Geopolitical Update : The hidden toll of the Corona Virus

By Christian Takushi, Independent Macro Economist & Geopolitical Strategist. 21 Feb 2020 (released to public 24 hours delayed and adjusted)

I am releasing today my independent assessment of the human toll of the Covid19-Virus and its effect on the Chinese and Global economy. As China faces a double challenge of Trade Wars & Corona Virus, it is not unthinkable the economy will shrink in 2020. Although there is plenty of China bashing these days, I am more concerned for other countries – particularly in the West.

Institutional investors have disregarded the virus as a temporary blip, and they vastly underestimate the potential economic toll.

While I criticised the initial handling of the outbreak by Chinese authorities and the WHO, the more recent actions by Beijing were resolute and effective. I also ascertain that the underreporting of the real number of dead most likely stemmed from a series of difficulties and not only from the need to control public order & information. While initially the authorities did try to cover up the extent of the problem, most of the deviation between the official death toll and the real death toll resulted during the following difficult 4-week period. Since last week those two daily sets of data seem to be converging, and Beijing has obviously decided not to release the unofficial tally. I doubt it will ever  release it as it might involve some elements of national security.

My assessment is not based on the official Chinese data, but my own analysis, source clusters, data aggregation and an a priori out-of-sample main scenario projection. These estimates spring from my main scenario, but I do have secondary scenarios that may rise in probability going forward. I am not attached to any scenario or estimate. Many independent random points of evidence suggest my estimates are not far detached from what really happened last month. There are actually witnesses and analysts with much higher estimates than mine. Experts in Hong Kong, well acquainted with China, suggested the real numbers are much higher than those reported. Since this is a work in progress, my estimates should be taken with the appropriate caution. I advise you anyway to take all so-called official and unofficial data that are circulating with caution. This is a highly complex situation and many of the officials giving an opinion have a vested interest or conflicts of interests. I urge readers and analysts to handle estimates and views with care since this is a delicate public health issue.

Covid-19 Impact on Chinese economy and Global Supply Chain

At this stage, my analysis points to a 3.5% shrinkage of the overall Chinese output since 31 Dec 2019. The economy is on track to shrink 4% by the end of this month from the end of 2019. I expect nevertheless, that Beijing will ramp up spending in the 2^nd half of 2020 to compensate for this implosion. Thus, 2020 could still see a de facto modest positive growth. The collapse of auto sales in China by 90% in the first half of February confirms my assessment that most economists and investors are in denial about the fallout.

Consensus assumes China’s growth during Q1 2020 has only decelerated from a 5.5% annualised pace to a 4% pace. While online-shopping has increased, many business activities have simply collapsed – Many factories have been shut down for 4 weeks, that is 8% of their annual output. Having said that, Beijing knows exactly what Western investors look at, and they are highly sophisticated in managing data with multiple “plausible data clusters”. Investors are likely to believe the official data, because it is in their own interest. Investors and policy makers are sitting in the same boat since 2009 and Beijing knows it.

While investors are expecting a World GDP growth of 3.3% in 2020, my estimate is +2.8% due to the impact of the outbreak on the Global Supply Chain – barring of course potential fiscal & monetary measures. Should the outbreak take place in other continents, World GDP growth could easily be weaker yet. Having said that a US-EU clash on policy & trade is likely during the US Campaign 2020. Markets are not discounting World GDP growth below 3% yet – why should they, central banks have flooded financial markets with gigantic amounts of cheap money.

The air travel industry seems to be assuming a similar impact on their revenue as with SARS, something I disagree with. Industry experts say that mostly China and partially Asia will be affected. Given the complexity of this outbreak and the conflicts of interests, I hope European CEOs are not only listening to industry insiders and medical experts (that is a must of course), but also to some independent superforecasters and military intelligence experts. Based on the likely hidden numbers of infected travellers that are spreading the virus, I think it would be more prudent to err on the side of caution and prepare the global travel and supply chain industries for a bigger impact. Critics of the air travel industry say the overblown and climate-harming mass travel market has been waiting for a Day of Reckoning. The Covid19 virus may be simply the trigger that is exposing an unsustainable and fragile business model, built on reckless growth, distorted pricing, and downplaying the risks it poses to humanity.

I think that mass air and maritime travel could prove to be the biggest factor aiding the virus to spread globally.

Why I deviate from Consensus this much 

My assessment of the magnitude of the outbreak is far greater than the official version. China’s measures have been so drastic, because the outbreak was more severe than what has been reported. Nevertheless, several data points suggest the outbreak may have peaked within China (needs confirmation of course).

Underreporting .. due to lab test related issues

The number of dead persons was vastly underreported for roughly 4 weeks for several reasons – including national security, an overwhelmed system, the house quarantines and the chaos & panic. The house quarantines slowed the outbreak effectively, but probably also de facto sentenced thousands to die in their homes. Here some of the reasons for the likely underreporting of the dead

1. Dead people suspected of having the virus were often disposed of immediately for safety reasons. A large number of corpses had to be incinerated quickly at official and unofficial sites to prevent the further spreading of the virus
2. The lab tests – which were in shortage – were not used on a mounting number of dead bodies. This was the right thing to do since many severely sick people were being turned away from hospitals for lack of lab tests. These “untested” incinerated bodies could not be added to the official corona death tally. This problem was only augmented by the widespread doubts about the test efficacy: multiple (up to 5 or 6) lab tests were sometimes needed to confirm a patient as corona virus victim, and people that tested negative went on to fall sick with the virus. This issue may have helped the virus spread faster and further than experts can concede. Western experts are defending the standard lab test and disregarding the many complaints by Chinese health personnel. Only in February Beijing realised it had to partially address this
3. There was a terrifying period of 4 weeks filled with fear, chaos and panic in several provinces, in which the authorities had to make tough decisions. Given the unfolding panic and the widespread fury at the government for persecuting a whistleblower doctor, the authorities decided to withhold their unofficial numbers in order to keep the official mortality rate below 3%. Social unrest could have led to a disastrous epidemic and pandemic. It seems that by early February Beijing opted to keep the total unofficial tally secret. It was obvious that in January many people were dying with little or no medical care, thus authorities could assume that once the medical care improved, mortality rates would normalise. And it did. The problem is that Covid19 seems to be very contagious and lethal when health care systems are overwhelmed. In a nutshell, the many issues with the lab tests and the tipping public unrest forced the authorities to track an official tally and an unofficial tally.

Mortality rate probably close to 5% in January, below 3% now

As of 21 February 2020 my main scenario estimates the real total death toll in China in the range of 5’400 to 9’800; and the total number of infected persons between 150’000 and  224’000 persons. The quarantines and lockdowns are necessary, because the lab tests are of limited help. It seems the nature of the virus is to blame, not the test itself.

The mortality rate seems to be stabilising below 3%. At the peak of the outbreak the mortality rate seems to have hovered around 5%. The lack of medical care “exaggerated” the mortality of the virus during several weeks. These estimates are not unrealistic and they actually look better than what some witnesses, experts and China critics are fearing. Still, kindly take my estimates with caution – this is a highly complex situation and I will humbly adjust my estimates with new information.

The most important piece of data has not been revealed. Beijing is not telling the world how many corpses were disposed of (emergency-incinerated) without been tested for the virus, over the past two months. 

Although the system is still overstretched and a flare-up can’t be ruled out, the remarkable emergency response by Chinese authorities and the brave sacrifice of thousands of health workers have managed to stabilise the situation. As a result, the official daily death tally seems to be getting closer and closer to the unofficial tally of Beijing.

China is an autocratic state with full control of data & surveillance, but we should also not assume evil intent in everything Chinese authorities are doing. We should also not equate official Beijing with the Chinese people. The heroic sacrifice of Chinese doctors, nurses, cremation officials, police officers, Christian yellow vests etc. are all testimony of great selflessness. I wonder how the West would fare under such circumstances. We analysts can often overlook the human side of geopolitical and economic events, let us not overlook what Chinese men and women are enduring so selflessly.

WHO under pressure 

The WHO has one of the toughest jobs of any UN agency. Many are saying the WHO relied too much on the official Beijing narrative, disregarded unpleasant questions and criticised nations that wanted to curtail free travel.

UN institutions are proud of advancing the free movement of people on sea and air (to advance globalisation), but questions are now being raised on whether the WHO put this goal above public health. I humbly believe the WHO should have erred on the side of caution. Now, its head is warning about a narrowing window to avoid a pandemic.

I find this warning remarkable, because if there is a pandemic, it may be in part, because most nations followed the advise of the WHO. The WHO criticised nations that wanted to curtail free mass travel on air and sea. Only the USA, Australia and Mongolia partially defied the WHO and the media. But in all fairness to the head of the WHO, most businesses and political leaders would have demanded his resignation in January, had he recommended a drastic limitation of air travel. Business and politicians care mostly about their earnings and GDP targets.

I believe “nobody” wanted to curtail mass business and leisure travel back in January. Thus, should there be a pandemic and major hit to the world economy, .. business and political leaders should see off laying the blame on the WHO leadership.

The latest warning of the WHO cannot undo the thousands of infected but healthy people that were freely traveling around the world during January thanks to the WHO recommendations.

Monetary-fiscal measures 

The convergence ..

To read the full report, kindly write to c.takushi@bluewin.ch

 

By Christian Takushi MA UZH, Independent Macro Economist & Geopolitical Strategist. 21 Feb 2020

Disclaimer: None of our comments should be interpreted or construed as an investment recommendation

A distinct broad approach to geopolitical research

(a) All nations & groups advance their geostrategic interests with all the means at their disposal

(b) A balance between Western linear-logical and Oriental circular-historical-religious thinking is crucial given the rise of Oriental powers

(c) As a geopolitical analyst with an economic mindset Takushi does research with little regard for political ideology and conspiracy theories

(d) Independent time series data aggregation & propriety risk models

(e) He only writes when his analysis deviates from Consensus