by John Mauldin
The Federal Reserve cut rates last week, after President Trump tweeted that he wanted a “big” interest-rate cut “to make up for China’s coronavirus situation and slowdown.”
Bond traders see more cuts coming. Maybe so, but the problem began in China. That’s where the solution will have to begin, too.
Last month, China made its first rate cut since October. But just before that, it did something more notable.
Just as this year’s Lunar New Year holiday was ending in late January, Beijing quarantined entire cities and regions in an effort to stop the viral outbreak. Workers who had left for the holidays couldn’t return. Others couldn’t leave home to go to work. Much of the country essentially shut down.
The most reliable source of on-the-ground data I know is China Beige Book. Their flash survey in February found 31% of companies still closed, and many of those that had reopened still lacked staff or materials and couldn’t operate at full capacity.
Simon Hunt shared this anecdote from one of his contacts.
“I can report 70% of street-side shops and businesses are open, however, 100% of the restaurants and 50% of the hotels are closed. Like mine, all residential compounds are gated and closed except to residents with huge piles of deliveries waiting outside for collection under makeshift awnings. Everyone and I mean everyone, wears a mask, and on a bike, breathing through an N95 mask is no easy business.
“I stopped at my local Starbucks to find it open, but all the furniture was stacked and swept to one side and a barista took my temperature before serving me. Seeing that my fellow customers were heavily wrapped delivery guys (Deliveroo, Sherpa etc.) I realized my usually cozy Starbucks was open for takeaway only. I mention this as Shanghai with 42 confirmed cases has not had any meaningful increase in virus cases for some weeks. Wuhan, where the new cases are declining but still averaging about 400 a day, is only 460 miles away. Clearly, the numbers in Shanghai are static because of the level of precaution the local community is happy to make.”
The measures seem to have been effective in slowing the virus spread, but at tremendous cost.
Note what he said about hotels and restaurants being closed. Those are low-margin businesses that employ millions of low-wage workers. How many lost their main, or only, incomes during this time?
Their incomes are low, but those numbers add up. This will certainly affect China’s consumer spending. Plus, many of the small businesses that had to close have outstanding loans. The government may shield them for a time, but somebody will have to absorb those debts.
Other statistics also show China still reeling. Estimates say anywhere from 40% to 50% of the trucks that are used to move products around China are simply not moving. And it appears at least 30% of the workers who traveled away from home for the lunar holiday still have not returned.
Apparently, the lockdown in Wuhan and other cities is effective as the number of new cases and deaths appears to be dropping rather rapidly.
That’s good but doesn’t solve the problem.
My best sources think most Chinese manufacturers should be back at full staff levels in the next month or so. In some cases, a few weeks — barring a secondary virus wave. (Which Simon Hunt thinks is possible; he notes schools are still closed with no reopening scheduled.)
But that doesn’t mean normal operations. Shipments for all kinds of items have been so scrambled, it could take months to get all the right stuff in the right places.
It’s also unclear if reports of business re-openings are true. A March 4 Caixin report said the lights may be on but that doesn’t mean people are working.
“As new coronavirus cases in China slowed in recent weeks, local governments in less-affected regions pushed companies and factories to return to work, typically by assigning concrete targets to district officials. Company insiders and local civil servants told Caixin that, under pressure to fulfill quotas they could not otherwise meet, they deftly cooked the books.
“Leaving lights and air conditioners on all day long in empty offices, turning on manufacturing equipment, faking staff rosters and even coaching factory workers to lie to inspectors are just some of the ways they helped manufacture flashy statistics on the resumption of business for local governments to report up the chain.”
Chinese data is “dynamic” in the best of times. If Beijing is now punishing local governments and businesses for not doing the impossible, then it’s not surprising they would try to generate the appearance of activity.
In any case, the full impact hasn’t yet reached us because businesses in the US, Canada, Europe and elsewhere have some inventory of the things they need from China. Some ships were already on the way before China shut down in late January. But we will start feeling it soon.
Then what? Much depends on how the virus spreads here, and what measures we take to control it. In a worst case, this could turn into a simultaneous supply shock (with the U.S. unable to obtain critically needed imports) and demand shock as millions can’t work or travel.
Either of those alone would be bad. Together, they would be devastating.
But if the coronavirus in the Seattle region — considered ground zero for the U.S. outbreak — intensifies and spreads like the one in Northern Italy, it’s a real possibility.
As you might suspect, my extensive network keeps me plugged into the latest coronavirus data. I’m getting reports from all over the world, and I’ll tell you this much: No one is sure where this is going. We are truly in uncharted territory.