China’s massive effort to try to contain the coronavirus definitely is having an effect on their economy, but now that the incident is winding down, they are starting to heal already.
Through all the panicking that is going on in the world about the potential spread of the coronavirus, we’re somehow not noticing that things are wrapping up with this in the country where it all started and where the great majority of the world’s cases of infection by this virus has occurred.
The number of new cases in China has been dwindling for a while now, and we’re now at the point where the spread of the coronavirus in China is only increasing at a small fraction of the rate it did back when this number was getting larger every day and we weren’t sure how big it might get.
From an economic perspective, the one that Wall St. Is focused on, or at least are supposed to be, the effect of the virus itself has been so minor as not to even be materially meaningful, although the massive effort by authorities to try to contain it is a different story.
This hasn’t even been that much about demand than it has about supply, at least as far as the economic effects of this on other countries are concerned. We don’t sell all that much to China in the first place, and the effects of this particular issue is more of a domestic problem than anything, although not all that big of one.
It is not that the whole country locked themselves in their basements for a month, but even if they did, they still will be consuming things like food and other necessities. This only affected a part of the country, and didn’t affect it in such a profound way that involved them stopping consuming.
Of the consumption that was temporarily lost, a good part of this will be made up for once spending gets back up to normal levels, and all you have to do in order to produce this is get rid of their being roped off from what they want to buy. We’re not there quite yet, but this is just around the corner.
This will have a material effect on Chinese GDP, but only a temporary one. This is all projected to bring down global GDP in 2020 by a tenth of a percentage point, which really isn’t a meaningful number. The Chinese will take the brunt of this, but with their all-powerful government there to lend a hand, things won’t be all that bad even at ground zero.
When we see a number like that, we don’t want to think that U.S. GDP will be reduced by that much, as this drop-off is not spread around proportionately. It will be the drop in Chinese GDP that makes up the lion’s share of this. Since we only use tenths of a percentage, and the impact in the U.S. is projected to be less than this, this means that this loss may not even show up in the numbers we look at due to it being too small to register.
There are some who believe that we can’t even predict anything yet because we just don’t know how big things will get, but we do have a very good idea of this by just looking at how the numbers have trended. In China, things peaked almost 2 weeks ago, after they adjusted their numbers which took a few days, and since then, this has been declining more each day.
While the final numbers are not in yet, we can look at the situation and predict with a good level of confidence that this won’t go over 100,000 in China, from the 80,000 it is at today. The number of infections do not even matter from our economic perspective though, as all we’re concerned about is people returning to their normal lives, and the chances that this virus will make such a comeback that they will be back in lockdown mode are too slim to even worry about, unless you just enjoy doing so.
Wishing to be afraid is one of the world’s biggest pastimes these days though, and it apparently is a lot more fun to just close your mind to what is going on if that helps maintain your fear. We don’t want to be joining the masses here and therefore want to take a more practical view of the situation, especially since we may be basing financial decisions on all this.
Aside from that, as long as so many people don’t die from this to reduce the Chinese workforce significantly, this won’t even matter from an economic perspective. We also would not want too many people sick at home with this either, but given that only about 1 in 360,000 people in China either have it or have died from it, seeing this double and getting to 2 just isn’t going to produce a big enough number to matter, as much of a stretch as the active cases doubling when they are going down markedly each day would be.
This is a very good way to understand how truly meaningless this affliction has been in itself to the economy, although when you cordon off your country in the way that China has, this will indeed have some real effects. This is the part that we really need to be paying attention to when we look to get an idea of what the damage will be, and we not only are not heading downward, we are well on our way back.
China’s Response to these Threats is Remarkably Different Than Elsewhere
There is a big difference between how China handles these things and how other countries would do it, because in China, the people in charge can just wave their mighty hands and make virtually anything they want happen, including shutting down a lot of the country.
This could never happen in the United States, even if we had the 80,000 cases that the Chinese did, instead of being under 100. The U.S. hasn’t even had a widespread quarantine since the Spanish flu of 1918, and that involved 28% of the population getting infected, which today would be the equivalent of 92 million people and 3.8 million deaths in the U.S. alone. That’s a real pandemic.
Even a tragedy this epic and widespread was not met with anywhere near the response that China has afforded this new virus, and the most that was done was to quarantine some of those affected. The effort to control this by way of public policy during this time was in stark contrast to China’s, for instance with Portland, Oregon’s attempt to make masks mandatory being struck down by the courts for being unconstitutional.
If they didn’t lock things down Chinese style back then, they surely won’t be doing so now, nor will they do much of this in other countries either. China was able to pull this off because they have a totalitarian government, and if you don’t have one, you can’t do that much to limit mobility domestically.
This isn’t to say that we won’t see any residual economic effects from other countries panicking over this, but it just won’t be anything close to what we saw from taking the world’s most populous country and the second largest economy and putting it in quarantine. The economic effect on these other countries will be so small that that does not even register.
There may be visions of everyone wandering the streets like zombies and bodies stacked up on every street corner like during the Black Plague, and while that would produce some pretty serious economic effects, expecting anything remotely close to this is just outrageous.
We have already seen the progression of this disease in the area where the concentration of this virus was spectacularly higher than anywhere else. 93% of all of the deaths from the coronavirus have come from Hubei Province, with only 7% coming from all of the rest of China and all the other countries in the world combined.
Given that the issue has reversed in Hubei Province, this gives us some good data to work with, including things such as how bad it got, how many people died, and how long it took to turn around. We know that the infection was on a much bigger scale in Hubei, so it would make sense to compare the experience with the other provinces to get an idea of what we may expect elsewhere, and the numbers are all much lower elsewhere.
Once again though, once you leave China, you enter the part of the world where this just won’t have a meaningful economic impact. It sure will in China though, but they are already showing real signs of getting back to normal.
What makes China so significant economically is their very high prominence in the supply chain, which means that we not only lose the end goods they produce for a time, a lot of other goods aren’t made in other countries because they are deprived of inputs.
Many are critical of how much we rely on China, but we don’t do so by accident, as this choice has been based upon merit and economic efficiency. The U.S. government will be spending a lot of money helping their businesses source more non-Chinese inputs, but it makes no sense to do very much of this if there are no issues with China, like they aren’t when there isn’t a virus scare going around.
Others think that the sheer size of China’s economy compared to the SARS days will have them taking considerably longer to recover, but that doesn’t make a lot of sense as this is just a logistics problem that is easily remedied, rather than rebuilding an economy that has suffered organic damage.
Looking for Clues at Ground Zero
People are already peeking behind the curtain to see how things are going over in China, including Gavekal Research, who looked at three measures to see if the worst is indeed over and things are at least starting to pick back up again.
Gavekal looked at rates of square footage sold, traffic congestion, and coal use to look to get a good peek at how things may be progressing.
The square footage of property sales dropped off of the table once the quarantine really got underway, but has moved up significantly over the past 2 weeks. We’re still a long way off, but this also happens to be an annual pattern this time of year and we therefore can’t really blame the decline on the coronavirus very much as much of this may be naturally caused.
Gavekal missed this pattern though, even though all you had to do is look to the left on their graph to see similar lows in February 2018 and February 2019. We are looking for a hockey stick here, not an annual yo-yo pattern.
Even so, this year’s yo-yo journey has already bottomed and we are moving back up as normal. We can’t say how much of a role the coronavirus response played in this, but things are proceeding according to plan regardless.
Gavekal also shows us charts of air pollution levels and coal consumption and we see the same thing with these other two, including the annual big dip in February, like clockwork. For whatever reason, the Chinese buy less property, generate less pollution, and burn less coal in February. The last two definitely go together.
This could all be just a coincidence, or a reporting anomaly, but if we are relying on the February drops in these things this year, we do have to account for the fact that this has happened in at least the two previous years, with no virus in sight each time.
We nevertheless do feel that this data does have some real value, because even if this is a regular thing, the regular thing that happens after the move bottoms is well underway. We know that things are improving regardless of what is causing this to happen, and that’s the only thing that matters.
China has shown plenty of eagerness to recover from the economic impact of this and get back on track, and there really isn’t a single good reason to believe that they will not achieve this goal in a timely way. They have bigger weapons than democracies do, and there is no debate or wringing of hands if a rate cut is desired, they just do it to whatever degree they wish and answer to no one, including the people.
When this broke, when it seemed that few understood the extent of the damage that will result from this, we told you that we need to be paying attention to this more. We never imagined it would blow up into something like this though, where we have multiplied the actual risk by the limits of our imaginations.
We see a number of other countries that are currently in an earlier stage than China, and we are seeing the same things play out, albeit on a smaller scale. Based upon what has happened in China, this should peak within a couple of weeks and won’t add up to anything like we did see in China.
President Trump called all of this a “hoax,” and while that might not be the best word to use since the numbers are real, and hoaxes are not real, the story the media is telling is certainly a gross exaggeration of the actual risk involved.
Whatever the economic risk was, it has peaked, and we can define it reasonably well already. It is coming at a reasonably small amount under the circumstances, and nothing like the stock market perceived it, dropping in lock step with Chinese air pollution levels.
Thinking that companies are worth 12% less than they were to start the month is where the absurdity emerges from the other end. This is one case where we can actually use book value for something useful, where the effect of this is only a fraction of a percentage. The same thing happens if we look at this as the value of future revenue streams like we do with bonds, and shaving off a bit from a quarter just doesn’t mean much, and certainly not 12%.
We do have a little hook on the end of the market courtesy of Friday’s late rally, like property, coal, and air pollution do in China now have as well, so perhaps we’ll take their lead soon and extricate ourselves out of this hole we have let our fear dig for us.
Once we do bounce, this is going to present an opportunity to the upside that is unique, as we don’t often sell off by an extra 10% out of sheer fear alone. We might be at this point right now. Stay tuned.