A Corona(virus) Gets Its Lime

The death toll from the coronavirus keeps rising in China, and the World Health Organization is considering an emergency declaration, but don’t worry – Donald Trump is all over it.

“I spoke to President Xi, we’re working very closely with China”, the US president said Wednesday, at the White House, around 24 hours after presenting a purported “solution” to the Israeli- Palestinian conflict, and in between battling Democrats for control of the impeachment narrative. He also signed the USMCA on Wednesday.

I mention all of that together just to underscore the sheer scope of everything Trump has on his plate. It really is mind-boggling.

---

In any event, there’s just one problem with Trump’s comment about talking with Xi – namely, it’s a lie.

According to a person Bloomberg describes as “familiar with the communications”, the two leaders haven’t spoken since December.

Oh well. At this point, it’s entirely possible Trump no longer even knows when he’s lying and when he’s not. And the public no longer cares.

But the virus scare is getting… well, it’s getting scarier. And not just from a public health perspective. It now looks as though it could imperil China’s ability to meet Beijing’s commitments under the trade deal.

“It obviously is going to have some ramifications economy-wide, which we hope will not inhibit the purchase goal that we have for this year”, Agriculture Secretary Sonny Perdue said Wednesday, on a conference call from Rome. “We’ll have to look ahead and see. But the honest answer is we just don’t know yet. But we’re hoping for a very quick conclusion”.

We all are, Sonny; in part because we’re worried about the ramifications for the global economy, but mainly because scores of people are themselves coming to a “quick conclusion”, where that means they’re getting sick and then dying in a hurry.

Here’s what’s been done on the containment front:

(JPMorgan)

On the economic front, here’s a reminder of what China has promised to purchase under the “Phase One” deal:

Moody’s was out Wednesday afternoon with some fresh commentary on the situation. Their baseline for Chinese growth in 2020 is 5.8%, and they aren’t ready to slash that quite yet. But, the ratings agency notes the obvious, which is that there’s “still a high level of uncertainty around the length and intensity of the outbreak”. Their forecasts will be reviewed if necessary.

They go on to note that in and around the SARS outbreak in 2003, Chinese growth and financial assets “weakened significantly”, but only briefly. The problem is that in addition to ambiguities around the virus itself (i.e., how comparable is it?), “the Chinese economy has changed appreciably since 2003”. Have a look:

(Moody’s)

Moody’s cautions that “over the past 16 years, the contribution of consumption to China’s economic growth has risen significantly [so] the impact of the coronavirus through the consumption channel may well be higher now”.

Recall that Chinese retail sales bounced strongly in November and held firm in December, stoking optimism that the worst of the slowdown was behind us.

“If there is indeed a sharp slowdown in consumption, we would expect macroeconomic policy to be eased in response”, Moody’s goes on to say, before noting that the shift to online sales could mitigate the problem – you can’t catch the Wuhan virus from a computer. Or at least not that anybody is aware of. When it goes digital as well as airborne, then we’re all doomed.

The policy response bit is obviously key. China has embarked on piecemeal easing over the past six months, cutting OMO rates and the revamped LPR, as well as RRR in a bid to deliver just the “right” amount of liquidity “drip” to bolster growth, but not enough to foster bubbles.

Nomura’s chief China economist Ting Lu suggests the new virus could hit the Chinese economy harder than SARS and expects monetary policy easing and stimulus interventions “to be unveiled in coming days”.

“We expect Beijing to introduce a raft of measures to provide liquidity and credit support to the economy, especially those business owners severely hit by the pandemic”, he says, adding that “RRR cuts, rate cuts, various lending facilities, and open market operations all are possible options” as are “targeted credit-easing measures to help corporates and households that are likely to suffer more from the virus outbreak”.

To be sure, China has room to cut.

It’s hard to perceive given the scale, but MLF and the 7-day reverse repo rate were cut in November. There’s considerable scope for more easing across all policy and pseudo-policy rates.

And yet, as alluded to above, domestic demand was still subdued even as things were improving at the margins late last year, so the virus hit could effectively snuff out the nascent inflection in China’s data. “It seems unlikely that these measures would turn the economy around, as the virus outbreak may further weaken domestic demand and thus render the upcoming policy easing less effective”, Nomura says.

The really disconcerting thing about all of this is that the deleterious economic effects of the virus sound a lot like those associated with the trade war. For example, consider one last passage from Moody’s:

The negative spillover will also affect countries, sectors and companies that either derive revenue from or produce in China. China has an even higher share in world growth and is even more closely connected with the rest of the world than during the SARS episode… The revenue of companies and sectors that rely on Chinese demand will be affected as that demand dampens. The outbreak will also potentially have a disruptive effect on global supply chains. Global companies operating in the affected area may face output losses as a result of the evacuation of workers. Companies operating outside China that have a strong dependence on the upstream output produced from the affected area will also be under pressure because of possible supply chain disruptions resulting from temporary production delays.

Sound familiar? (That’s a rhetorical question.)

The read-through is that this has the potential to put the brakes on the recovery engendered by the thawing of tensions between Washington and Beijing. I talked about this on Tuesday in “Coronavirus May Delay Recovery In South Korea’s Export Machine“.

Finally, in a testament to [fill in the blank], 30-year real yields are approaching the lows since 2012…

---