The Black Swan is Here


The Black Swan is Here 

By Wen-Che Huang

As the COVID-19 epidemic rages on, aside from a few industries that have been spared, like masks and food delivery, the overall investment environment looks grim. Thus, the sources of continuing global turbulence, remaining risk points, and China’s plans will become important data points for its subsequent economic growth.

On February 11, 2020, in a coastal Fujian county where there were still no confirmed COVID-19 cases, residents nervously watched the scenes playing out in Hubei on their phones. For the next twenty days, they unanimously agreed to quarantine any cases, rich or poor, just like in Hubei. The next steps would involve inestimable costs.


Getting Through the Crisis Together

Sometime around the eve of the Spring Festival on January 23, long-distance busses used to take low- and middle-income residents to Xiamen, as well as the local transit service, quietly stopped operating. Trucks from other provinces lined up to park next to the highway toll station. Their drivers had long since become stranded, and rumors say that they ended up being isolated in an old hotel in the county capital. Although neighboring counties did not experience the farce of digging up roads and building walls, as on the Hubei border, they swiftly set up sentry posts on county borders to check the registration of each passing car.

“14 + 14” suddenly became a hot topic around the county. The nearest Grade A Class III hospital (Note 1) with testing capability was in a municipality 90km away. Officials on the ground learned that the simplest testing method was just to quarantine. Driving to another county would incur a 14-day quarantine, and returning home another 14 days. Meanwhile, trains maintained service, despite cutting their schedules. The government sent people to the station to check each arriving passenger. Those who passed the inspection were sent to 14-day quarantine, while those with unknown travel histories were forced to take the next train out.

Residents voluntarily practiced social isolation. Only a few supermarkets and beverage shops in the county were allowed to stay open, and customers were not allowed to linger and chat, only to get delivery or carry-out. Security guards set up posts at the entrances to housing communities and alleys, requiring people to fill in their reasons for exit. E-commerce, essential for survival at home, continued to operate, but delivery became slower and more expensive, as the five express companies (Note 2) were also required to follow the “14 + 14” rules, and could not deliver across county boundaries. Only the state-owned Shunfeng Express, incorporated in 2019, could facilitate delivery on a national scale. At that moment, residents could only come together and wait for things to improve.

County Party secretaries in China often implement “60-day campaigns” to improve the people’s livelihood. In practice, these campaigns start with a lavish press conference but tend to peter out towards the end. The determination of those on top is firm, but ordinary citizens lack connection to the larger goals. The coronavirus outbreak, however, touched a raw nerve in villagers. Chinese speak of the “three mountains” of education, housing, and medical expenses, but for ordinary households, the latter of those in fact gets short shrift. Most everyday medical problems are treated with prescriptions, and most people consider true medical treatment to be a “black swan” expense. No matter how healthy one may be, the costs of a coronavirus infection could ruin one’s own and one’s family’s finances overnight. Starting on January 23, this fear drove citizens to launch a semi-organized movement. Within only ten days, the relaxed county turned into a previously unimaginable fortress. It was only on February 11, seeing CCTV announce slightly fewer national cases, and Fujian Province declining from its peak on January 28 with 26 people to five on that date, the county finally breathed a sigh of relief, having maintained zero cases.

Hoping for a Quick “People’s War”

CCTV’s Novel Coronavirus Epidemic program releases data twice daily. Besides Hubei, on February 5, the data on confirmed cases started declining, but the State Council’s February 10 work resumption plan created the next problem for local officials. In the aforementioned Fujian county, for example, a neighboring industrial area for umbrellas employed hundreds of migrant workers, mainly from Jiangxi. The national petrochemical industry base 30km from the county capital, and surrounding factories, also employed hundreds of mid-level managers from the north of China – most of whom had left their posts due to the Spring Festival. Should the front-line local officials let them return to the fortress and sully their unbroken record? The residents, having been cooped up for over two weeks, could only hope that President Xi Jinping’s “People’s War” would start to subside after reaching a peak in late February, as predicted by CCTV scholar Zhong Nanshan. They hoped that everyone could safely return to work. [DS1]

On February 11, the State Council announced that provinces, cities, and districts excluding Hubei were gradually returning to work. In particular, companies in key areas such as medical supplies, energy, food, transport, and logistics had started work. Data from the 10th on 22 key provinces showed that 76% of mask companies, 77% of protective clothing manufacturers, 94.6% of grain producers and processors under key national monitoring, and 57.8% of coal mines had resumed work. It deemed the supply of power, gas, and refined oil as sufficient, and stated that civil aviation, railroads, and water pipeline networks were working normally.

Labor Shortages, Unreliable Logistics 

The companies mentioned by the State Council were mostly large state-owned enterprises in key industries, nurtured ‘from cradle to grave’ in industrial zones, which were relatively unaffected by the epidemic. Their nature is completely different from the companies that drove China’s growth for 30 years. Their location has moved from the Yangtze and Pearl River deltas of the early “caged bird” policy to emerging Chongqing, Zhengzhou, and Wuhan. Large companies like Foxconn, Huawei, Volkswagen, and BYD are all downstream manufacturers that utilize industrial clusters. Their head offices form dense sea, land, and air logistics networks, information networks, and talent networks with surrounding parts, testing, consumable materials, maintenance, logistics, and peripheral service providers. Since January 23, countless cases like that of the Fujian county have emerged, disrupting these networks. When local officials have received orders to restart work, they’ve faced shortages of labor and unreliable logistics.

Looking back over the entire incident, the reason that the factories originally shut down was not a large natural disaster that could not be anticipated, but rather a routine Spring Festival shutdown. Restarting should not require a professional environmental safety assessment. The people in charge of the factories and the corresponding local governments can simply reach an understanding. The State Council press conference was only of a declarative nature. Even though local governments could not open by February 10, they have all begun taking steps to remove obstacles as the case totals have slowly fallen.

Fear of Cross-Contamination

The next steps will be a high-stakes game for all involved, from the central to the local governments. There is still no consensus on the timing of work resumption. The biggest concern is the risk of cross-contamination as workers return to their workplaces. Assuming that everybody has learned from the first wave of infections how to minimize harm while reducing further infections, the next few weeks should play out as follows. The government will remove human resources, logistics, and financing obstacles first for key industries with limited resources. In the aforementioned Fujian county, a provincially-owned petrochemical plant in the central petrochemical industry base has begun to issue orders to stranded workers to return to their posts. This company was able to skip past county-level orders to make its own social distancing arrangements. Meanwhile, it is using the power of the provincial government to remove the remaining logistical obstacles, provide financial assistance, and even help upstream key component manufacturers to facilitate work resumption. Similarly, municipalities and county governments have also given priority to their key industries using limited resources based on their own development plans. It is worth noting that local governments lost their land tax relief under the national tax unification plan in 2018. Under this playbook for operations of governments at each level, even if they manage to avoid the second black swan of another infection wave, the predictable result will be that less competitive private SMEs in less favored industries, lacking government connections, will face an even harsher operating environment, and even be extorted by low-level officials on the pretense of epidemic security. Without any larger political change, this will mark one more step backward for China's private economy and a continuation of Xi Jinping’s policy of “the state advances while the private sector retreats.”

Aside from a few industries that have been spared, like masks and food delivery, the overall investment environment looks grim. The situation is markedly different from the aftermath of SARS. Indeed, the 2003 SARS outbreak occurred during a period of torrid economic expansion for China following its accession to the WTO. In 2019, in contrast, the government was already busy dealing with a variety of challenges including the trade war, industry chain relocation, and a real estate bubble. On December 6, 2019, Xi presided over a meeting of the Politburo analyzing the economy in 2020. The meeting emphasized “six stabilities”: employment stability, financing stability, trade stability, foreign and domestic investment stability, and stability of expectations. Ironically, the coronavirus outbreak occurred within 50 days of that meeting. Based on personal observations, this has shaken the trust of some grassroots-level officials and citizens in the government. Looking back, the Central Economic Work Conference noted that “changes are occurring at a faster pace, and the sources of global volatility and risk points have increased significantly. China must prepare accordingly.” Going forward, the key points will still be the ongoing volatility, risk points, and China’s plans. (The author is an advisor to the Taiwan Academy of Banking and Finance)

Note 1: Grade A Class III hospitals refer to hospitals with over 500 beds, each with 1.03 health technicians and 0.4 nurses, and with various public health conditions.

Note 2: The Five express companies refer ZTO Express, YTO Express, STO Express, Best Express, and Yunda Express, which returned to work on February 11.

Note 3: This article is translated originally from pp.82-85, Vol.124, Taiwan Banker Monthly.