What Can We Learn From China’s Coronavirus Economic Recovery?

I’m no expert in physics, but according to some guy named … checking Wikipedia … some guy named Albert Einstein, space and time are basically versions of each other.

Is that wrong? … checking Wikipedia … you know, I don’t know. Space and time might be versions of each other. That doesn’t sound totally incorrect.

Again, I’m no expert in physics. I’m not a physician.

But I do know that if we want to get a sense of what our post-coronavirus future in the United States might look like, we can look at what is happening right now in another location: China.

Scientifically, that’s how spacetime works.

So let’s look at what’s going on right now in China, where the coronavirus first broke out months ago.

Can We Trust China’s Coronavirus Data?

If we’re to look at China, the question arises: Can we trust any of the numbers coming out of the country?

Yes, and no.

Truly, I’m not interested in China’s coronavirus data: The numbers of reported cases, deaths, etc.

I doubt that information is reliable anyway, and I don’t know how applicable it is to the U.S., since the two countries have had significantly different public health responses to the virus. South China Morning Post CEO Gary Liu talks about how China has handled the coronavirus on a Mar. 25 TED talk.

I trust the overall, big-picture coronavirus information coming out of China now: I believe, perhaps naïvely, that the spread of the virus in China has drastically slowed. (Of course, I might be wrong.)

But I don’t trust the granular coronavirus data, especially the numbers that we were getting months ago.

The economic data, however, is different. While the Chinese government likely has the power to conceal the true depths of the country’s coronavirus crisis, it can’t hide the business it conducts with the rest of the world. And I imagine it wouldn’t want to.

For years, we’ve looked at economic data from China with the strong assumption of accuracy. I don’t know why we wouldn’t be able to do the same now.

And it’s the economic data I’m interested in: I want to know how China is economically recovering from the Coronavirus — because, spacetime savant that I am, I want to know what might — might — be in store for our economy once we get the coronavirus under control.

What Is the Shape of China’s Economic Recovery?

On the Mar. 27 episode of The Journal podcast, Lingling Wei and Patrick Barta of The Wall Street Journal discuss China’s slow post-coronavirus economic recovery.

Because the coronavirus crisis (unlike the financial crisis of 2008) wasn’t brought on by an economic catalyst, there is widespread hope in the U.S. that we will enjoy a swift, V-shaped recovery once the virus is under control.

I take the 20% move in the stock market on Mar. 24-26 as a manifest sign of our optimism.

But there hasn’t been any V-shaped economic recovery in China.

Rather, we’ve seen something that looks like the dreaded “L.” Maybe China’s recovery will eventually take the shape of a “U,” but right now we’re looking at what might be the macroscale worst-case scenario.

And that’s especially alarming because China has taken significant steps to prop up the economy. Per Wei:

You also saw the government ordering big state conglomerates … to slash rents for their tenants. … State banks are being called upon to offer very low interest-rate loans to companies that are struggling with cash flows. … Some of them have cut salaries and other forms of compensation for their employees, but they have been told definitely not to do any layoffs. Instead, they actually have been told to hire more.

In China, most of the factories have reopened, and people are returning to work.

Even so, the recovery in China has been slow.

Why Has China’s Economic Recovery Been Slow?

The big reason China has recovered slowly is its interconnectedness with the rest of the world. Even though China is ready to get back to work, there is limited demand for the country’s products because so many other nations are sheltering in place.

That which has helped make China a world power — globalization — has now hindered its ability to bounce back.

As it relates to the coronavirus, globalization is likely to screw over the world twice. First, in the transmission of the virus. Second, in the reliance — perhaps overreliance — countries have upon each other in the worldwide economy.

It’s easy to recall Nassim Nicholas Taleb’s prophetic analysis of globalization in The Black Swan.

As we travel more on this planet, epidemics will be more acute — we will have a germ population dominated by a few numbers, and the successful killer will spread vastly more effectively. … I am not saying that we need to stop globalization and prevent travel. We just need to be aware of the side effects, the tradeoffs — and few people are. I see the risks of a very strange acute virus spreading throughout the planet. (317)

Although China missed out on the first round of globalization-based screwing (because the outbreak started there), it looks to be leading the world right now in second-phase pain — a recession brought about by a highly networked and correlated global economy.

Again, Taleb saw that such an outcome was possible, maybe probable, when looking at globalization.

It creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. … Globalization might give the appearance of efficiency, but the operating leverage and the degrees of interaction between parts will cause small cracks in one spot to percolate through the entire system. (313, 317)

Essentially, China is recovering slowly because it is just one part of an integrated whole still dealing with a public health crisis — a crisis that seems likely to last months on the global scale.

Additionally, it’s not as if China’s workforce is operating at peak capacity. Not all workers have returned to work, and China is yet to lift significant workplace restrictions for fear the virus might break out again.

Finally, consumers are reticent. Instead of spending their money as they once did, they are now looking to cut back on expenses and save — just in case the recession turns into a full-blown depression, or just in case the coronavirus returns, or just in case there’s another random and unrelated outbreak. Or just in case any other Black Swan emerges.

All of this makes sense, and none of it should surprise.

Will the U.S. Economic Recovery Look Like China’s?

I don’t know why it wouldn’t.

Like China, the U.S. is incredibly interconnected, and the world economy might not be ready to rebound even once we have the coronavirus under control.

Also, I expect there will be measures in place to prevent the spread of the virus once work picks back up in the U.S., and those measures could impact the economy. Example: Sports leagues might return to action but without spectators in attendance.

And I especially believe that U.S. consumers, like those in China, will be conservative. Per Barta:

Are people going to get back on planes right away? Are people going to spend the way they were right away? Are people going to be licking the wounds of their businesses for six months? That’s kind of the thing we’re starting to see in China, so China is telling you, “This is hard. It’s going to take a while.”

Even after people have returned to work, many will be tighter with money so they can build their savings. Additionally, many will wish to limit their time in public, which will result in the diminished circulation of money.

What was once considered “discretionary” will be mentally reframed by consumers as “nonessential” and sacrificed on the alter of austerity.

We are early in the process. China’s recovery could speed up. But the early numbers are discouraging.

And that doesn’t bode well for our future.

In rewatching the 2011 film Margin Call, I reached this conclusion: Now is a time for selling.

I’m not a financial advisor, and I don’t suggest that you make any decisions based on anything I say or write … but I expect it to be at least a little while before I buy again.