) than the CCP could start a campaign in which they say these countries have poor systems which did not handle the virus well, whereas China did and therefore China’s system is better and more suited for such things. The failings of other countries in their response could be spun into praise for Xi and the CCP by its propaganda machine.
If the trend continues and China can get the epidemic under control relatively soon, I think citizens will in fact be quick to forget the initial cover-up. This could still end up very much strengthening the CCP's image inside China. I'm hopeful that if push comes to shove, the US can do a good job containing the virus despite current problems with CDC testing (see C. Scott's comment above and T Cowen's relevant post (link below, why can't I hyperlink here?)). But any failings will be exploited by the propaganda machine. Beyond the US, if this thing gets out of control in countries with less capacity to react, like Indonesia or Pakistan for example, it could get really ugly, and that will again reflect well on the CCP's overall response.
https://marginalrevolution.com/marginalrevolution/2020/02/why-are-we-letting-fda-regulations-limit-our-number-of-coronavirus-tests.html
But, propaganda machine or not, they would be right. The complete lack of capacity in the US, consequent on years of disinvestment in public health for any other than the wealthy, contrasts badly with China. But this also relates to the fact that so far 2,700 (approx.) people have died in China. Last year 65,000 died in the US from flu. Disproportionately poor people. There will be a lot of questions asked of the Chinese government - about its own capacity to deal with these outbreaks (of which there will be more) and how it has disinvested in public health. The system under Mao compared more favourably in some respects. But these questions will be used to strengthen the public health system - one hopes. They are not about "China's Tiananmen moment' or its 'Chernobyl' moment, all of which are fantasies of the kinds of Cold War warriors on display on these pages. Ones for whom 'propaganda' means anything that might suggest China is not an evil empire ready for taking down by the shiny crusaders of US global righteousness.
Not to step all over your point, but the reason why there is such a huge discrepancy in reported deaths for flu in China vs. other places is that China relies on reported cases instead of using statistical modeling like most other countries. In 2017 they only officially reported 41 (yes, forty one) deaths from influenza. Since they are using reported deaths for the COVID numbers as well, you can safely assume that those numbers are equally misleading. Comparing this data to another country's data like you have done above is not really informative.
Umm...it s fairly basic. Thousands of experts agree and certainly visually to the untrained that virus data outside and inside China so far have been remarkbly consistent in terms of transmission, severity, death/patient demographic and medical condition profiles. Your supposition is not showing in stats. It might one day. But not atm.
Also u should note and read about all the different criteria different countries are using. They are as varied as there r countries, even in Europe, to my horror....rationally this is normal for a new viral epidemic...emotionally though this puts me in all kinds of doubts and suspicions as i feel perosnally more threatened in Europe by this.
Anyway to get back to China watching, all too often, when it comes to China, people lose objectivity and commit all kinds of behaviour biases, with predictably bad outcomes in terms of understanding and predicting China.
Yet, in China's case, the more people are proved wrong, the more it must be facts and China that are being 'funny', not the nice thoeries and narratives people take for granted (again for what reason i dont know as they certainly habe not done anyone any favours, apart from chicom perhaps...re my earlier point on negative biss/propaganda).
I'm not disputing their characterization of the virus or the observed characteristics of the virus. I'm just saying that doing a head count of people who have been tested positive and then died of the virus is the way that China counts and reports fatalities (or at least it was the method they used for the critical first few months until they switched gears in mid-Feb).
That is not a good method, especially for an outbreak that reached the scale it has in China. It's a known fact that the Hubei region did not have enough kits to test all patients in early months, so right away you know scores of people were certainly not counted as deaths though they likely should have been.
Comparing that method to a number yielded by statistical modeling is not useful, and like all data from China primarily serves to advance a beneficial political narrative and not to inform or guide decision making in other countries regarding the outbreak.
I have worked with employment statistics and know the limitations of these kinds of methods. The issues around counting in China, access to testing kits, the pitfalls of statistical estimates - these are all important. However, when you have a difference between a figure of 2,700 and one of 65,000, the difference is of an order of magnitude than outweighs any methodological glitches. In that sense it is helpful to compare. What we conclude from this comparison is of course open to debate. But your point ultimately was undermined by your last sentence, in which you conclude that the Chinese statistics serve a primarily beneficial political narrative. Which we all know how politicians and administrators the world over do this to various degrees, that you would dismiss the Chinese statistics in such an blanket way suggests that your analysis itself is there to serve a particular political narrative.
As I said in my original post, you are comparing apples to oranges. Here are the two sets of data that might be at least arguably comparable:
1) 2017 influenza deaths in the United States: 61000 (statistical modeling) vs 2017 influenza deaths in China: 41 (cause of death influenza and reported to NHC)
Note: If China used statistical modeling it is estimated they would report around 100,000 deaths a year from influenza using the same methods.
2) 2019 COVID19 deaths in the United States: 0 (positive test for COVID + death caused by COVID or complications) vs COVID19 Deaths in China: 2718 (positive test + death caused by COVID)
So if we use the Chinese number 102,718 to compare to the U.S. number of 61,000, taking into account the population differences, you might actually be able to make the case that China is doing a better job with healthcare than the U.S. But that would require an attempt to discuss the matter in good faith rather than re-framing reality to push your own preferred narrative.
Btw, italy in its infinite wisdom has decided to only test people by symptom not by association with the infected...and it s doing a great job spreading it around in Europe. I understand that with limited resources, one has to prioritise to deal with an emergency. But still, it s not comfortable to know that.
Erik, read up on representstive sampling. That s what any counting in the real world ever is. It s a miracle if any data compilation or indexing manages to reflect the charscteristics of underlying reality. Especially when dealing with an epidemic. Some seem to hold chicom by God's standard. Which is odd given that the same people think they are totally useless.
Yeah I'm not necessarily criticizing their decision to use that counting method, it's a crisis and you have to expect that things will be sort of hit or miss. You can see right now in the U.S. that we are facing a shortage of kits in hot spots and we have had much longer to prepare.
It's just not comparable to numbers involving seasonal influenza which saturates the entire earth every year and infects tens of millions.
I’ve been struggling to think of a framework to understand what being “in hot water” looks like for a government with this degree of control over media and even, via WeChat (obviously with caveats), a huge portion of the private conversations of its citizens. I don’t know that history provides much of a guide here. Is it strikes? Are people protesting on the street? If so how does that get organized assuming the technical means now exist to prevent people discussing these things in group chats?
Sorry for the confusion with my phrasing, I should have elaborated on this. By saying ‘hot water’ I just meant the trust in the CCP May diminish and over time it could lead to citizens demanding more accountability from the government. If the COVID-19 has really bad economic ramifications, than perhaps capital flight could also challenge the CCP.
time will tell as always. But the success of skewed media coverage and skewed analysis from China watchers mean that it s not hard for chicom to beat expectations. Afterall, all they need prove is that they are not incompetent genocidal devil incarnate. Even chicom can beat that i d say. ;). I hope propagandists on both sides understand this point. Sometimes one's zeal helps one's enemies. I doubt they would though. Zealots are ususlly so blind to facts that they can maintain their fantasy indefinitely. Well, up to a century anyway.
One point to note on the economic side and the feasibility of a stimulus--it is currently not lack of demand that is holding growth back, but supply. So adding stimulus now will not help.
Very true! And a lack of supply will result in companies looking to diversify their supply chains, which stimulus will not be able to help to the extent that it would need to.
"How should the US government react to the expulsion of the three Wall Street Journal reporters?" Yes, and how should the Swedish govt react to the recent Gui Minhai sentencing in Sweden, where the Chinese govt unilaterally stripped him of his Swedish citizenship and then gave him 10 years of prison on an absurd charge?
Both these cases amount to unilateral redefinition of what is accepted behaviour between sovereign nations — especially with the Gui case, which creates a real chiling effect for all ex-Chinese naturalized citizens around the world, including EU and US.
Unfortunately, Sweden, other European govts, and the US still act naively and in an uncoordinated manner on these kinds of issues, mostly because everyone wants to protect narrow commercial interests from retribution. It's really disconcerting how easily the Chinese govt is getting away with these acts with impunity — all because the rest of the world is so bad at creating a united front.
...sentencing in China* (wish I could edit these comments_
The Gui case is just one high-profile example of a practice that is pretty common in China, namely, ignoring foreign citizenship when the offender is of Chinese ethnicity. You are correct that this is handled in a piece-meal manner by foreign governments, in the U.S. case due to privacy laws which require express permission from the people in question to intercede in their case. The Chinese government typically applies pressure on the individual via their legal representative to reject consular assistance and/or any efforts to publicize the case in return for lighter sentencing or expedited rulings, which serves to hide the scale of the problem.
Doubt many highly leveraged developers can go two-three months at current levels of property sales without running out of cash and funding options, given that many depend on sales for over half their ongoing funding needs. If they start hitting the wall, it adds to pressure on banks that will be forced to absorb rising NPLs, which would clog up credit transmission channels even if the PBOC is easing further. And of course if no one is buying property a couple months from now it will be a sign of a deeper confidence crisis with even larger ramifications...
#3. For Shanghai at least, when the bao'ans switch from checking temps at the gates of the xiaoqu and revert their efforts back to zealously enforcing the new rubbish-sorting rules
I would like to get some reaction to the economic assessments currently going around. Few, if any analysts have come up with a negative you growth for quarter one. This is rather astonishing for anyone that has seen the available micro day to day data on transport, coal use, migrant returns, shipping etc. My back-of-the envelope would be that as a minimum you would get a minus 5 or worse in the first quarter. This would make a 5.6 percent centennial" growth for the year practically impossible. Views?
Yesterday I also posted an East Asian Institute commentary on growth projections: https://research.nus.edu.sg/eai/wp-content/uploads/sites/2/2020/02/EAIC-12-20200228.pdf
The PMIs this morning shed more light on the economic impact question. It is bad, really bad. Manufacturing at 35.7 (from 50), which is even lower than the bottom of the financial crisis. Services from 54 to 29.6
Bert, sorry, I'm late to this thread. Break down GDP by industry. Do a simple day-count on the additional days idle because of the virus in Q1. Every extra week is a quarterly fall of almost 8% as a benchmark. A 5% decline in secondary industry, none in primary and 10% in tertiary gives you a 6.8% quarter on quarter decline and 2.5% year on year rise.
With how long its taking to restart firms (at least as measured by the Baidu location data), its not hard to get a year on year decline in Q1.
The question I have is will the government publish data showing a year on year contraction (note that going into the quarter GDP was 4.6% higher than March 2019)? It's hard to make a contraction square with the story that the government is handling the crisis admirably. In the past, data releases have been seen as a means to influence behavior rather than as a means to understand current conditions. This environment would seem underline the desire to influence rather than to inform.
So, we may be back to tracking trends in Chinese trade as measured by other countries and the potpourri of alternative activity measures rather than relying on official data. GDP may be a literal and figurative victim of the "people's war".
Surely this is a great time to come clean, given that virus excuses everything and chicom is not God. Managing the outbreak and delivering great growth, r u sure that s what the Chinese public demands? If they do, they r certainly very pampered.
P.s. i never understand the GDP red herring. Do u know how much judgement IS involved in GDP calculation? Read the small prints in any country's report and weep. But overall somehow it does the job. Or are u one of those people Stil maintaining that Chinese GDP s fake, despite all these decades of actual realised history proving that Chciom GDP more or less has measured reality? Or? Genuinely puzzled.
Am not saying u r doing it, but i find the irony of some people screaming 'fake China' for 30-40 years without an iota of an inkling of who the faking party is on this issue too difficult to ignore.
Ken, no I'm not sure that high growth in Q1 is what the Chinese public demands at present. It does seem, though, that that is what the government is exhorting. One usually comes clean as part of a shift in leadership, but the consensus of the threads here is that that is not likely.
I am not "one of those people". I do know from direct experience that given the margin of error in calculating GDP (I have read the small print) Chinese officials choose figures so as to manipulate sentiment. In the incident with which I am most familiar the person choosing to alter the official estimate was in the then Premier's office.
Hi Bert
My firm is forecasting a year-on-year contraction in Q1. I suspect the reason most are not is that -- for institutional or other reasons -- they are compelled to forecast published GDP. I very much doubt the published number will be negative.
Mark, your call of a contraction was bold but looks very rooted in reality. If the y/y Q1 GDP contracts, does that increase the odds of the hoped-for "v-shaped recovery". and mathematically what would the growth have to be for remaining 3 quarters to hit the target? thanks
So I did an assessment of a 6 percent negative shock (YoY) in the first quarter, based on an assessed days lost in q1. This would require the rest of the year to grow by 9 percent to reach 5.6 for the year.
The longer the shutdowns continue the more drawn-out any recovery becomes because the impact on incomes and employment will mount. Some people won't have jobs to return to. Others will have spent a chunk of savings just getting by and will limit their spending even after they are back at work to build savings back up. That's why policymakers are talking so much about supporting SMEs since they are key to whether shutdowns hurt workers. But as others have noted, policymakers aren't very adept at helping SMEs.
Back of the envelope, if the economy contracts 2% y/y in Q1 and gets back to 6% in Q2, it would need to grow 9% y/y through the second half of the year to hit the target. I don't think that's plausible in even a best case scenario. Policymakers can't stimulate output without limit. There's a ceiling determined by the economy's productive capacity, and China's is much lower.
CNBC had a JPMorgan talking head on yesterday talking about contraction in the first quarter and then 15% growth year on year after that. I guess it's some progress that the market watchers are actually starting to admit the virus will have some negative impact at all, but they are still embracing fantasies in order to claim the long term outlook is going to be positive.
https://www.cnbc.com/2020/02/26/jpmorgan-china-gdp-up-15percent-in-q2-after-negative-coronavirus-driven-q1.html
Sorry I misqouted, he was talking about quarter on quarter. Not as outrageous given the way he explains it but still taking for granted stimulus and other measures will be effective.
Thanks.
I'm also a bit flabbergasted. If the economy operates at 50% of normal for a quarter, why is yoy growth not -50% for the quarter?
certain portion of economy is fixed...such as rent, power, telecom, etc, etc.
Many many businesses are refusing to pay rent, and power consumption is orders of magnitude less than it normally is during this period. So while some of the economy is fixed, I think the real earnings on this “fixed” income may end up being more volatile than expected.
Hi Bill. To kick things off, I'm happy to give a take on 2. This is the last year of the Party's 10 year plan to double GDP, and I think that they need 5-6% growth not to miss the target. This will be possible with 0% growth in the first quarter only through large stimulus measures. So expect to see some of the good work of Guo in deleveraging rolled back. Perhaps again by pumping up real estate prices through local government largesse. If the epidemic is not under control soon - let's say not until May/ June - then it will be very difficult, if not impossible, to post 5-6% growth for the year. So the amount of fiscal loosening depends a lot on how quickly the Govt. feels it can loosen the shackles on movement which are holding back economic activity.
Paul
Paul, we are thinking alike, though in my view, the first quarter is decidedly negative. If it is minus 5, the ret fo the quarters would, on average, need to show 9 percent (yoy) growth. This seems rather impossible in today's world, more so now that the virus is becoming a global issue.
Why are a couple quarters of very high (9%?) rebound growth not possible? Refilling orders and inventories would mean a massive surge IF things were back to pre crisis levels. Question is whether they will be. Due to business failures, NPLs, and faltering global demand resulting from global virus. Those are my concerns. Also to the plus for china: commodity price collapse if sustained means surge in net export component, ironically, due to terms of trade. Short supply of china intermediate exports will elevate those price levels. On whole though I have a very dark view of 2020 GDP.
One related question: what are the chances that the CCP misses its 10-year plan, 5-6% GDP target for 2020? As in, will they allow a miss, or will they ensure they hit the target no matter what the real numbers say? Can they afford to miss it?
I see no reason they couldn't say "conditions have changed." It is a valid argument on business contracts in China, so why not on a social compact?
It's all going to depend on how they're feeling about public opinion as the country emerges from this crisis, and you'd better believe they're watching that closely. if the popular narrative is "The Central Government did an excellent job in the face of the Wuhan government's failure," then they will feel emboldened to sell a revision of their projections. If, on the other hand, the predominant narrative is "The Chinese governmental system caused this to happen," then, as Paul says, "they will move heaven and earth to hit the target."
My assumption is that they will move heaven and earth to hit the target. But as Bert and others have noted, this may simply not be possible if economic activity stays depressed beyond the first quarter (and is pretty challenging even if it is doesn't). And, by 'move heaven and earth' I mean flood the economy with money. See Patrick's comment above for a good explanation of how this can be done. The supplementary questions from me are: 1. what would this do to inflation? It could easily hit 10% I think with a sudden increase in printing money; 2. And the RMB valuation. Can it be kept at around 7/$? If not Beijing will run into political difficulties with Washington; 3. Can SAFE keep a lid on capital outflow? This means stopping Chinese companies from investing overseas, and from having net sales in the Chinese stock market, among other things.
One other factor to consider is the revising up of previous year’s GDP numbers. This happened most recently adding 2.1 percent to China’s 2018 economic growth. There’s much that can be done there to make it appear the growth target is met even with a dismal 2020.
Ironically the decision to restate recent years upward will make the outcome this year more negative due to base effects.
Yes that is a distinct option. Also, there is a difference in what will happen and what will be reported: NBS has a tendency to smooth quarterly numbers