By Gwynne Dyer
China officially went back to work on Monday, after an extended two-week Lunar New Year holiday, while the authorities struggled to get the spread of the new coronavirus under control. But a lot of Chinese factories are still shut, and the spread of the ‘devil virus’ (as President Xi Jingping called it) is not under control.
This virus has already killed over 900 people, and it’s accelerating. The last few days have seen almost 100 deaths a day, and the death rate in Wuhan, where the disease originated, is now 4% of those infected.
Significantly, President Xi is no longer claiming that he is “personally commanding” the anti-virus fight. If this is going to be a complete disaster, somebody else should get the blame, and the man in charge of the national campaign against the virus is now vice-premier Sun Chunlun.
Aware that he has become the designated fall guy, Sun immediately visited Wuhan and declared that the city and country now face ‘wartime conditions’. But dramatic words won’t save him if the epidemic goes nationwide.
It probably will: China will never get back the three weeks that were wasted after the virus was first detected. Travel curbs and lockdowns may limit the spread of the virus beyond China (or maybe not), but even if the viral epidemic is largely contained within China the risk of financial infection is high. High enough, in fact, to qualify as a potential ‘black swan’.
A ‘black swan’ is an unforeseen event that has a huge impact on the normal course of events. The SARS epidemic in 2002-03 was a black swan: it knocked about two percentage points off China’s economic growth that year.
However, that epidemic did not cause a global recession, because back then China was only 4% of the global economy.
Now the Chinese economy is the world’s second-biggest. It takes up four times the space in the global economy that it occupied in 2002, so a 2% fall in Chinese economic growth now translates into at least a half-percent hit to the entire global economy. That would not be a big deal if the global economy was in good shape, but it isn’t.
Twelve years after the 2008 sub-prime financial crisis the global economy is still in the intensive care ward, and interest rates, except in the United States, are still at rock-bottom. That means the banks have no room to cut the cost of borrowing and stimulate demand if the economy starts to tank.
This applies in particular to China itself, where the banks have been forced by the government to finance huge amounts of unproductive investment as the regime continuously ‘primed the pump’ in order to ward off a recession.
By now China has a Potemkin economy where the official economic growth rate is 6% a year but the true number, as measured by electricity use or megatons of freight carried by the railways, is between 2% and 3%. Knock 2 percentage points off that and you have no growth at all – and a crisis of survival for the regime.
That would be the biggest black swan you ever saw. The official lies and incompetence that surrounded the Chernobyl disaster made the Soviet public ripe for regime change a few years later. Could the coronavirus have a similar effect? It’s not likely, but it is conceivable.
The immediate and short-term deaths from the Chernobyl melt-down amounted to sixty people. The Wuhan coronavirus has killed fifteen times as many Chinese citizens already.