The coronavirus epidemic may be centre-stage for epidemiologists and other health professionals right now, but it is unquestionably also a political economy event in China with important repercussions for the rest of the world and financial markets.
Look no further than the 150 billion yuan ($22 billion) net liquidity injection (1.2 trillion yuan gross) by the People’s Bank of China (PBC) over the weekend, ahead of the re-opening of banks and markets after the new year holiday. This was the largest such operation for a single day ever undertaken and follows a year in which the PBC became a serial supplier of additional liquidity in response to an erratically slowing economy and the failure of at least 3 small lenders, which nevertheless constituted contagion risks for the central bank. The public health scare, then, has been not only unwelcome for obvious reasons, but untimely for policymakers.
The virus does not seem to have a high fatality rate compared with other communicable diseases but its virality rate, or the number of cases one infected person generates over the course of the infection is considerably higher than for other seasonal flu outbreaks, SARS and the 1918 Spanish flu. Given this, we can appreciate now the draconian measures introduced by the Chinese authorities.
These have included quarantining tens of millions of people and shutting down large swathes of the public transportation network and public events during an extended Chinese New Year holiday. The travel, tourism, leisure, entertainment, retail and property sectors have all been hit hard. Factories have shut down, including foreign auto companies Toyota and VW. Large retailers have as well, including foreign firms such as Starbucks, McDonalds and Apple. Luxury goods companies selling in China or to Chinese tourists travelling abroad report much slower traffic. Stories abound about migrant workers being told not to report back for work yet, though no one knows how many.
While economists are trying to tabulate the impact of the virus on the economy, markets have conveyed their own rather pessimistic take. The copper price – bellwether of Chinese industrial and economic health – has fallen 12 per cent since mid-January. The economic severity of the Chinese reaction to the virus depends not so much on the death rate as on the time it takes to bring the infection under control and provide antidotes. If this happened soon, the economy should snap back with little permanent loss to output and spending. But if, as some WHO and other health experts suggest, this doesn’t happen until March – when the annual National People’s Congress and Chinese People’s Political Consultative Conference take place – or even later, the economic impact through the first half of 2020 could be significant.
As it is, first quarter GDP, as measured by private analysts at least, may slide from about 5-5.5 per cent to about 4.5-5 per cent, but if the crisis measures extend into April or May, then, a further deterioration is likely. Whether official statistics will report on this sort of setback is a moot point.
The impact on global GDP will be less marked, though the world economy isn’t exactly in the rudest of health anyway. But airlines, automobile firms and others selling into Chinese markets, firms in China-focused supply chains will all be watching nervously and hoping that business conditions normalise soon. Yet, it’s easy to see why the global market bond-equity conundrum has received the latest twist in favour of the former, for the time being at least.
The economics of all this though should be transitory. The infection will eventually stabilise, there will be vaccines, and business will snap back to a degree. The politics of this experience though will linger in China and with more unpredictable and protracted consequences.
President Xi Jinping hasn’t had the easiest of times recently. The economy has been buffeted by structural headwinds and there have been worrying bank failures albeit among smaller lenders. Hong Kong protests have been an embarrassment, and the Taiwanese election last month came as the most recent in a series of pushbacks against China, including the on-going so-called trade war with the US, which as we all now recognise, is an existential struggle spanning commerce and technology, and standards and beliefs for both sides. Both speak the rhetoric of either decoupling or self-reliance, which is easier said than done, but there are serious and deep-seated adversarial politics which will be around for the foreseeable future.
Now, with the virus crisis to boot, President Xi, who has amassed more power and control around himself at the head of the Communist Party than anyone since Mao, faces an intriguing moment. There are serious questions being raised in China about the delay, roughly 40 days, separating the first cases of the Wuhan virus and the emergency declared around the 21st January by the president. In this time, whistleblowers were punished, important information flows were suppressed, public events continued, and an ‘everything is normal’ facade obtained. The political craving for stability and control perversely, and not for the first time, created precisely the opposite.
Further, President Xi has become a sort of one-man cult, whose thoughts and declarations embody China’s past and future success, and who sits at the ‘core’ of the Central Committee of the party, leading China to a better quality of life and global respect and influence. He is the newly anointed ‘people’s leader’.
Yet since the emergency was declared, he has not been seen on state television. When things go wrong as they have done with the virus outbreak, blame is liable to fall fully on the leader. Depending on how things evolve in coming weeks, this may affect respect for the leader, rather than his capacity to rule. The 2020 coronavirus teaches us a little more, though, that Xi’s position in China may be far more brittle than narrative and hype suggest. And that goes for policymaking too, including as it affects the economy.