Geopolitics Watch: Why China is Not a Coronavirus ‘Safe Haven’

◎ The following analysis was first published in the March 5 edition of our subscriber-only SinoWeekly Plus newsletter. Subscribe to SinoInsider to view past analyses in our newsletter archive.

Since mid-February, the CCP has been releasing information which suggests that it has the coronavirus epidemic under control and that China is rapidly moving towards “normalcy.”

After the acceleration of the spread of the coronavirus outside China in late February, PRC propaganda has even begun pushing the narrative that “China is saving the world from the coronavirus and the world should be grateful.” On March 4, state mouthpiece Xinhua republished an opinion piece titled, “Be Self-confident, the World Should Thank China” that juxtaposed America’s approach to handling the coronavirus outbreak on home soil with that of the PRC’s. In an interview with AFP in January after the PRC had acknowledged the coronavirus, we noted that the CCP would very likely seek to paint itself as a world’s “savior” and cultivate the image of China as a responsible stakeholder, a move that is consistent with its tactic of spinning calamity into victory.

The PRC has also recently started pushing a new disinformation theory that the coronavirus originated in the United States and that U.S. intelligence agencies could have been behind the outbreak.

Additionally, the CCP appears to be manipulating its markets and has rolled out economic policies to attract foreign investment:

  • According to mainland media reports, 13 provinces and municipalities have released their investment plans for key infrastructure projects in 2020 as of March 1. The investment plans list a total of 1,326 projects, and eight of the 13 provinces and municipalities announced planned investments totaling 33.83 trillion yuan.
  • China’s A-shares markets (Shanghai and Shenzhen) saw total trading volume break 1 trillion yuan on Feb. 19 after hitting lows on Feb. 3. And between Feb. 19 to March 5, the A-shares markets saw total trading volume break 1 trillion yuan for 11 out of 12 days. The performance of China’s A-shares markets defied the epidemic situation; in contrast, global markets plummeted for several consecutive days after the rapid outbreak of the coronavirus in several countries near the end of February.
  • The renminbi broke the 7 to the dollar level after the coronavirus outbreak was confirmed, but has in recent days strengthened to climb above the 7 mark.
  • On March 2, Morgan Stanley upgraded China stocks from “equal-weight” to “overweight,” indicating that the Chinese equity markets can now provide shelter from the coronavirus. Morgan Stanley cited expectations of further policy stimulus and cheaper relative valuations for the upgrade.

Our take: 
1. Based on our observation, the CCP domestic and external propaganda efforts have been working, with some success, to:

  • Cover-up the actual epidemic situation to convince the Chinese people to return to work and attract foreign investment, and hence preserve the PRC’s economy and safeguard the CCP’s political legitimacy.
  • Convince the world that it has the epidemic under control through releasing dubious data and leveraging on a positive World Health Organization survey of the regime’s epidemic efforts in Wuhan.
  • Spin calamity for the regime into victory for the CCP’s authoritarian system and its global leadership.
  • Depict the CCP as the world’s “savior” to extract gratitude while simultaneously demonizing America to boost nationalism and escape culpability for the epidemic.
  • The CCP’s propaganda efforts go beyond slogans and are highly manipulative. Businesses, investors, scholars, and governments should never underestimate the sway of CCP propaganda or its ability to convince people to believe in a CCP-approved reality (see our explanation of the CCP’s Red Matrix).

A CCP-approved reality, however, is not the real world. As much as the CCP propaganda apparatus wills it, the coronavirus will not suddenly disappear overnight. Nobody should be deceived into believing that the epidemic situation in China has drastically improved just because the CCP “shows” and claims it to be so.

2. The PRC’s stimulus measures and “countercyclical” stock markets do not automatically make it a “safe haven” amid the coronavirus outbreak:

  • The PRC’s 2009 4 trillion yuan stimulus ultimately caused China’s property bubble to expand dangerously and led China’s economic development to a dead end. The financial deleveraging campaign rolled out in 2017 was partly aimed at tackling the problems brought about by the earlier stimulus. There is a large question mark over whether the 33.83 trillion yuan planned for infrastructure spending will end up helping or hurting the Chinese economy.
  • China has a shortage of U.S. dollars, and the Sino-U.S. trade war makes it harder for China to grow its foreign exchange reserves. China’s trade surplus with the U.S. was in 2019 was $295.8 billion, down 8.5 percent from the $323.3 billion in 2018; 2019 also saw China’s exports to the U.S. fall 13 percent and imports decline by 21 percent. The PRC’s worsening dollar shortage means that the 33.83 trillion yuan stimulus would inevitably cause a sharp devaluation of the renminbi.
  • Zhong Nanshan, the scientist leading the PRC’s coronavirus investigation, said recently that he is confident that the epidemic situation will be “basically contained” by the end of April. We previously noted that financial analysts estimate that the PRC could see losses of as much as 5 trillion yuan (about 5 percent of China’s 2019 GDP) if the epidemic persists until the end of March; Zhong’s estimate, if accurate, means very tough times ahead for China’s 10 key industries (tourism, automobile, home services, clothing, cellphone, aviation, liquor, film, etc.) and a serious drag on the Chinese economy.
  • A prolonged epidemic will have a disastrous impact on the purchasing power of the Chinese people. According to a June 2019 report on consumer financial literacy by the People’s Bank of China, as many as 560 million people in China have zero savings. Even after subtracting school children and retirees, this means that a good number of Chinese people will either have to take on more debt or go to work and risk getting infected in order to make ends meet. Declining consumer purchasing power and rising financial risks will impact regime stability, which in turn affects the CCP’s ability to guarantee that the PRC remains a financial “safe haven” from the coronavirus.

3. We are very pessimistic about China’s economic prospects. The health of the Chinese economy will have ripple effects for the global economy, and several countries will see tough times until global supply chains are rebuilt or restored.

We are also very skeptical about the CCP narrative that it is going to quickly bring the epidemic under control. We believe that there is a very good chance of another major outbreak emerging as soon as May 2020, if not the second half of the year. The second major outbreak will likely be worse than the December-January outbreak, will be even harder to contain, and could deal critical blows to the Chinese economy and the CCP’s political legitimacy.

Businesses, investors, and governments must look beyond the propaganda and make various preparations (coronavirus, political risk in China, etc.) to avoid being blindsided by Black Swan events.