China is losing its battle against the 2019-nCoV – we must brace for a global pandemic. China is nearing the point where social and economic costs of trying to stamp out the coronavirus by totalitarian methods are greater than the trauma of letting it run. telegraph.co.uk/business/2020/…
Richard Meade at Lloyd’s List: “This health emergency has paralysed ports, it has disrupted schedules across all sectors, led to serious challenges for crew management, and prompted a round of container services to be withdrawn, with lines now forecasting issues well into the
second quarter of the year. It has thrown the global gas market into turmoil”. He told me Lloyd’s is getting reports of ships floating round Asia unable to dock at port after port, and running out of food.
If Xi Jinping sticks to his “total war” against the coronavirus, his government cannot at the same time launch the meaningful fiscal stimulus that markets are already anticipating. The spending channels are blocked by the health controls.
All it can do is to keep injecting liquidity through central bank reverse repos, keep ordering state lenders to extend debt forbearance, and further wind down Liu He’s campaign against the shadow banking industry – and kiss goodbye to financial discipline yet again.
This at least avoids a cascade of defaults and a Minsky Moment for the Chinese debt bubble. But it does not avert a protracted economic slowdown. Caixin reports that services alone are losing $140bn a week and smaller firms will hit a wall within a month.
My working assumption is that China will lose its battle against the 2019-nCoV. At some point the Communist Party will conclude that it is less disruptive to manage the disease, and shift to total economic mobilisation instead – as the lesser of evils.
If this is correct we must therefore all brace for a global pandemic. It may already be too late to stop it. The task will then be to tame the virus and hope to buy enough time for warmer weather to slow the spread. It is not the end of the world.
What does this mean for equities, bonds, and global recession risk? I defer to Fed chairman Jay Powell. It is hard enough to understand China’s economy and its global ramifications at the best of times. “The outbreak of the coronavirus has made that exponentially more difficult”.
