Personally, I think the glacial SARS episode of 2003 tells us little about the fast-spreading Wuhan virus. This is more akin to the Spanish flu pandemic of 1918. It appears to be tracking the 1918 death rate at about 2.3 per cent (20 times normal winter flu) to the extent that we can believe any figures, but with a difference. Spanish flu felled the young: this virus carries away the old. There is no global economic safety margin. Both the US Federal Reserve and the European Central Bank have already relaunched quantitative easing, a bizarre thing to do if the US economy is really doing as well as Trump claims.
The scale of disruption in China is already staggering. Hyundai, number five in global car sales, has been forced to close all its factories at home in Korea for lack of key components. Volkswagen, Toyota, General Motors and Tesla have all downed tools at their Chinese plants, as has Apple’s iPhone supplier Foxconn.
Crude prices have dropped 20 per cent since early January, that long-ago moment when eight Wuhan doctors were already trying to alert the world to the virus, only to be arrested for “spreading rumours”.
This is the biggest shock to oil markets since the Lehman crisis. Chinese demand has fallen by 3m barrels a day, twice the UK’s North Sea oil output. Opec is having to talk about yet further output cuts.
The channel of financial contagion runs from the epidemic through the oil price to a “bear market rout” in the broader energy sector, and from there to overstretched US junk bonds.
“High yield is where the rubber hits the road,” says Edward Harrison from Credit Writedowns. The coronavirus is the sort of “black swan” catalyst that the US Treasury frets about. Its latest stability report said corporate bonds are an accident waiting for such a trigger. The number of investment-grade securities rated BBB or lower has risen fivefold since 2008, many perched just above junk. If fear takes hold there is likely to be a cascade of downgrades, setting off a fire sale.
Commodity markets have taken it on the chin because they are instant barometers of demand. Equity markets are instead shrugging off the Wuhan virus as media noise, betting that China’s factories will reopen on February 14 or thereabouts as Beijing brings the epidemic under control.
This is a brave assumption and I can only marvel at analysts suggesting that the infection rate may be tailing off based on official data. Are they aware of the Kafkaesque accounts of reality in Wuhan, Huanggang, and soon no doubt the 35 million-strong megalopolis of Chongqing, where Britain has just closed its consulate?
Are they reading dispatches by Caixin and others revealing a desperate shortage of testing kits and tales of the walking afflicted (transport has been stopped) queuing for hours at hospitals, only to be turned away and sent home to die undiagnosed. These glimpses of truth are about to vanish. The propaganda police have ordered those within their direct reach to conduct an “editorial review”.
The coronavirus numbers are fiction. Far more have died than 490. A Lancet study last week by the University of Hong Kong estimated that the Chinese authorities have understated the epidemic tenfold. It calculated even then that the true figure for Wuhan cases was likely to be 76,000, and that Chongqing and Changsha are already riddled with the disease. “Independent self-sustaining outbreaks in major cities globally may become inevitable,” it said.
Views differ but it is striking how many global experts say it may already be too late to stop the spread. “It’s very, very transmissible, and it almost certainly is going to be a pandemic,” said Anthony Fauci, head of the US National Institute of Allergy and Infectious Disease.
It is the same warning from an “increasingly alarmed” Peter Piot at London’s School of Hygiene and Tropical Medicine. The danger is that it will become endemic and circulate everywhere like flu, a manageable headwind for rich countries but certain havoc for Africa or South Asia.
There is a contradiction in the market’s nonchalance. Yes, it is possible China will catch enough of those infected before they can spread it further. Such a hi-tech totalitarian response has never been tried before.
But the more thoroughly China enforces this, the greater the global economic shock. How can industrial plants really be reopened next week? Yet if it takes another month, it becomes progressively harder to contain the international damage.
We are in treacherous waters. The People’s Bank can no longer ignite instant growth. Debt saturation and weak credit demand have furred up the monetary transmission channels. Extreme rate cuts and “QE with Chinese characteristics” would risk setting off a yuan slide and a repeat of the 2015 currency crisis.
For now global markets remain in Pavlovian mode. There will always be more Chinese stimulus. Close China-watchers – and many scientists – suspect that this latest flurry of optimism is just a lull before the thunderstorm.