Chinese investors in a Nanjing stock brokerage. Photo: AFP

China’s reform camp is nervous. Beijing employed the full power of the Chinese state to suppress the coronavirus epidemic – and to demonstrate to the Chinese people and the world that it would stop at nothing to prevent social unrest in its wake. After locking down 150 million Chinese and imposing compulsory quarantines and other siege measures, reformers wonder whether President Xi Jinping can put the genie back into the bottle. Key reforms promised as part of China’s provisional trade deal with the United States, including the opening of China’s financial sector to Wall Street firms, may be delayed or scuttled, some observers fear.

Beijing is scrambling to repair its bruised credibility. There is no doubt that the government reacted at least two weeks later than it could have to an epidemic already signaled on social media. The sad case of Dr Li Wenliang, who died of the virus after he tried to warn about the outbreak on WeChat, puts the regime under pressure. Dr Li was arrested after he warned on December 30 of an unusual outbreak of pneumonia in Wuhan. By that time Western consulting firms monitoring social media and other sources had concluded that an epidemic was underway. 

The government’s slow response to the crisis is being blamed on bureaucratic lethargy by experts who advise the State Council. Local officials were afraid to pass bad news up the chain of command, and lost a critical two weeks in response time. 

If China’s stock markets are any indicator, the government’s efforts to restore confidence are succeeding. The Shenzhen Component Index has almost regained its early January peak after a short sharp drop. That follows a 50% gain from early January 2019 to its January 11, 2020 high.

The Shanghai Stock Exchange’s new Science and Technology Board (STAR) is still generating IPOs with spectacular price appreciation. Of the top 10 companies on the STAR board by turnover, nine are trading above their IPO price, and six have doubled or more. Several IPOs were well received during the past week.

It’s hard to be sure, but the continued buoyancy of China’s nascent answer to NASDAQ appears to reflect retail sentiment. China’s stock market is dominated by individual investors, unlike institution-dominated Western markets. There is some speculation that in a crunch, the Chinese authorities might repeat their direct intervention into the stock market of 2015, but there’s no evidence of government purchases yet.

The STAR board is a small but important parameter of Chinese sentiment. Private entrepreneurs will determine whether China can shift its growth model up the value-added chain and turn technological prowess into economic growth. Enthusiasm for the listings of new high-tech companies would raise the animal spirits of the Chinese private sector and encourage new capital commitments.

The key parameter for China’s economy remains the rate of new infection. According to China’s National Health Council (as reported by JP Morgan), the number of new confirmed and suspect cases is falling and the total is leveling off.

There’s no reason to take China’s numbers at face value, to be sure. At the epidemic’s epicenter in Wuhan, medical personnel ran out of test kits two weeks ago and it is not clear to what extent they have been resupplied. Ferocious exhortations by Chinese officials to citizens not to evade quarantine suggest that many are dodging the requirement, especially in Wuhan, where the concentration of cases has left many quarantined patients without adequate medical care. And the government may simply misreport numbers in order to suppress panic. 

Another reason that reporting of new cases may be an underestimate is that the new coronavirus strain in most cases has manageable symptoms. Perhaps 100,000 Chinese die of influenza each year, and if the death rate continues to taper off, the death toll may be no worse than a bad flu season.

We can however trust the data from most other countries. Both the total number of new cases outside of China as well as the number of new cases on February 10 and 11 are low, according to worldometers.info.

The long latency period of the virus makes it hard to model the infection rate. There may be thousands of supercarriers loose outside of China propagating an infection that is yet to become apparent. But the fragmentary data available suggest that the stock market’s optimism is not entirely misplaced.

Analysts are struggling to gauge how deep the resulting cuts might be in China’s economic output. Because economic activity in China shuts down to a great extent during the just-concluded Lunar New Year holiday, high-frequency measures such as port activity and freight car loadings provide little information.

Given the challenge to the party’s credibility, analysts expect a big economic stimulus package. If the European Central Bank’s former president Mario Draghi was willing to “use a bazooka” to restart growth, China’s Communist Party will use the economic equivalent of nuclear weapons if it has to. But there are limits to the efficiency of central bank largesse and government spending. China built world-beating infrastructure which contributed to economic efficiency, but the marginal impact of new infrastructure spending on productivity will be much lower than in the past. The home market is saturated with unsold apartments, and the government doesn’t want to add to the supply. 

The sort of government spending that availed China after the 2008 world financial crisis and the 2015 yuan devaluation will be much less effective today. Growth depends increasingly on China’s homegrown high-tech sector and the private entrepreneurs who drive it. If the Chinese Communist Party executes a turn to the left after its grand demonstration of state power, China’s economic prospects will deteriorate. If it gains the confidence of the private sector, though, the economic impact of the coronavirus will be temporary and China will meet its growth target of around 6% for 2020. 

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