Coronavirus – Beyond the headlines

China Coronavirus fears hit equity markets

A guest commentary by Frank Sieren. The best-selling author has lived in Beijing since 1994 and reports exclusively from China for Flossbach von Storch AG.

More sick every day, more dead every day. The new virus from Wuhan continues to set sad records – despite the enormous and unprecedented containment measures taken by the Chinese government. After discussions with doctors and management, however, it is becoming increasingly clear that it makes little sense to draw up progression curves based on the figures. All that remains is an arbitrary section of the actual disease. This is less about clumsy cover-up attempts, but rather about new medical findings on the one hand, extended measurement methods and political will on the other.

Whether, when and where people will work, travel and go to school again, i.e. when the virus will be defeated or not, is a predominantly political decision. Whether the current measures in China were necessary is ultimately decided by the Permanent Committee of the Politburo under the leadership of State and Party Leader Xi Jinping. So if Xi recently noted “positive changes”, that was such a decision.

Significantly more influenza deaths than Corona deaths

According to the latest statistics (as of 14.2.2020), there are more than 60,000 infected and over 1,300 dead with the corona virus, 99 percent of them in China. For comparison: According to estimates by the Robert Koch Institute, the influenza wave alone will cause around 25,100 deaths in Germany in 2017/2018. However, this was the highest figure in 30 years. The lowest was 800, but the measures we took then had little to do with what we are seeing in China today.

And for the 2019/20 winter season, the U.S. Centers for Disease Control and Prevention (CDC) estimates the number of flu patients in China at 15 million. Of these, 140,000 have so far had to be treated as inpatients. More than 8,000 people have died of the disease. This is not a particularly high figure in a long-term comparison. Even if one were to add the more than 1,300 corona virus deaths to this figure, it would not be an extreme rash. But the season is not over yet either.

US-Americans reacted much more laxly in 2009

The H1N1 virus, which broke out in the USA in April 2009, caused more than 1.6 million illnesses at that time, 18,449 people in 214 countries died according to official WHO figures. The CDC even speaks of 284,000 deaths. For the US government at the time, this was no reason to take even remotely similar measures to those currently being taken by the Chinese government. At that time hardly anyone was bothered by this, there were not even travel warnings for the USA. While the World Health Organization (WHO) spoke of a “pandemic” at the time, this is not yet the case with the corona virus. Both reactions should be considered “extreme”. The American as “extremely carefree”, the Chinese as “extremely concerned”.

China has now “set the standards for future epidemics,” said WHO Director-General Tedros Adhanom Ghebreyesus. Nevertheless, the WHO has declared an international emergency because of the need to protect other countries that might not respond as well to the spread of such a virus as China. However, the WHO has not yet issued a travel warning for China and has not imposed trade restrictions.

Research laboratory for President Xi

I have heard from some doctors that their impression is that the Chinese government is pulling out all the stops to be prepared for worse cases and much deadlier viruses. President Xi would gain such important insights into how his citizens behave in times of crisis and how foreign countries react. He would probably make a virtue of necessity. Driven by the concern that the population will get the impression that the government does not care enough and covers up a lot, he has taken the exact opposite path.

This has been of political benefit to him, at least so far. The population rewards his brisk action and his power has been strengthened. China has moved closer together in the fight against the virus.

It’s very likely that Xi is aware of the economic damage involved. Here, too, it’s a matter of self-imposed goals: China has set itself the goal of doubling its economy from 2010 to 2020. This goal will nevertheless be achieved with growth of only 5.4 percent this year. I wouldn’t be surprised if the figure was higher at the end of the year. After all, Xi can always loosen the reins again. Nevertheless, no one can accuse him internationally of not doing enough.

Outrage at official US reactions

This in turn does not stop US politicians from using the virus for the power struggle between China and the USA. In a solo effort and against the advice of the WHO, Washington has now put China on the same level as Afghanistan, Iraq and Libya, i.e. countries in which, according to the US government, “life-threatening risks are likely”. This is “not a gesture of goodwill,” commented a government spokesman in Beijing. In addition, millions of Chinese have been outraged in the social media by a statement by the American Secretary of Commerce, Willbur Ross. He said the virus “helps accelerate the development that more jobs are returning to North America.” A spokesman for his ministry later added that while it is now necessary to fight the virus first, it is also “important to mention the

consequences of doing business with a country that has a long history of concealing real risks to its people and the rest of the world.

Equity markets remain unimpressed

But the American stock markets have not been particularly impressed by the reaction of US policy or the epidemic. The Hong Kong Hang Seng Index, on the other hand, initially fell. However, the slump is not a particularly large outlier after the wave movement in recent months. On December 4th, October 10th and September 3rd, the wave troughs were deeper than on January 31st, the previous low following the outbreak.

Since then, things have been looking up. The US stock index Dow Jones Industrials and the German stock index DAX even reached their all-time high in these days. So the markets obviously assume that the virus is only a short temporary phenomenon. The International Monetary Fund (IMF) also comes to this conclusion. There they speak of a short V-shaped development. Of course, nobody is buying a car now. But it is just as natural that they will make up for it as soon as the air is clear again.

The comparison with sars is reassuring

Even when compared with the SARS virus, a sustained growth shock seems unlikely: My memory of SARS 17 years ago was that the epidemic disappeared in late spring just as quickly as it had previously swept across China. In fact, the economic statistics from that time show a brief sharp slump. During the 2003 sars epidemic, for example, retail sales in May were more than halved from 9.2 percent the year before. In June they were already back at 8.3 percent and in July at 9.8 percent. The year ended with a slight increase from 8.8 percent in 2002 to 9.1 percent. Overall growth in China also fell by two percentage points to 9.2 per cent in the first quarter of 2003. The figures recovered in the third quarter. But the year as a whole ended with growth of 10 per cent, compared with 9.1 per cent in 2002. The question, which of course cannot be answered, is: How high would growth have been if there had been no SARs?

It is difficult to compare the situation of the Chinese economy today with the situation the country’s economy was in 17 years ago. At 16.5 percent, China’s share of global GDP is currently more than three times as high as in the days of sars. The share of car production has increased from seven to 27 percent. The share of world tourism rose from three to twenty percent, and the share of world trade rose from five to 13 percent.

What will become of the world economy?

At the same time, the Chinese economy has become more independent of the world economy. The share of the service industry has risen by twelve percent to 54 percent since 2003, and it usually recovers particularly quickly. This means that the damage to the Chinese economy could be less than with sars.

Conversely, the damage to the international economy would have to be higher in relative terms, as many economies are more dependent on China today than they were then. But these considerations remain speculation in the end. My personal view is that in the long term, not much is likely to happen to the Chinese economy because the Chinese government has enough leeway to quickly stimulate the sagging economy. That also helps the global economy. That was already the case in 2008/2009: the Chinese economic stimulus program helped the global economy back on its feet. In contrast, the virus is a comparatively minor problem.