China Is The Real Sick Man Of Asia; Its Financial Markets May Be Even More Dangerous Than Its Wildlife Markets

China Is The Real Sick Man Of Asia; Its Financial Markets May Be Even More Dangerous Than Its Wildlife Markets
     The title above comes from Walter Russell Mead’s February 3, 2020 Op-Ed in the Wall Street Journal.  Mr. Mead is a professor of foreign affairs, and humanities at Bard College, and a scholar at the Hudson Institute. For Mr. Mead’s full article, I refer you to the Feb. 3 edition of the WSJ.
     “The mighty Chinese juggernaut has been humbled this week,” Mr. Mead wrote, “apparently by a species-hoping bat virus. While Chinese authorities struggle to control the epidemic and restart their economy, a world that has grown accoustomed to contemplating China’s inexorable was reminded that nothing, not even Beijing’s power, can be taken for granted.”
     “We do not yet] know how dangerous the coronavirus will be,” Mr. Mead observes.  “At this point, the virus appears to be more contagious, but less deadly than the pathogens behind Ebola or SARS — though some experts say that SARS is as contagious as coronavirus.”
     “The likeliest economic consequence of the coronavirus epidemic, forecasters expect, will be a short and sharp fall in China’s economic growth in the first quarter of 2020, and recovering as the disease fades,” Mr. Mead wrote. “The most important long-term outcome would appear to be a strengthing of a trend for global companies to “de-Sinicize” their supply chains. Add the continuing public health worries to the threat of new trade wars, and supply chain diversification looks prudent.”
     “China’s financial markets are probably more dangerous in the long run, than its wildlife markets,” Mr. Mead asserts. “Given the accumulated costs of decades of state-driven lending, massive malfeasance by local officials in  cohoots with local banks, a towering property bubble, and vast industriial overcapacity, China is as ripe as a country can be for a massive economic correction,” Mr. Mead warns. “Even a small initial shock could lead to a massive bonfrire of the vanities, as all the false values, inflated expectations, and misallocated [overinflated] assets implode. If that comes, it is far from clear that China’s regulators and decision makers have the technical, or the political authority to minimize the damage — especially since that would involve enormous losses to the wealth of the politically connected.”
     “We cannot know when, or if a catastrophe of this scale will take place, but students of geopolitics and international affairs — not to mention business leaders and investors — need to bear in mind that China’s power, impressive as it is, remains brittle,” Mr. Mead notes. “A deadlier virus, or a financial-market contagion could transform China’s economic power and political outlook at any time.”
     “The consequences of a China economic meltdown would travel with the same sweeping inexorablility,” as a deadly wildlife virus. Mr. Mead wrote.
     A very thoughtful article by a very thoughtful and articulate man. But, Mr. Mead’s observations aren’t a new observation or concern. There has been a clarion call among some scholars, business leaders, hedge fund managers, etc., who have been predicting a China implosion for decades. One of these times, they may be right. It is hard to see that the present-day coronavirus will be the straw that breaks the camel’s back. Yes, China is going to be hurt in the immediate short-term economically from this Black Swan event. Already, major financial institutions and investment firms have lowered their forecasts for China’s GDP for 2020, from 6%-7% down to 5%-5.5% for the year. By most accounts, China needs economic growth of 6%-7% just to break even with respect to spending and keeping the populace satisfied. In the immediate short-term, expect China to unlease major economic stimulus, such as cutting interest rates, reduce taxes, and provide other incentives to stimularte growth.
     Another worrisome concern for China is that supply-chain diversification was already well underway before the outbreak of the coronavirus. Many major global conglomerates were in the process of moving substantial portions of their Chinese production facilites off the mainland and to Vietnam, Singapore, South Korea and elsewhere in southeast Asia. This trend could well accelerate now, compounding China’s economic and financial challenges. Beijing’s inabilty, or unwillingness to shutdown the open animal/fowl/fish markets, which have become ground zero for SARS, swine flu, coronavirus and so on, could be the impetus for businessess to locate their personel and facilities eleswhere in Asia, so as not to be present when the next coronavirus breaks out.
     It is indeed interesting times in China. And Beijing’s ‘strongman,’ President Xi, may be a ‘strawman’ by the time this virus runs its course –– giving POTUS Trump an even stronger hand in trade negotiations. RCP,


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