The scenarios for how the pandemic is going to change the world and how China fits into it are diverging sharply, and you can take your pick. China is going to emerge the clear winner, China is going to be in dire straits, and everything in between. US strengthened, China on top, no one single superpower any more. What is clear is that this crisis challenges the very foundations of the world order and that both China and the US have missed opportunities in the midst of it. If the US had ramped up production of ventilator masks as soon as it was known that this was going to be a global pandemic, which was early February at the latest, it could have been the world’s savior. Trump’s appalling irresponsibility squashed that. If China had been more transparent earlier, less selective in supply shipment destinations and more stringent in oversight of fake production – all would have helped in terms of the gathering international vibe. Right now, in terms of the Great Global Game, it’s probably a balance of own-goals with no winner to be declared. To restate a point from a few weeks ago, this is the first international crisis since WWII when the US did not step up to lead the response. That is significant. If the US does emerge as the winner, it will largely by default.
All that aside, how does the economic impact play out? It’s dire for everyone, of course. But China has several problems that make its situation more difficult. Lack of transparency, the hollowing of both exports and domestic demand, questions over whether its level of indebtedness allows for the kind of stimulus packages that the rest of the world is implementing, the unprecedented wave of global negativity and pork-related inflation. But then China has its strict central controls which has allowed for a sharply flattened infection curve and a resumption of business in cities like Shanghai and Shenzhen to an extent not seen anywhere else.
Which economy is suffering more? Or to sort of put it another way, where will be the US dollar this time next year compared to other currencies? There are people who say weaker. Our view would be stronger, flight to safety being the core issue. One smart guy we know said that as the US-China confrontation worsens, China for sure is going to sell off much of its US treasury bill holdings. Another smart guy said: they can’t do it to any meaningful extent because there is nowhere else to put that amount of the money. We tend to the view of the latter.
We could list out all the related issues that are ricocheting around the world, but it’s not necessary to do so. There is just this sense of a tsunami of change bearing down, at the back of which is that question of what the hell happened here?
Try and have a good weekend.