In markets, as in society, state power will determine virus resilience

There is much to criticise in how the Chinese government runs its highly controlled society and financial markets. In the early stages of the Covid-19 coronavirus outbreak, state authorities' repressive instincts led them to deny the seriousness of the threat, making it worse.

But since the epidemic accelerated in January, that mis-step has been left behind. 

It is too early to cheer or become complacent. But, according to the reported figures, China has managed what seemed impossible. It has slowed the rate of new infections from 2,000 to 3,000 a day in early February to a few hundred. The most recent figure of 119 new cases on Wednesday was the best yet. This is also just about the only good news so far in the coronavirus epidemic.

This success has only been possible by throwing the full power of the world’s mightiest and most intrusive government at the problem. Shutting down vast cities, recruiting armies of volunteers to test and quarantine people, building new hospitals in a matter of days.

In the coming weeks, China will show the world whether it is possible to slow the infection rate even further, and perhaps stop it. It will only manage this by sustaining its pressure and vigilance. There is no possibility of relaxation.

The Chinese government has tried just as assiduously to keep its economy and capital markets functioning, even while having to forcibly close swathes of businesses.

The ease and speed with which China reaches for the credit controls at a moment of crisis — whether by providing special central bank loans to banks in Hubei, or loans to small and medium-sized enterprises, or easing monetary policy — is remarkable. Many would see in this a sign of the Chinese economy’s dangerous financialisation and debt dependency.

But it is certainly true that financial markets, and the bond market in particular, are far higher on the policy agenda, better understood by the government, and more responsive to state control, than they are in Western countries. By early February, China had even introduced a special strand of Novel Coronavirus Prevention Bonds: companies and banks could get fast track registration for bonds whose proceeds were to be used at least in part for activities contributing to fighting the infection.

Partly as a result of these measures, the Chinese capital markets have been less badly affected than some others by the outbreak.

Chinese bond issuance in February was $41bn, according to GlobalCapital analysis of Dealogic data. That is less than 1% down on the average for the previous three Februaries.

The US bond market, which ignored the virus for a long time, had issuance 12% up on its average, but issuance was down 9% in Europe and 20% in the rest of the world.

Remarkably, there were even 43 Chinese equity capital markets deals in February, totalling $5.9bn. This volume was 38% down on the average of the last three Februaries. But the number of deals was actually higher than in either February 2018 or 2019.

The CSI 300 share index plummeted by 11% between January 22 and February 3, but has since rebounded by 12%, and is nearly back where it started the year.

Meanwhile, the S&P 500, which hit a record high as recently as February 19, has since fallen 11%.

If China can hold on to and build on its success so far in fighting the virus, the front line of the outbreak moves to — everywhere else.

The chance that any country can avoid infection altogether is slimming. Unfortunately for the world economy, clamping down on travel will be a vital part of slowing the rate of spread.

But ultimately, most countries are likely to have to fight a serious outbreak, as South Korea, Iran and Italy are already having to do.

Fortunately, the next places on the list, by numbers of infections, all have high tech healthcare systems: Japan, France, Germany, Spain, Singapore, the US and Hong Kong SAR.

But what happens in South Korea and Italy will show whether democracies, without the same level of power as China wields over its citizens and organisations, can control the virus. Already there are doubts about whether the US, with its fragmented healthcare sector, is reporting the spread of cases accurately. Some suspect the true figure could be three times higher than the reported 106.

Iran is a different matter: an emerging market, long isolated and impoverished by sanctions, with a government tinged with corruption and incompetence. If 23 members of parliament have been infected, as was reported on Tuesday, the outbreak is likely to be far more widespread than the officially confirmed 2,300 cases.

The greatest danger is the virus spreading to the poorest countries and those with the most overcrowded cities and weakest health systems, such as India and much of Africa.

Some argue that the social costs of trying to contain the disease absolutely are too high — that it would beggar millions when only a minority would die of the sickness. It would be better to use precautions and fight the disease, but accept that it is going to become common, they claim.

Thinking on this issue will evolve. It may be that society's hand is forced. 

But two things are clear. One: no government has yet proposed such a policy. Two: it would entail enormous human, and therefore economic, cost.

Media on Wednesday reported that the global mortality rate was 3.4%. This was based on a remark by Tedros Adhanom Ghebreyesus, head of the World Health Organisation, that 3.4% of people so far reported to have had the illness have died. But put another way, only 50,700 of the 93,455 victims so far have recovered. That means 42,000 still have the disease, and have not died or recovered yet. Many have only recently been infected: 17,900 in the past two weeks.

The percentage of those who have died, out of those where the disease has run its course to death or recovery, is 5.9%.

That compares to a case fatality rate for influenza A — the form which can cause pandemics — of less than 1%, according to the Centres for Disease Control and Prevention.

It is perfectly clear that only a total assault on the infection by all central and local government authorities can have any hope of containing it, once infection begins in a country. Poor and weak countries will need massive assistance from richer ones.

The financial markets have a limited role to play in defeating the virus. But at the margins, they can help.

Keeping the economy and markets alive — as China has done, using more than 30 policy interventions by the central bank, government bodies and regulators — will not cure infections. But it does help society keep functioning, allowing it to carry on fighting the disease and reducing the general sense of alarm and panic.

The Federal Reserve’s 50bp interest rate cut on Tuesday, in response to the threat of the Covid-19 coronavirus outbreak, is surprising and unorthodox. Market participants are already criticising the Fed from many angles. Its swift, unscheduled action makes it look more than ever like the central bank is under the thumb of President Donald Trump. It is also clear, as GlobalCapital argues here, that cheap debt alone cannot save the economy from a recession if it is forced to shut down to control the outbreak.

But the Fed's move is nevertheless welcome and laudable. Only concerted action by all organs of the state — which includes the central bank — can defeat the virus and its economic impact.

The analogy of a war is not an exaggeration. There are combatants: the health services and those in charge of controlling travel and setting rules for society. But all members of society have contributions to make.

Markets need to keep providing financing, and not spiral into self-defeating fear. The best way to ensure they do so is for state bodies — central banks and governments themselves — to show the markets they are on the case, providing support, stimulus, encouragement and direction.

At a deeper level, the only thing that can really cure markets' malaise is news that humanity is winning against the disease. For the moment, China offers some hope. Everywhere else, the government is on trial.