Feb 132020
 


Saul Leiter 463 1956

 

Hubei’s Coronavirus Cases Rise 10-Fold After Change In Diagnostic Criteria (SCMP)
COVID-19 Coronavirus Cases (Worldometer)
Novel Coronavirus (COVID-19) Mortality Rate (Worldometer)
44 More Cases On Diamond Princess Cruise Ship Anchored Off Japan (SCMP)
WHO Team Arrives In China As Wuhan Coronavirus Deaths Top SARS (CNN)
Beijing’s Purge Over Virus Takes Down Top Communist Party Officials In Hubei (SCMP)
Botched Wuhan Quarantine Left Dead Bodies In The Street (ZH)
What Happened After One Chinese Company Reopened After The Corona-Chaos (ZH)
China Struggles To Balance Coronavirus Containment With Economic Cost (SCMP)
Protecting The US From Global Pandemics (Scott Gottlieb)
South Korea’s Moon Says Virus Epidemic To End Soon (YNA)
Epidemics Are Tough To Turn Into Profit (R.)

 

 

Major developments today (overnight for many) with regards to the COVID19 coronavirus. Probably not so much in infections or deaths per se (at least not that we know), but in the way(s) cases are reported. Or, if a spade is called a spade, the way they have been severely underreported so far.

What happened is Hubei’s health commission changed the diagnostic criteria used to confirm cases. And that looks something like this:

 

 

Which leads to this global picture:

 

 

What it comes down to is Hubei used to count cases according to “the old method”, which required clinical diagnosis PLUS testing, and has now switched to “the new method”, in which clinical diagnosis suffices. “Clinically diagnosed cases” here means those cases that show up positive on a CT scan (CT: computed tomography, a way to “look at” internal organs). The changes are in red in the doc:

 

 

Basically, “showing up positive on a CT scan” refers to the detection of pneumonia. For weeks, officials maintained that in an area under heavy siege of a disease for which pneumonia is one of the main symptoms, additional testing was mandatory to confirm a case as COVID19. Yeah, that’s a little crazy.

Ironically, the WHO went along with these counts based on “the old method”, with its chief effusively praising China for its efforts to combat the virus, but the switch to “the new method” comes just two days after a first team of WHO specialists arrived in China, which will “lay the groundwork for a larger international team.” Looks like Beijing has lost control.

The Party understood that it would no longer be able to keep up appearances, so it fired a whole bunch of politicians (Wuhan Party Chief et al) and other functionaries, appointed others in their place, and now vows a fresh start without the Party being blamed for a thing. And it can say nothing really changed, there is no large amount of additional cases, it’s all just a diagnostic ”tweak”.

Still, this hides the reasons behind the diagnostic changes: China either doesn’t have enough testing kits, or can’t get them out -and used- in the field fast enough. And that means too many potentially infectious patients are out there able to spread the virus. Add the WHO team of specialists to the mix and they chose to do damage control.

 

 

All of which leads to these provisionary official numbers:

 

 

Obviously, this has blown all previously referenced models out of the water.

Even JPMorgan’s most pessimistic case can’t keep up. Everybody needs to go back to the drawing board. And will do so, much more suspicious of anything China says from here on in. Tomorrow’s official numbers are likely to “normalize” again, 2,000 new cases, 90 deaths, that sort of thing. But they will now be reported with big question marks. Still, politicians and media alike, whether in the west or in China, will tell you things are improving. They can’t help themselves. But you can.

 

 

Here are some of the relevant news stories. Regular news in the Automatic Earth Debt Rattle will follow later today.

 

 

“Hubei’s new confirmed cases pegged at 14,840, nearly 10 times more than the previous day, while deaths more than doubled to 242.”

Note: that may look like a mortality rate of 20%, but that is far too high. Then again, 2% max doesn’t look tenable anymore either. More on that below.

Hubei’s Coronavirus Cases Rise 10-Fold After Change In Diagnostic Criteria (SCMP)

Health authorities in China’s Hubei province – the epicentre of the coronavirus epidemic – reported on Thursday 14,840 new confirmed cases, almost 10 times the number reported a day earlier, and new deaths attributable to the contagion rose to 242, more than double on the day. This brings the totals announced by the province’s health commission to 48,206 and 1,310, respectively, as of Wednesday. Officials in Hubei had reported 94 fatalities and 1,638 newly confirmed cases a day earlier. Hubei’s health commission said in its daily statement that it had changed the diagnostic criteria used to confirm cases, effective Thursday, meaning that doctors have broader discretion to determine which patients are infected.

“From today on, we will include the number of clinically diagnosed cases into the number of confirmed cases so that patients could receive timely treatment,” the health authority said. Previously, patients could only be diagnosed by test kits, which has seen a shortage of supply across the country. Tong Zhaohui, an expert in the central guidance group and vice-president of Beijing Chaoyang Hospital, said the move was in line with the National Health Commission’s latest diagnostic guidelines to include clinical diagnosis, using CT scans and other tests. “When doctors diagnose pneumonia, they can only get the etiology of the disease 20 to 30 per cent of the time. We have to rely on clinical diagnosis 70 to 80 per cent of the time. Increasing the diagnosis of clinical cases will help us make an additional judgment on the disease,” he told state broadcaster CCTV in an exclusive interview.

[..] Some 13,436 of the new cases announced on Thursday were confirmed in Hubei’s capital of Wuhan …

Read more …

The mortality rate looks bad. See more in next article. (h/t Doc Robinson)

COVID-19 Coronavirus Cases (Worldometer)

There are currently 60,373 confirmed cases and 1,369 deaths from the Wuhan Novel Coronavirus (2019-nCoV) outbreak as of February 13, 2020, 05:20 GMT. The condition of patients, according to the World Health Organization (Feb. 7 press conference) and based on 17,000 cases in China, are: • 82% mild •15% severe •3% critical


“Total Cases” = total cumulative count (60,373). This figure therefore includes deaths and recovered/discharged patients (cases with an outcome). By removing these from the “total cases” figure, we get “currently infected cases” (cases still awaiting for an outcome). The charts include provisional data and values for Feb. 12 that are the result, for the most part, of a change in diagnosis classification, for which an additional 13,332 cases and 107 deaths were counted on Feb. 12..

Read more …

Mortality rate in Hubei/mainland China looks awful at 18%. Is that just because no “light” cases are counted, which the world outside China does seem to do?

Novel Coronavirus (COVID-19) Mortality Rate (Worldometer)

Let’s take, for example, the data at the end of February 8, 2020: 813 deaths (cumulative total) and 37,552 cases (cumulative total) worldwide. If we use the formula (deaths / cases) we get: 813 / 37,552 = 2.2% CFR (flawed formula). With a conservative estimate of T(ime) = 7 days as the average period from case confirmation to death, we would correct the above formula by using February 1 cumulative cases, which were 14,381, in the denominator: Feb. 8 deaths / Feb. 1 cases = 813 / 14,381 = 5.7% CFR (correct formula, and estimating T=7).

T could be estimated by simply looking at the value of (current total deaths + current total recovered) and pair it with a case total in the past that has the same value. For the above formula, the matching dates would be January 26/27, providing an estimate for T of 12 to 13 days. This method of estimating T uses the same logic of the following method, and therefore will yield the same result. An alternative method, which has the advantage of not having to estimate a variable, and that is mentioned in the American Journal of Epidemiology study cited previously as a simple method that nevertheless could work reasonably well if the hazards of death and recovery at any time t measured from admission to the hospital, conditional on an event occurring at time t, are proportional, would be to use the formula:

CFR (case fatality rate)= deaths / (deaths + recovered) which, with the latest data available, would be equal to: 1,369 / (1,369 + 6,032) = 18% CFR (worldwide) If we now exclude cases in mainland China, using current data on deaths and recovered cases, we get: 2 / (2 + 76) = 2.6% CFR (outside of mainland China) The sample size above is extremely limited, but this discrepancy in mortality rates, if confirmed as the sample grows in size, could be explained with a higher case detection rate outside of China especially with respect to Wuhan, where priority had to be initially placed on severe and critical cases, given the ongoing emergency.

Unreported cases would have the effect of decreasing the denominator and inflating the CFR above its real value. For example, assuming 10,000 total unreported cases in Wuhan and adding them back to the formula, we would get a CFR of 7.9% (quite different from the CFR of 18% based strictly on confirmed cases). Neil Ferguson, a public health expert at Imperial College in the UK, said his “best guess” was that there were 100,000 affected by the virus even though there were only 2,000 confirmed cases at the time. [11] Without going that far, the possibility of a non negligible number of unreported cases in the initial stages of the crisis should be taken into account when trying to calculate the case fatally rate.

Read more …

Ship has 2,600 passengers, 1,100 crew. Only a few hundred have been tested. And we get it, it’s very hard to isolate that many untested people off the ship, where do you get the accomodation.

Now crew members are increasingly getting infected, while attending to the passengers. A crew member told CNN the quality of meals is getting real good, children get new toys every day etc.

The same crew member said she herself waited for 2 days to see a doctor. Crew also don’t have private rooms. They must be very anxious.

44 More Cases On Diamond Princess Cruise Ship Anchored Off Japan (SCMP)

Another 44 people on board a cruise ship moored off Japan’s coast have tested positive for the novel coronavirus, the country’s health minister said on Thursday. Health Minister Katsunobu Kato said the 44 new cases were detected from another 221 new tests. They raise the number of infections detected on the Diamond Princess to 218, in addition to a quarantine officer who also tested positive for the virus. Kato said authorities now want to move elderly people off the ship if they test negative for the virus, offering to put them in government-designated lodging. “We wish to start the operation from tomorrow or later,” Kato told reporters.


Of the newly diagnosed infections, 43 are passengers, and one a member of the crew. The Diamond Princess set off from Hong Kong on January 25 for a trip scheduled to end on February 4. Instead, it has been moored off Japan since February 3, after it emerged that a former passenger who disembarked in Hong Kong last month had tested positive for the virus now named Covid-19.

Read more …

At the WHO, the administrative leadership is miles apart from the medical specialists. The latter are now taking over.

WHO Team Arrives In China As Wuhan Coronavirus Deaths Top SARS (CNN)

The number of deaths from the Wuhan coronavirus had risen to over 1,000 by Tuesday morning, as experts from the World Health Organization (WHO) arrived in China to assist with controlling the epidemic. Chinese health authorities said 108 people died from the virus in mainland China on Monday, with the majority of those deaths occurring in Hubei province, the capital of which is Wuhan – the city where the virus was first found. The total number of deaths stands at 1,018, all but two of those in mainland China. Globally, 43,114 have now been diagnosed with the virus, again with the majority in China. Around 4,000 patients have been treated and released from hospital in China since late December.


A team of World Health Organization (WHO) experts landed in China on Monday. The organization’s director general, Tedros Adhanom Ghebreyesus, said they will “lay the groundwork for a larger international team,” which will join them “as soon as possible.” The WHO group in China is led by Bruce Aylward, who helmed the body’s response to Ebola, as well as initiatives for immunization, communicable diseases control and polio eradication. Their arrival comes as the WHO is facing increasing criticism for its initial decision not to declare a global health emergency, and for officials’ effusive praise of China’s handling of the crisis, even as Beijing faces outrage domestically for, among other things, the death of whistleblower doctor Li Wenliang, and the subsequent censorship of that news.

Read more …

Spring cleaning.

Beijing’s Purge Over Virus Takes Down Top Communist Party Officials In Hubei (SCMP)

Beijing’s purge of officials in Hubei province picked up pace with the removal of the top Communist Party leaders in the region as the central government responded to public anger over what is seen as a botched response to the deadly coronavirus outbreak in the region. China’s official Xinhua news agency reported that Hubei party secretary Jiang Chaoliang will be replaced by Shanghai Mayor Ying Yong, 61, a close ally of Chinese President Xi Jinping. The Communist Party leader of Wuhan city Ma Guoqiang, 56, is also set to be dismissed, according to a person familiar with the development who was not authorised to speak on the issue. Ma will be replaced by Wang Zhonglin, 57, party secretary of Shandong’s provincial capital Jinan.


Jiang, 61, is the highest-ranking political casualty so far in the outbreak, which has killed more than 1,100 people in mainland China, the vast majority in Hubei and its capital, Wuhan city. As details have trickled out on how local officials mismanaged the outbreak, public anger has swelled on social media. Academics have also signed a public petition to demand free speech after the police punished doctors who raised the early alarm about the outbreak. “Sending Ying Yong and Wang Zhonglin to Hubei shows the central government is determined to fix Hubei and give people answers. The cadres there have been really disappointing,” the unnamed person said. “The outbreak cost the party dearly. Those who are responsible will be held accountable.”

Read more …

“Then on day 8, the reporters saw their first dead body in the street. He’s a man, in his sixties, who is lying on his back in front of a closed furniture store. Officials in hazard suits slowly approach the body, taking every conceivable precaution.”

Botched Wuhan Quarantine Left Dead Bodies In The Street (ZH)

[..] few have captured the atmosphere of the situation quite like a team of AFP journalists who lingered in Wuhan after the lockdown, and have detailed their experiences in diary format. The diary begins on Jan. 23, the day Wuhan was placed under lockdown. It starts as one might expect: Though the news was a shock, few tried to escape the city before the lockdown officially went into effect. Police chase the last travelers out of the railroad station. But the situation doesn’t really start to escalate until Jan. 25, or New Year’s Day in China. Those who went to worship at the city’s Guiyan temple, normally packed this time of year, found it empty: nobody was allowed inside.

“No-one is allowed inside in order to prevent the virus spreading,” a uniformed man – who is not wearing the compulsory mask – tells AFP. On the fourth day of the crackdown, conditions in Wuhan really started to deteriorate. This marked the beginning of hard times for Wuhan. Overwhelmed hospitals arbitrarily turned people away if their swab tests came back negative for the virus. One man told an AFP reporter that he had been turned away by four hospitals, despite being seriously ill. “I haven’t slept,” he said. He was getting ready to wait in line all night to hopefully be admitted to another hospital. For the first in their memory, the AFP reporters said Chinese out on the streets approached them to complain about the government’s handling of the lockdown.

“Like a horror film,” says one witness, who tells AFP bodies were left unattended for hours. [..] On day 6, the AFP spoke to a French doctor who had decided to stay in Wuhan, a Dr. Philippe Klein. “It’s not an act of heroism,” he said. “It’s been well thought out, it’s my job.” More signs of the government crackdown are beginning to appear: Guards take the temperature of customers at supermarkets and other stores hawking essential goods. Then on day 8, the reporters saw their first dead body in the street. He’s a man, in his sixties, who is lying on his back in front of a closed furniture store. Officials in hazard suits slowly approach the body, taking every conceivable precaution.

Read more …

Well, you can’t say I didn’t warn you. This is precisely what I warned about. And the new numbers will do nothing to restore any confidence at all.

What Happened After One Chinese Company Reopened After The Corona-Chaos (ZH)

Today, two days after China officially returned to work, we got the first confirmation of just how catastrophic Beijing’s order to local enterprises and businesses to rush back reboot the economy could be, when Jennifer Zeng reported that a company in Suzhou reopened, and immediately at least one CoVid2019 case found. As a result, the company’s 200+ employees couldn’t go home and were immediately placed under quarantine. At least the workers managed to “organize” quilts for themselves. This is just the first such case. Expect many more – especially across Hubei and its neighboring provinces – as latent cases of Coronavirus which were never caught and cured spark new infections and mini epidemics, all of which dutifully captured on a smartphone clip for everyone in China to watch and freak out even more.

Which reminds us of another comment from Rabobank, which last week explained why the dilemma facing China is “truly awful”: The quandary for China between releasing the quarantine straitjacket in days to stop its economy from getting truly sick, and allowing a virus like this to spread further as people start to mingle again is truly awful. There are no good options. For a world with a serious lack of final end-demand, and which has been relying on China, along with increasingly “Chinese” central banks, this is going to be a nasty shock either way that Mr Market is treating like he is Mr Magoo.

And since Beijing has no way out, especially since the epidemic is still raging despite Beijing’s “doctored”, no pun intended, infection and death numbers, expect China to unleash the most draconian censorship crackdown on any reports Covid-2019 has not only not been purged but is making unwelcome appearances across China’s enterprises, which will be quietly put under blanket quarantine even as Beijing pretends that all is well and its economy is once again humming on all cylinders until eventually the epidemic reaches a critical mass and China has no choice but to once again admit the full extent of the social and economic fallout. And just like in the case of SARS, don’t expect such “honesty” to emerge for at least several weeks if not months.

Read more …

“The city governments of Zhongshan and Foshan in Guangzhou province have postponed the resumption of work until March 1, while companies must apply for special permission in Hangzhou, the capital of Zhejiang province. The local administration has so far only given the green light to 1,462 out of nearly 30,000 companies based in the city”

Will these party officials be fired for being too strict?

China Struggles To Balance Coronavirus Containment With Economic Cost (SCMP)

To work or not to work – that is proving a crucial question for Chinese officials, companies and employees as the world’s second largest economy struggles to balance the risk of the deadly coronavirus with the need to resume business. Most provinces across China restarted operations on Monday after an extended Lunar New Year holiday, but an influx of workers returning from their hometowns is posing a headache for authorities. The coronavirus, which has killed more than 1,100 people and infected nearly 45,000, shows few signs of being contained, stoking fears of a potential spike in infections as people return to work. While the central government has made it clear that containing the outbreak is an overriding priority, Communist Party leaders know they cannot afford to freeze industrial production indefinitely, especially as China’s economy grows at its slowest pace in decades.

[..] As the virus has spread from Hubei’s provincial capital Wuhan, authorities across China have imposed travel restrictions, cancelled public events and locked down neighbourhoods. Last week, the government of Suzhou, a major manufacturing hub in Jiangsu province, which is known for its silk products, asked local communities to tell workers from Hubei and Zhejiang provinces not to return until further notice. This employee “blacklisting” was echoed by other cities, including Wuxi in the south of Jiangsu, which banned migrant workers from at least seven provinces. While most provincial level governments have urged companies to resume operations this week, officials at local levels are dragging their feet.

The city governments of Zhongshan and Foshan in Guangzhou province have postponed the resumption of work until March 1, while companies must apply for special permission in Hangzhou, the capital of Zhejiang province. Once approved, employees are required to report their body temperatures to local authorities daily. The local administration has so far only given the green light to 1,462 out of nearly 30,000 companies based in the city, an approval rate below 5 per cent. Small and medium-sized enterprises in China, which are a cornerstone for employment and social stability, are at most risk from the efforts to contain the outbreak. A recent survey conducted by researchers from Tsinghua and Peking universities in Beijing, two of China’s top institutions of higher learning, found that 67.1 per cent of small and medium-sized enterprises had only enough financial reserves to sustain operations for two months if revenues dried up. The survey of 995 companies also found that 30 per cent expected revenues to shrink by at least half from 2019.

Read more …

In case the virus didn’t scare you enough:

“80 percent of the U.S. supply of antibiotics are made in China…”

Protecting The US From Global Pandemics (Scott Gottlieb)

About 40 percent of generic drugs sold in the U.S. have only a single manufacturer. A significant supply chain disruption could cause shortages for some or many of these products. Last year, manufacturing of intermediate or finished goods in China, as well as pharmaceutical source material, accounted for 95 percent of U.S. imports of ibuprofen, 91 percent of U.S. imports of hydrocortisone, 70 percent of U.S. imports of acetaminophen, 40 to 45 percent of U.S. imports of penicillin, and 40 percent of U.S. imports of heparin, according to the Commerce Department. In total, 80 percent of the U.S. supply of antibiotics are made in China.

While much of the fill finishing work (the actual formulation of finished drug capsules and tablets) is done outside China (and often in India) the starting and intermediate chemicals are often sourced in China. Moreover, the U.S. generic drug industry can no longer produce certain critical medicines such as penicillin and doxycycline without these chemical components.iv According to a report from the US-China Economic and Security Review Commission, China’s chemical industry, which accounts for 40 percent of global chemical industry revenue, provides a large number of ingredients for drug products.

It’s these source materials – where in many cases China is the exclusive source of the chemical ingredients used for the manufacture of a drug product – that create choke points in the global supply chain for critical medicines. Moreover, when it comes to starting material for the manufacture of pharmaceutical ingredients, a lot of this production is centered in China’s Hubei Provence, the epicenter of coronavirus. Most drug makers have a one to three-months of inventory of drug ingredients on hand. But these supplies are already being drawn down. Among big API makers in Wuhan are Wuhan Shiji Pharmaceutical, Chemwerth, Hubei Biocause, Wuhan Calmland Pharmaceuticals.

[..] We’re facing the potential for unprecedented supply chain disruptions. You can’t easily switch component part suppliers — either starter material for the manufacture of drugs or components for device devices. You have to qualify those alternative sources, make sure they meet regulatory standards for Good Manufacturing Practices (GMPs), and meet the conditions set by those incorporating these materials into their finished goods. Even if FDA is able to offer manufacturers flexibility in making these component changes, substitutions are often complex.

Read more …

Some people are just not all that smart.

South Korea’s Moon Says Virus Epidemic To End Soon (YNA)

President Moon Jae-in expressed confidence Thursday that South Korea will soon bring the novel coronavirus pandemic under control and stressed it is time to resume full-scale efforts to revitalize the economy, meeting with a group of local business leaders. “COVID-19 will be terminated (in South Korea) before long,” he said, using the official name of the disease, during the session held at the Korea Chamber of Commerce and Industry (KCCI) in Seoul. Fortunately, he said, domestic quarantine management “appears to have entered a stable stage to some extent,” although it is still too early to be complacent. He emphasized that quarantine authorities here would continue their efforts “until the end” to contain the virus.


The president voiced regret once again over the outbreak’s negative impact on the country’s economy, which he said had been showing clear indications of recovery. “It’s very regrettable that the ankle of the economy has been seized by the occurrence of the COVID-19 incident,” Moon told the attendees including Samsung Electronics Vice Chairman Lee Jae-yong, SK Group Chairman Chey Tae-won, CJ Group Chairman Lee Jae-hyun and Park Yong-maan, chairman of the KCCI. “Now, it’s time for the government and business circles to join forces and revive the recovery trend of the economy,” Moon said. He reaffirmed the government’s resolve to ramp up its bid to create more jobs with massive investment projects and support private firms with “bold” tax incentives and regulatory reform.

Read more …

And here’s for the morally challenged. If it won’t make us rich, we should we develop a vaccine?

Epidemics Are Tough To Turn Into Profit (R.)

Epidemics are catastrophic for humans, and it turns out they aren’t much better for healthcare companies. The number of confirmed cases of the new coronavirus has multiplied more than 80-fold over three weeks despite measures such as travel bans, and exceeded 45,000 across 26 countries on Wednesday, according to researchers at Johns Hopkins University. Tests and treatments are in demand. Yet past events like SARS show slow research, high production costs and political pressure on pricing often add up to disappointing returns. Tests for the virus now called SARS-CoV-2 are here. These are vital for diagnosing, isolating carriers, and tracking exposure.

Meridian Bioscience saw its stock pop on news it had developed a test, but the shares then dropped as investors realized Roche, Qiagen and others would all fight for thin margins. So far, none of the stocks has moved much. A treatment has better profit potential, as competition probably will be limited. The snag is, proving a drug’s effectiveness typically takes years. There are already multiple trials started using existing anti-viral treatments, and potential new drugs by Gilead Sciences and Regeneron Pharmaceuticals have begun testing, or will soon. Even if one company hits the jackpot, production can be a problem. Flu fears in 2009 made Roche’s Tamiflu a blockbuster. But securing enough production of spice star anise to make the drug proved troublesome.

The best long-term hope for coronavirus control is a vaccine. Old-school giant Novartis, biotechnology outfit Moderna and others want to make one. But drug development is hard, and vaccines can be particularly tricky due to viral mutation. World Health Organization chief Tedros Adhanom Ghebreyesus said on Tuesday a vaccine might be available in 18 months, a long way off even assuming no hiccups. Vaccines can be profitable for endemic diseases – Pfizer sold $1.6 billion of a pneumonia vaccine last year. But the outbreak of Severe Acute Respiratory Syndrome in 2003 flared up and hasn’t been seen in humans since. SARS-CoV-2 might follow the same path.

Read more …

 

 

 

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Feb 052020
 


Max Ernst Inspired hill 1950

 

Hi, it’s me again, with more virus stories. I know you may think it’s enough now, but I do want to do this one. Actually, I haven’t written all that much about it, just two essays, 2019-nCoV and The Party and the Virus, but the topic has become a staple of my daily Debt Rattle news aggregators lately. So much that I find I need to remind myself all the time that it’s been a news item for only two weeks, going back to January 20 or so.

Through those two weeks, I’ve seen a number of studies, simulations, models, of where the virus can be expected to go going forward. And I want to take a look at some of them. I said early on that I didn’t like people talking about the economy as soon as the first people died, but 2 weeks later, given the growth of the epidemic, that doesn’t appear avoidable anymore.

People are starting to wonder what’s going to happen to society at large, and in “the markets” -or what’s left of them after central bank manipulation- if and when the virus remains an issue for an X amount of time. I think I can explain some of the parameters, though I want to make clear predicting what viruses do is, even for virologists, crystal ball material, and I ain’t got one of those.

 

China injected $242.74 billion into the markets via reverse repos on Monday and Tuesday, and stocks seem to have made up for their $445 billion losses on Monday. But what exactly is that optimism based on? Is it that “investors” think the PBOC will have their backs no matter what? Is it the reports of companies like Gilead testing possible solutions, vaccines?

I’m not an expert, but I do know it takes a sophisticated drug company about a year to develop a drug/vaccine for a novel disease, as “WuhanCorona” is. From what I can gather, the Gilead drug (co-)tested by the Chinese is basically an anti-viral developed with Ebola in mind, which may or may not work. Ebola is somewhere related to “WuhanCorona”, in a third cousin twice removed kind of way, but that’s it. HIV drugs could also perhaps work to some extent, but that’s a big question.

So what the optimism in the “markets” is based on, you tell me. Are people so afraid of what might be coming that their minds switch off, are they afraid to get informed, or do they genuinely think it’ll all soon be over? Me, I hope it’ll turn out fine, but I wouldn’t put any money on it. And that’s based on what I’ve been reading.

 

When reporting on the Wuhan situation started for real in the west, let’s say January 20 (that’s just 16 days ago!), there were 291 registered infection cases. There are 27,648 now, and 564 people have died. Those are “official” Chinese numbers, and there are plenty doubts about their accuracy (see today’s stories about Tencent posting 10x higher numbers), but let’s roll with the official ones for the moment. I’m going to hop through time a little, but please bear with me, there is a logic.

First, there’s this from January 28 in the SCMP (South China Morning Post), a major Hong Kong news outlet owned by -very Chinese- Alibaba. Zhong Nanshan is a scientist working for the government. My first reaction when I saw this was: it looks like he’s doing damage control for the CCP.

 

Chinese Experts Say Wuhan Coronavirus Outbreak Will Not Last

One of China’s top experts said the Wuhan coronavirus infection rate could peak in early February. “I estimate that it will reach its peak in around the next week or 10 days, after that there will be no more major increases,” said Zhong Nanshan, the respiratory disease scientist who played the pivotal role in China’s fight against the severe acute respiratory syndrome (Sars) coronavirus epidemic in 2002-03.


[..] Gao Fu, the director of the Chinese Centre for Disease Control and Prevention [said] he was “optimistic” that the outbreak’s “turning point” could arrive by February 8 if current disease control protocol is maintained.

3 days earlier, January 25 (that’s just 11 days ago!), the SCMP ran this piece on the same Zhong Nanshan, which reinforces my image of him a bit more. One might argue that Beijing has become more transparent recently, but the facts remain that for instance the WuhanCorona virus can be traced back to early December if not earlier, and that after the first death on December 9 no testing at all was done in Wuhan for a week.

Just to name a few things. So for a scientist to claim that “Beijing has no secrets to hide” and “has not held back information in reporting the outbreak in Wuhan” is at the very least over the top.

 

China Has Been Transparent About Wuhan Outbreak, Virus Expert Zhong Nanshan Says

Chinese officials have been transparent in handling the Wuhan coronavirus outbreak and the participation of a Hong Kong professor through the process indicates that Beijing has no secrets to hide, said one of the country’s leading experts on communicable diseases. Dr Zhong Nanshan, whose team is advising the leadership on how to handle the crisis, told a news conference in Guangzhou on Tuesday that China had not held back information in reporting the outbreak in Wuhan, which has sickened more than 300 people across the country since early December.

But also on January 25, there was this Zero Hedge piece about British scientist Jonathan Read, who had completely different ideas about the outbreak. Note: both predictions focus on Feb 4.

 

UK Researcher Predicts Over 250,000 Chinese Will Have Coronavirus In Ten Days

[..] in 10 days time, or by February 4, 2020, Read’s model predicts the number of infected people in Wuhan to be greater than 250 thousand (with an prediction interval, 164,602 to 351,396); [..] Read estimates that only 5.1% of infections in Wuhan are identified (as of Jan 24)..


[..] Read’s model alleges that Beijing was woefully late in its response and that recently imposed “travel restrictions from and to Wuhan city are unlikely to be effective in halting transmission across China; with a 99% effective reduction in travel, the size of the epidemic outside of Wuhan may only be reduced by 24.9% on 4 February.”

Very different. Remember his “travel restrictions from and to Wuhan city are unlikely to be effective in halting transmission across China”, it’ll come in handy later. Now, I’ve been posting a few math sequences, Fibonacci and otherwise, and those are way too negative, or at least would seem to be.

Problem with that is, as with many facets of the whole thing, we don’t know. There are simply too many scientists who state that real infection- and fatality numbers are much higher than what Beijing reports. They do that based on models, simulations etc. Not because they want The Party (CCP) to look bad, but because the models tell them.

An example: SCMP reported early Tuesday that the mortality rate for the city of Wuhan has reached 4.9%, while the mortality rate for Hubei province as a whole is 3.1%. They added that the mortality rate is predicted by doctors to drop, because extra medical attention is available etc. But we know that extra attention threatens to be overwhelmed by too many patients, shortages of beds, equipment, test kits, protective clothing etc. Nice try, but…

 

All this just to get to why I started writing this, which is a report published at The Lancet on January 31, from Hong Kong University (HKU). I have cited previously that it estimated 75,815 people had been infected in Wuhan on January 25, a far cry from the 1,300 official number at that point. And yes, I do want to use the discrepancy to cast at least some doubt on the official numbers.

But there’s something else that I would like to focus on. The same report also says that the epidemic -or episode, pandemic- would end “around April” 2020, so between, say, mid-March and mid-May, 6 weeks and 14 weeks from now, if certain conditions are met. And that’s just Wuhan. Add another 2 weeks “across cities in mainland China”.

The full name of the paper by Prof Joseph T. Wu, PhD, Kathy Leung, PhD and Prof Gabriel M. Leung, MD is “Nowcasting and forecasting the potential domestic and international spread of the 2019-nCoV outbreak originating in Wuhan, China: a modelling study”

It says: “We estimated that if there was no reduction in transmissibility, the Wuhan epidemic would peak around April, 2020, and local epidemics across cities in mainland China would lag by 1–2 weeks.”

[..] In this modelling study, we first inferred the basic reproductive number of 2019-nCoV and the outbreak size in Wuhan from Dec 1, 2019, to Jan 25, 2020, on the basis of the number of cases exported from Wuhan to cities outside mainland China. We then estimated the number of cases that had been exported from Wuhan to other cities in mainland China. Finally, we forecasted the spread of 2019-nCoV within and outside mainland China, accounting for the Greater Wuhan region quarantine implemented since Jan 23–24, 2020, and other public health interventions.

Figure 2 summarises our estimates of the basic reproductive number R0 and the outbreak size of 2019-nCoV in Wuhan as of Jan 25, 2020. In our baseline scenario, we estimated that R0 was 2·68 (95% CrI 2·47–2·86) with an epidemic doubling time of 6·4 days (95% CrI 5·8–7·1;).

We estimated that 75 815 individuals (95% CrI 37 304- 130 330) had been infected in Greater Wuhan as of Jan 25, 2020. We also estimated that Chongqing, Beijing, Shanghai, Guangzhou, and Shenzhen, had imported 461 (227–805), 113 (57–193), 98 (49–168), 111 (56–191), and 80 (40–139) infections from Wuhan, respectively.

Beijing, Shanghai, Guangzhou, and Shenzhen were the mainland Chinese cities that together accounted for 53% of all outbound international air travel from China and 69% of international air travel outside Asia, whereas Chongqing is a large metropolis that has a population of 32 million and very high ground traffic volumes with Wuhan. Substantial epidemic take-off in these cities would thus contribute to the spread of 2019-nCoV within and outside mainland China.

 


Figure 2 – Posterior distributions of estimated basic reproductive number and estimated outbreak size in greater Wuhan
NOTE: a zoonosis is an infectious disease that can spread between animals and humans. FOI = force of infection

 

Figure 4 shows the epidemic curves for Wuhan, Chongqing, Beijing, Shanghai, Guangzhou, and Shenzhen with a R0 of 2·68, assuming 0%, 25%, or 50% decrease in transmissibility across all cities, together with 0% or 50% reduction in inter-city mobility after Wuhan was quarantined on Jan 23, 2020.

The epidemics would fade out if transmissibility was reduced by more than 1–1/R0=63%. Our estimates suggested that a 50% reduction in inter-city mobility would have a negligible effect on epidemic dynamics.

We estimated that if there was no reduction in transmissibility, the Wuhan epidemic would peak around April, 2020, and local epidemics across cities in mainland China would lag by 1–2 weeks.

If transmissibility was reduced by 25% in all cities domestically, then both the growth rate and magnitude of local epidemics would be substantially reduced; the epidemic peak would be delayed by about 1 month and its magnitude reduced by about 50%.

A 50% reduction in transmissibility would push the viral reproductive number to about 1·3, in which case the epidemic would grow slowly without peaking during the first half of 2020.

However, our simulation suggested that wholesale quarantine of population movement in Greater Wuhan would have had a negligible effect on the forward trajectories of the epidemic because multiple major Chinese cities had already been seeded with more than dozens of infections each.

The probability that the chain of transmission initiated by an infected case would fade out without causing exponential epidemic growth decreases sharply as R0 increases (eg, <0·2 when R0>2).

As such, given the substantial volume of case importation from Wuhan, local epidemics are probably already growing exponentially in multiple major Chinese cities.

Given that Beijing, Shanghai, Guangzhou, and Shenzhen together accounted for more than 50% of all outbound international air travel in mainland China, other countries would likely be at risk of experiencing 2019-nCoV epidemics during the first half of 2020.

 


Figure 4 – Epidemic forecasts for Wuhan and five other Chinese cities under different scenarios of reduction in transmissibility and inter-city mobility

 

Ergo: reducing mobility is ineffective because too much mobility had already happened prior to the lockdowns. That ship has sailed. Not that one shouldn’t try to limit mobility, but it can’t stop the disease from spreading. The HKU team doesn’t say much about how they would see transmissibility lowered, but that seems to come down to more, and intense, lockdowns.

There’s a cruise ship floating off Yokohama where everyone is ordered to stay in their cabin because of the virus. Think along those lines: ordering people to stay in their homes. Sort of like the Black Death plague in 14th century Europe.

Perhaps there are anti-virals that can lower transmissibility somewhat, but that is by no means sure. The discovery ofasymptomatic transmitters doesn’t help either. You can’t very well test everyone, you test those with symptoms.

Chinese health authorities have identified a number of patients who have become carriers and transmitters of the coronavirus despite showing no outward symptoms of the disease. Li Xingwang, chief infectious diseases expert at Beijing Ditan Hospital, said most of the “dormant” carriers were related to and had caught the virus from patients with symptoms.


“These [carriers] have the virus and can transmit it. The amount of virus correlates to the severity of the illness, which means these patients carry less of the virus and their ability to transmit disease is weaker,” Li said.

 

Lunar New Year holidays have been extended everywhere across China, except in a few rare places. Major cities are under full lockdown. Western companies are scrambling to find alternative suppliers. Just 2 weeks into the epidemic. What happens when the factories stay closed for 6 or 16 more weeks?

Where will Chinese and western stocks be then? Xi Jinping has declared the WuhanCorona virus the number 1 threat. How can he order the factories to re-open before mid-April at the earliest then, when the peak of the epidemic hasn’t even been reached? But at the same time, can he afford to order all production shut for 2-3-4 months?

Thing about such peaks is, you can only see them in the rearview mirror. But you can bet that in 2-3 weeks max, people will solemnly declare the peak is here. Because the existing but especially potential economic damage will be so great. Bur declaring a peak too soon, let alone the end of the epidemic, is too much of a risk.

The way things are going, pretty soon there won’t be any westerners left in China, other than those who wish to stay permanently. Many if not most factories will be closed. No Chinese will be allowed to visit the rest of the world, while Chinese products will not ship there.

The big lockdown has just begun. Because once you start it, you can’t go back until you can prove that everything is safe. And that will in all likelihood take a long time, months. When will absolutely everybody have faith that everything is safe? When nobody falls ill anymore, when nobody can infect other people anymore.

But that’s a long way away. April, May, or later? And that in an economic system built on just-in-time delivery? Chinese oil demand is allegedly down 20% already. How can oil prices not fall if that is true? Since those prices are linked to the US dollar, what will happen with the currency?

There are too many questions that nobody can answer, or even try to. That’s complex systems for you. And I really really hope I’m wrong, but the way out of the lockdown is not clear at all.

The world cannot afford the risk of consciously helping to spread a lethal pandemic. And the only way to prevent it may be the big lockdown. Unless there’s a vaccine. But there isn’t one right now.

Overly alarmist, you say? Let’s hope so.

 

 

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Feb 022020
 
 February 2, 2020  Posted by at 3:30 pm Finance Tagged with: , , , , , , , , ,  11 Responses »


Samuel Colman The Edge of Doom 1836-38

 

What the future will bring for the 2019nCoV novel Wuhan coronavirus is still unclear. An epidemic it already is, but is it also a pandemic? Some 20 countries have reported infections, but it still could all fizzle out; 305 deaths can be forgotten by next week. Nobody can tell you how this will play out, not even the most experienced and/or smartest virologists and other experts.

Because there’s no telling what viruses will do, not even for them, and because while they have some idea about the infinitesimal size and lifespan of viruses, “ordinary” people have no grasp of either, and that includes managers, planners and politicians. Whether in the rich west or in “up and coming” China.

 

The timeline is quite literally terribly obvious. In early December -and it could have been even earlier-, it was obvious to doctors and Communist Party (CCP) politicians in Wuhan that something was wrong. But their painfully predictable reaction was to hope this would pass. Never a bad word should be uttered about the Party, and nothing said that could embarrass it.

December passed, as news was getting worse and more obvious due to a large number of “pneumonia” patients. Chinese doctors published an article in the Lancet this week (this week, 6 weeks after the fact!) saying human-to-human transmission had been established by mid-December.

But the code of silence was not broken, even when a man died from the virus on January 9. It took until mid-January before word got out, a full week later. By then millions of people had left and/or entered Wuhan, a city of 11 million, potentially infecting millions of other Chinese and perhaps people abroad. 5 million later left the city for Lunar New Year.

On January 10, the virus was defined and the sequence was shared, but testing didn’t start for another week; patients were registered as pneumonia sufferers, including those that died (we have no idea how many there were).

 

 

Then, mid January, doctors starting testing for the virus. The first “exported” case was noted in Thailand on January 13, but it still took more time for the potential threat to be realized and reported. The Party boys were still hoping it would all pass. Can you blame them? They are civil servants, they don’t know anything about viruses, or their threat.

Ironically, over 300 civil servants (Party officials) and health care workers were sanctioned very recently for not doing enough. The Party makes sure the blame is put on individuals, not on itself. Even if all they’ve done is follow the party line. It’s very simply how the system works. And not just in China. If the virus might come to a town near you, check where the blame is placed. It won’t be the president or prime minister, health workers will be first in line, civil servants second.

It’s good to note how fast the novel virus has spread. If only to show what those who are determined to keep such a thing silent are up against. Can’t be easy. 291 cases on Jan 20, 14,562 cases 13 days later. Those are exponential numbers, even if the number of fatalities “only” rose by 46 overnight.

It’s also good to keep in mind that the main threat in viruses is their ability to mutate and become deadlier. This virus now has at least those 14,562 hosts which they can use to mutate in. Hong Kong University doctor and epidemiologist Gabriel Leung and his team said in a Jan 31 report: “In our baseline scenario, we estimated 75,185 infections as of Jan 25.” . And they were reporting on Wuhan alone. In other words, well over 5 times as many hosts and chances for the virus to mutate in just one city. In a city of 11 million people, numbers like that are perhaps not that extreme.

 

 

Back to politics. We have had two phases so far. 1 is first discovery followed by total silence. 2 is damage control, and deflecting all blame from the Party.

We are now in phase 3. The WHO, which was caught napping as much as the Party in phase 2, lavishes great praise on that same Party now for its “extraordinary safety measures”. Locking down entire cities (increasingly people are not even allowed to leave their homes), speed-building hospitals, you name it. And the WHO is not the only entity praising the Party.

The reason why there is so much emphasis on this is that the CCP is desperate to show everyone, at home and abroad, that it is in control. That there is no reason to worry, at least not due to actions by the Party. If other countries have problems, that is not the Party’s fault.

And also, the Party will take it from here, no need for foreign assistance. They’ll allow in some doctors, preferably WHO related, and they have asked both the US and EU for medical equipment and doctors’ uniforms, hazmat suits, that sort of thing, just so nobody asks any further questions: see, we do accept help! We’ll let you know if we need anything.

Other than that, the Party is in full control, thank you very much. And if Chinese people start protesting the failures of the Party so far, as they are, that is none of anyone else’s business. “We” have it under control”. Ask the WHO, they said so too.

 

If the Party is allowed to get away with this behavior aimed at self-preservation above anything else, including human lives of both Chinese and foreigners, something bad is sure to happen. Maybe not this time, maybe this one will fizzle out. But the next one, or the one after that, will not.

It is obvious how dangerous this is, putting the interests of the Party, or the economy, above the risk of spreading global pandemic. But is is also obvious why it happens. And it wouldn’t or couldn’t happen only in China. Though the country in its present state is a ideal breeding ground.

Flights are halted. Hundreds of millions will soon be in lockdown. Exports will plunge, because production will. Which will hit the west as much as China. Just so the Party can say it did what had to be done, and so it will stay in power. Xi Jinping knows his power depends on the economy, but he thinks he has what it takes to hold on to power even when the economy tanks.

He can simply declare force majeure, he can tell his people how much worse things would have been had he not decided to lock down everything.

We’ve been following the numbers of infections and fatalities now for 2 weeks or so, even as we know they don’t mean much, they’re just Party propaganda. The Party will release what it thinks it must, but no more. Perhaps we need other sources; these will come if and when things get out of hand. Not that we know they will.

Xi can claim today that he has control. He can say things are not too bad, but we don’t really know, he’s issuing the numbers. What we do know, and there’s the crux, is that he was 6 weeks late in starting to acknowledge the epidemic, in contacting the outside world, in acknowledging his mistakes, and in acknowledging that such mistakes are baked into the model that keeps him in power.

Phase 1 is complete denial, not a word. Phase 2 is damage control, massaging the numbers downward. Phase 3 is “close all the doors, not to worry, nothing to see here, we got this, no you can’t come in, too risky!”

But, yeah, praise him while you can. The only praise he cares about is from people just as clueless as he is anyway.

The Party is a highly effective vehicle for protecting its own interests and survival. For other things, perhaps not so much. Viruses can be quite deadly at times. Combine them with politics and the risk factor rises exponentially.

Tragedy assured. Just not every single time.

 

 

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Aug 052019
 


Odilon Redon Peyrelebade landscape 1880

 

It’s never easy to gauge what exactly is happening in China, or why the CCP Politburo takes the decisions it does. Today, or overnight, is no exception to that. However, one thing that appears certain, but which I don’t see reflected in all the analyses, is that Beijing pushing the value of the renminbi (yuan) down below 7 to the USD in one fell swoop, is a major setback for Xi Jinping and his government.

Yes, China may have given up hope of reaching positive conclusions in its trade talks with the US. And yes, some may think, even in China itself, that devaluing the currency is a tool that can be useful in a potential currency war. But there’s another side to this coin. It’s not even about the value itself, or the change in it, it’s the heavy-handed way it’s executed.

 

China wants, and desperately needs too, for the yuan to be a force in global financial markets. In very simple terms this is true because if it then wants to buy something, it can simply print the money for it. But only about 1% of global trade today is executed in yuan. That is not nearly enough. It means China needs dollars and euros, all the time. And devaluing the yuan means the country needs even more of those.

You’d almost think: why would you want to do that? What are the long-term prospects for a move like this? You’re telling forex markets that the value of the yuan is not trustworthy, because if Xi or the PBOC decides in the next five minutes that it should go up or down by 10% or 20%, they can do it. The Fed and ECB also have tools to manipulate their currencies (re: interest rates), but none of that magnitude.

 

The crux of the dilemma probably lies in the Belt and Road Initiative (BRI), which I’ve been saying for years is just China’s way to sell its overcapacity and overproduction abroad. Sure, there may be loftier goals, and surely in the glitzy brochures, but the fact remains that China has tried to be an economic miracle, doing in 10 years what took the US a century, and it never slowed down its growth, at least not voluntarily, even if that might have been a wise move.

Already lately, purchases by Chinese citizens and companies of real estate and businesses abroad have been curtailed, and not a little bit, by Beijing. There’s no better way to convince Chinese people of the miracle’s success than to let them travel the world and spend there, but that, too, may well soon be cut. It kills foreign reserves.

If Beijing could charge participating countries in the Belt and Road Initiative in yuan, and they could pay for the overcapacity’s steel and cement and what not in yuan, that could be a game-changing program for the entire planet. But these countries have no reason to hold yuan, other than the BRI itself. And they, too, were watching the overnight move above 7 and must have thought: let’s be careful now.

And to top it all off, China right now needs for these countries to pay in dollars instead of yuan, because its foreign reserves are shrinking so fast. It’s Catch-22 all the way down. China’s need for dollars goes against everything BRI stands for.

 

Could the move hurt the US as well? Absolutely. But the long-term view behind the tariffs, and the talks China appears to have lost faith in, is to move the US away from its near all-encompassing addiction to Chinese production, and to move at least some of that production back home. Problem of course is, that is precisely what China’s miracle growth has been built on.

If the US starts bringing production home, who is Beijing going to sell its (over-)production to? Yes, I hear you, to the BRI countries. But there it runs into the currency problems mentioned before. To Europe? The top of that trade route is also behind us. Europe will have to follow the US to an extent, and also bring factories back to the continent (and not just to Germany either).

China could perhaps sell more than it does today to Russia. But that country still does produce a lot of things, and has been forced to be much more self-sufficient due to US and EU sanctions. It’s also a mighty small market compared to 350 million North Americans and 500 million Europeans, who are on average much richer than your average Russian to boot.

 

There is a way for China to make the yuan more important in global trade (but devaluation is definitely not that way): Beijing could let go of its central and total control over the value of its currency, and let forex markets figure it out. That would give traders -and everyone else- faith in the value. Problem with that is, this is not how central control communist governments think.

Beijing wants both: central total control AND a prominent place in world trade. And it may take them a long time to figure out that is not going to happen, unless of course they first conquer the entire world militarily. That is not an option, at least not for the foreseeable future. Come see me next century.

 

It wouldn’t be the first time for me to say I can see China retreat into itself, into its own borders and culture and market (1.3 billion people!). If the Communist Party wants to remain in power, and there’s no doubt it does, this may be only possible choice going forward. If growth has indeed left the miracle -as many observers think-, it can implode in very rapid succession. And even if growth hasn’t yet evaporated, it may well very soon. Without the growth, there is no miracle anymore.

And if China can no longer grow its exports, its domestic growth will also become a thing of the past. Domestic consumption can only grow as long as exports do too. Seen from that angle, the problems with trade and the currency look downright ominous. If you need dollars that badly, and you notice that you’re already getting fewer of them, not more, you’re in trouble.

Devaluing your currency may afford you some temporary respite, but it can’t possibly solve your troubles. It can make them much worse though.

I think China has wanted too much too fast, got carried away and forgot to take care of a few potential barriers to its growth, in particular the standing its currency had and still has in the world, and the grinding need for dollars that stems from it. And the Communists have no answer to this problem.

 

 

 

 

Jan 092019
 
 January 9, 2019  Posted by at 7:27 pm Finance, Primers Tagged with: , , , , , , , , , , , , ,  9 Responses »


Pablo Picasso Massacre in Korea 1951

 

In the New Year, after a close to the old one that was sort of terrible for our zombie markets, do prepare for a whole lot of stories about China (on top of Brexit and Yellow Vests and many more windmills fighting the Donald). And don’t count on too many positive ones that don’t originate in the country itself. Beijing will especially be full of feel-good tales about a month from now, around Chinese New Year 2019, which is February 5.

And we won’t get an easy and coherent true story, it’ll be bits and pieces stitched together. What will remain is that China did the same we did, just on steroids. It took us 100 years to build our manufacturing capacity, they did it in under 20 (and made ours obsolete). It took us 100 years to borrow enough to get a debt-to-GDP ratio of 300%, they did it in 10.

In the process they also accumulated 10 times more non-productive assets than us, idle factories, bridges to nowhere and empty cities, but they thought that would be alright, that demand would catch up with supply. And if you look at how much unproductive stuff we ourselves have gathered around us, who can blame them for thinking that? Perhaps their biggest mistake has been misreading our actual wealth situation; they didn’t see how poorly off we really are.

 

Xiang Songzuo, “a relatively obscure economics professor at Renmin University in Beijing”, expressed some dire warnings about the Chinese economy in a December 15 speech. He didn’t get much attention, not even in the West. Not overly surprising, since both Beijing and Wall Street have a vested interest in the continuing China growth story.

But with the arrival of 2019, that attention started slowly seeping through. Former associate professor of business and economics at the Peking University HSBC Business School in Shenzhen, Christopher Balding, left China 6 months ago after losing his job. At the time, he wrote: “China has reached a point where I do not feel safe being a professor and discussing even the economy, business and financial markets..”. And, noting a change that very much seems related to what is coming down the road:

”One of my biggest fears living in China has always been that I would be detained. Though I happily pointed out the absurdity of the rapidly encroaching authoritarianism, a fact which continues to elude so many experts not living in China, I tried to make sure I knew where the line was and did not cross it. There is a profound sense of relief to be leaving safely knowing others, Chinese or foreigners, who have had significantly greater difficulties than myself. There are many cases which resulted in significantly more problems for them. I know I am blessed to make it out.”

A few days ago, Balding wrote this on Twitter:

“Most experts dismissed the speech by Xiang Songzuo (claiming Chinese GDP growth could be as low as 1.67%) as implausible…”. No, we didn’t. The GS PE guy and the PKU dean have every reason to deny it. Car and mobile phone shipment down 2% and 16% are not a 6.5% growth economy.”

That certainly sets the tone of the discussion. GDP growth of 1.67% vs the official 6.5%; smartphone shipments down 16%, car sales slumping. Not the kind of numbers you’ll hear from Beijing. And Balding does know China, whether they like it or not. On Monday, Bloomberg, where he was/is a regular contributor, published this from his hand:

 

China Has a Dangerous Dollar Debt Addiction

Officially, China lists its outstanding external debt at $1.9 trillion . For a $13 trillion economy, that’s not a major amount. But focusing on the headline number significantly understates the underlying risks. Short-term debt accounted for 62% of the total as of September, according to official data, meaning that $1.2 trillion will have to be rolled over this year .

Just as worrying is the speed of increase: Total external debt has increased 14% in the past year and 35% since the beginning of 2017 . External debt is no longer a trivial slice of China’s foreign-exchange reserves, which stood at just over $3 trillion at the end of November, little changed from two years earlier. Short-term foreign debt increased to 39% of reserves in September, from 26% in March 2016.

 

The true picture may be more precarious. China’s external debt was estimated at between $3 trillion and $3.5 trillion by Daiwa Capital Markets in an August report. In other words, total foreign liabilities could be understated by as much as $1.5 trillion after accounting for borrowing in financial centers such as Hong Kong, New York and the Caribbean islands that isn’t included in the official tally. Circumstances aren’t moving in China’s favor.

The nation’s companies rushed to borrow in dollars when there was a 3% to 5% spread between Chinese and U.S. interest rates and the yuan was expected to strengthen. Borrowing offshore was cheaper and offered the additional bonus of likely currency gains. Now, the spread in official short-term yields has shrunk to near zero and the yuan has been depreciating for most of the past year. Refinancing debt in dollars has become harder, and more risky.

 

Beijing’s policies have exacerbated the buildup of foreign debt. To promote Xi Jinping’s Belt and Road Initiative, the president’s landmark foreign policy endeavor, China has been borrowing dollars on international markets and lending around the world for everything from Kenyan railways to Pakistani business parks. With this year and 2020 being the peak years for repayments, China faces dollar funding pressure.

To repay their dollar debts, Chinese firms will either have to draw from the central bank’s foreign-exchange reserves (a prospect Beijing is unlikely to allow) or buy dollars on international markets. This creates a new set of problems. There are only 617 billion yuan ($90 billion) of offshore renminbi deposits in Hong Kong available to buy dollars . If China was to push firms to bring debt back onshore, this would necessitate significant outflows that would push down the yuan’s value against the dollar.

 

The Xiang Songzuo speech was also noted by the Financial Times this week. Their conclusions are not much rosier. Recent US imports from China look good only because both buyers and sellers try to stay ahead of tariffs. And whole some truce or another there may smoothen things a little, China must launch a massive stimulus against the background of twice as much investment being needed for a unit of GDP growth.

 

Nervous Markets: How Vulnerable Is China’s Economy?

A relatively obscure economics professor at Renmin University in Beijing sparked a minor furore last month when he claimed a secret government research group had estimated China’s growth in GDP could be as low as 1.67% in 2018 — far below the officially published rate of 6.7% for the year up to September. 

Most experts dismissed the speech by Xiang Songzuo as implausible, despite longstanding doubts about the reliability of China’s official GDP data. Yet although discussion of his claims was quickly scrubbed from the Chinese internet, the presentation has been viewed more than 1.2m times on YouTube — an indication of the raw nerve Mr Xiang touched with his doom-laden warnings.

[..] the question that is hanging over global markets is just how vulnerable is China to a much sharper slowdown? Ominously, the recent downturn has occurred even though the expected hit to Chinese exports from the trade war has not yet materialised. In fact, analysts say exports probably received a one-off boost in recent months as traders front-loaded shipments to beat the expected tariff rise from 10% to 25% that US president Donald Trump threatened would take effect in January. That rise is now on hold due to the 90-day truce that Mr Trump agreed with Chinese president Xi Jinping at the G20 meeting in Argentina last month.

[..] The amount of new capital investment required to generate a given unit of GDP growth has more than doubled since 2007 , according to Moody’s Analytics. In other words, investment stimulus produces little bang for Beijing’s buck, even as it adds to the debt levels.

[..] “They [Beijing] will soon have no choice but to launch massive stimulus,” says Alicia Garcia Herrero, chief Asia Pacific economist at Natixis in Hong Kong. “They do not want to give away their credibility because they said they wouldn’t do it, but there is no time to be cautious any more. Not having growth is ultimately the worst outcome of all.”

 

Christopher Whalen picks up on Xiang Songzuo’s speech as well, and quotes him saying that “Chinese stock market conditions resemble those during the 1929 Wall Street Crash”. Whereas the China Beige Book states that sales volumes, output, domestic and export orders, investment, and hiring fell on a year-over-year and quarter-over-quarter basis. Which leads to the conclusion that deflation is, or should be, Beijing’s main worry.

Oh, and Chinese consumer demand has weakened, something we’ve seen more off recently. Reuters headlines “China To Introduce Policies To Strengthen Domestic Consumption” today, but that headline could have come from any of the past 5 years or so. Domestic consumption is precisely China’s problem, and they can’t achieve nearly enough growth there.

 

China’s Stability Is at Risk

Foreign investors have convinced themselves that the Chinese Communist Party (CCP) is superior in terms of economic management, this despite ample evidence to the contrary, thus accepting the official view is easy but also increasingly risky. In a December 15 speech , Renmin University’s Xiang Songzuo warned that Chinese stock market conditions resemble those during the 1929 Wall Street Crash. He also suggested that the Chinese economy is actually shrinking.

China growth, Tesla profitability, or the mystical blockchain all require more credulity than ever before. For example, in the first half of 2016 global capital markets stopped due to fear of a Chinese recession. Credit spreads soared and deal flows disappeared. But was this really a surprise? In fact, the Chinese government had accelerated official stimulus in 2015 and 2016 to counter a possible slowdown and, particularly, ensure a quiet domestic scene as paramount leader Xi Jinping was enshrined into the Chinese constitution.

Today western audiences are again said to be concerned about China’s economy and this concern is justified, but perhaps not for the reasons touted in the financial media. The China Beige Book (CBB) fourth-quarter preview, released December 27, reports that sales volumes, output, domestic and export orders, investment, and hiring fell on a year-over-year and quarter-over-quarter basis. CBB is a research service that surveys thousands of companies and bankers on the ground in China every quarter.

Contrary to the positive foreign narrative about “growth” in China, CBB contends that deflation is the bigger threat compared to inflation. “Because of China’s structural problems, deflation has very clearly emerged as the bigger threat in a slowing economy than inflation. Consumer demand has weakened, and you see that reflected in retail and services prices,” CBB Managing Director Shehzad Qazi said in an interview.

 

So, China phone shipments are down 16%, as per Balding. But Tim Cook says Apple’s never done better. Still, if that 16% number is correct, either Apple or its Chinese suppliers are doing worse, not better. And 16% is a lot.

 

Despite Recent Battering, Tim Cook Says Apple’s ‘Ecosystem Has Never Been Stronger’

Apple Inc. stock has taken a beating in recent months, but Chief Executive Tim Cook defended his company Tuesday, and expressed optimism that trade tensions with China would soon ease. Apple shares have fallen by more than one-third since their peak on Oct. 3, and tumbled further last week after the tech giant warned of disappointing iPhone sales in its holiday quarter. But in an interview Tuesday with CNBC’s Jim Cramer, Cook said the company was still going strong, and its naysayers were full of “bologna.” “Here’s the truth, what the facts are,” Cook said about reports of slow iPhone XR sales, according to a CNBC transcript.

“Since we began shipping the iPhone XR, it has been the most popular iPhone every day, every single day, from when we started shipping, until now. . . . I mean, do I want to sell more? Of course I do. Of course I’d like to sell more. And we’re working on that.” Slower sales in China also contributed to Apple’s lowered forecast, and Cook said Tuesday he believes that situation to be “temporary.”

“We believe, based on what we saw and the timing of it, that the tension, the trade-war tension with the U.S. created this more-sharp downturn,” he said. Cook said he’s “very optimistic” a trade deal between the U.S. and China will be reached . “I think a deal is very possible. And I’ve heard some very encouraging words,” he said.

 

16% fewer phones, that gets you the second production cut at Apple and its ‘magnificent ecosystem’ in short order. Now sure, Cook can try and blame the tariffs. but Samsung’s Q4 2018 sales fell 11%, and its operating profit fell by 29%. It’s a bigger and wider issue, and China is at the heart of it.

 

Apple Cuts Q1 Production Plan For New iPhones By 10%

Apple, which slashed its quarterly sales forecast last week, has reduced planned production for its three new iPhone models by about 10% for the January-March quarter, the Nikkei Asian Review reported on Wednesday. That rare forecast cut exposed weakening iPhone demand in China, the world’s biggest smartphone market, where a slowing economy has also been buffeted by a trade war with the United States.

Many analysts and consumers have said the new iPhones are overpriced. Apple asked its suppliers late last month to produce fewer-than-planned units of its XS, XS Max and XR models, the Nikkei reported, citing sources with knowledge of the request. The request was made before Apple announced its forecast cut, the Nikkei said.

 

And very much not least there was this graph of Chinese investments in Africa. What are the conditions? At what point will they call back the loans? And when countries can’t pay back, what’s the penalty? How much of this has been provided by Beijing in US dollars it doesn’t have nearly enough of?

 

 

It’s like the much heralded Belt and Road project, or Silk Road 2.0, isn’t it, where the first batch of participating nations have started sounding the alarm over loan conditions. Yes, it sounds great, I admit, but I have long said that in reality Belt&Road is China’s ingenious scheme to export its industrial overcapacity and force other countries to pay for it. It’s like the model Rome had, and the US still do, just all in one single project. And this one has a name, and it can be expanded to Africa.

But no, I don’t see it. I think China’s debt, combined with the vast distance it still has from owning a global reserve currency, will call the shots, not Xi Jinping.

China won’t be taking over. At least, not anytime soon.