Are the markets vulnerable to the coronavirus?
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The coronavirus outbreak re-casts several critical geopolitical, macroeconomic, and behavioral realities, all founded on utter uncertainty—which point negatively in the immediate term. The human toll in lives lost and illnesses suffered is creating widespread fear and anxiety. For most political leaders, especially in democratic societies, the safety and health of their populations is the paramount consideration, overriding the immediate bilateral diplomatic and trade concerns of China.
Economic shocks can materialize from seemingly any market or region in the world.
Beijing’s criticism of the U.S. for restricting most air travel with China clarifies its priorities. Authorities seem more concerned with avoiding embarrassment, upholding reputations, and maintaining social control than with actively taking all available measures—in full coordination with medical authorities worldwide—to contain the outbreak as quickly as possible. China’s authorities prevented U.S. Center for Disease Control officials, with significant experience in containing outbreaks, to enter China. They feared the discovery that Chinese authorities initially sought to conceal the virus breakout, the pace of human to human transmission, the actual number of cases, and the coronavirus death rate—believed to be a relatively low 2%.
China is not simply a vast market. Every significant transaction with China involves the presence of the Chinese Communist Party (CCP), whose top priority is maintaining absolute control over every aspect of life and society across the country—even at the expense of Chinese lives. Two months ago, when local Wuhan doctors warned of a SARS-like virus, CCP officials threatened them and suppressed all media information flows while the government assessed the outbreak’s impact on domestic political and social population controls—and on global trade concerns. One upside of China’s authoritarianism is the ability to implement mass domestic quarantines and take non-democratic steps to isolate and contain the outbreak internally, which can continue to slow down its global spread.
Economic shocks can materialize from seemingly any market or region in the world. Two months ago, worldwide focus was on the outcome of the U.S.-China trade talks, and the degree to which the two sides could agree on a final text, when the ‘phase-two’ trade talks would commence, and would they be completed prior to the November 2020 U.S. presidential election. Today, questions center on how widespread the outbreak has reached, if the virus may mutate into a deadlier form, when a vaccine may be developed, and when the outbreak will have subsided. None of these questions will be answered in the short-term, even as the outbreak will soon be classified as a global pandemic—with all the additional anxiety that will trigger.
In the meantime, global supply chains will be affected for weeks to come, potentially months. Many have been moved out of China, due to trade uncertainty and lower wages in other markets. With Chinese demand projected to drop in the months ahead, emerging markets and commodity exporters will likely suffer economically, as will leading trade partners such as Germany and Japan, enduring already anemic growth.
Whenever ‘phase-two’ U.S.-China trade talks begin, it is less likely Beijing will accept meaningful structural reforms to its system of industrial subsidies while its slowing economy remains adversely affected. It is increasingly unlikely China, in an economic slowdown, will even purchase $200 billion in U.S. goods as committed in the ‘phase one’ agreement just signed.
Global supply chains will be affected for weeks to come, potentially months.
New questions arise about the reliability and independence of the World Health Organization (WHO), which declares the outbreak “a global health emergency” then criticizes the U.S. and other countries for restricting travel to and from China? The WHO Director General is from Ethiopia, a very poor country in which China has invested over $12 billion under its Belt-Road Initiative, which the U.S. and other Western nations claim exploits debt in aid recipient countries to secure Beijing’s objectives. The WHO Assistant Director for Communicable and Non-Communicable Diseases is Dr. Ren Minghui, who worked nearly thirty years in the Chinese Ministry of Health and on international health cooperation prior to assuming this post in 2017. A WHO declaration of a global pandemic, which it has not yet done despite the virus outbreaks on every continent, would put even greater strain on China’s economy and drag down global economic markets.
Whether a global emergency or a pandemic, a vaccine that is normally manufactured in one location would likely need to be produced on a large scale at multiple locations. However, the country where the vaccine is developed will face strong domestic pressure to first vaccinate its own citizens, generating tremendous diplomatic blowback from China and every affected country.
Most perilous could be the notion that at some point the global economy returns to a state of normalcy. Though it is extremely unlikely, one scenario envisions in the aftermath of a domestic Chinese health catastrophe a severe domestic political or social reaction against General Secretary Xi Jinping’s leadership of the CCP, given the mistrust that has been sown amid a nationwide health crisis with devastating consequences for everyday Chinese citizens.
Global Market Implications of CoronavirusOur analysis suggests the main economic impact will be experienced in China, likely dampening global GDP growth. Click here to learn more.
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