What’s going on in China?

Is the new virus under control and soon to fade? Or are we on the brink of a gigantic pandemic?

The business press reports a number of disturbing, if not alarming, trends in industrial companies dependent on the Chinese supply chain that has been severely disrupted by COVID-19. The examples are multiplying rapidly—the American Chamber of Commerce in Shanghai said 48% of their member companies are “impacted” by the rolling shutdowns, and 78% are short-staffed.

U.S. manufacturing, what’s left of it anyway, is highly dependent on inputs farmed out to companies in China, so the deep disruption of economic activity through mandatory quarantines and factory suspensions can paralyze entire industries if they continue for too long. Surprise, surprise, turns out the wholesale shipping of U.S. industrial capacity to low-wage venues in pursuit of a quick buck turns out to have a downside despite its success in crushing labor domestically.

Apple has had to revise profit forecasts, and HSBC is taking a huge hit from its giant Asian operations. Volkswagen can’t get key parts for its cars, and the list goes on and on.

This deep drag on economic activity is not only threatening to crush China’s growth rate or even throw it into reverse, but it also could bring the ruling Communist Party and Chairman Xi specifically into disrepute given his ham-handed approach to the viral outbreak and years-long L’etat, c’est moi determination to identify the state with his divine person. It is significant that Xi, who normally makes sure that his image is plastered all over the news media daily, virtually disappeared from view for nearly two weeks just as the coronavirus disaster was unfolding.

In fact, some analysts are suggesting that a coronavirus pandemic, if it materializes, could be the “black swan” event that triggers the next worldwide recession. With some estimates of total infected persons reaching into the hundreds of millions in China alone, the consequences of ongoing quarantines, factory shutdowns, etc., are incalculable and must be making party officials mighty nervous. The big firms can bounce back and make up for lost production, but smaller enterprises will go under, and not just in China.

On the other hand, if people are sent back to work whether the illness is under control or not, the economic damage will be minimized, at least for a while, even if the result is a rejuvenated epidemic with the disease spreading to neighboring countries and eventually the entire world.

Therefore, all numbers coming out of China that purport to show a slowing of the infection rate and an early peak to the epidemic’s spread should be taken, in my view, with a boulder of salt. If the Chinese leadership is calculating a course of action between two unwelcome bad choices—an uncontrolled epidemic or economic disaster—it’s pretty easy to see where their short-term self-interest lies. And U.S. businesses reliant on Chinese supplies are unlikely to cast doubt on what would be highly reassuring news, even if the actions taken as a result put their own workers in danger.

Incidentally, my suggestion here Feb. 15 that high rates of cigarette smoking in China might be contributing to the toll of disease is supported by an academic article published last week in an online magazine. A study of lung tissue looking for a receptor named ACE2 that increases the likelihood of COVID-19 infection found no differences in rates among patients from different racial, age, or gender categories. But one factor was statistically significant: smokers had greater ACE2 gene expression than non-smokers (p=.008) The datasets are small, and the article isn’t peer-reviewed. Nonetheless, it’s not a stretch to assume that a respiratory illness will hit hard in a population in which 60% of adult males smoke.