Coronavirus is a black swan for China — and beyond

The term "black swan" was popularized by Nassim Nicholas Teleb in his book by the same name.  It is taken to mean an unpredictable event that's beyond what can normally be expected and that has a high impact.

To put it another way, black swans are characterized by their extreme rarity and their severe impact.  Looking at a black swan event in retrospect, however, it can be seen that the danger was always present but never sufficiently hedged against beforehand.

The coronavirus that broke out in China is a black swan event.  Nobody saw this virus coming, yet it shouldn't have been a surprise.  China is the world's premier incubator of new infectious flu strains.  Health experts blame China for the 1918–19 "Spanish flu,"1957's Asian flu, the Hong Hong flu of 1968, the Russian flu of 1997, and the more recent SARS outbreak of 2003.

Now that this viral black swan has landed, here are some of the likely repercussions. 

China is going to take hits politically, economically, and to its image.  Politically, the credibility and competence of the Chinese communist leadership is under a dark cloud.  The Chinese people are blaming their government for covering up the disease and thus helping it spread.  And the government's ham-fisted methods in how it quarantines people are fueling the discontent.  Some, such as AT's Monica Showalter, speculate that the coronavirus can take down the communist dictatorship itself.

Economically, China was already staggering from the trade war with America before the outbreak.  The coronavirus can only exacerbate this situation.  To prevent the spread of the virus, schools and factories have been closed, and travel within China has been restricted.  This will cut deeply into the Chinese GDP, and specifically, it will hamper China's ability to export.  Since so much of China's economy relies on revenue from world trade, this will send shockwaves throughout Chinese society.  Many supply chains have also been leaving China due to the trade war, rising labor costs, environmental concerns, and China's increasing authoritarian leadership.  The coronavirus will accelerate this trend, thus weakening China even further and into the future.

China faces a terrible dilemma.  If the government maintains the quarantine long enough to truly contain the virus, its economy tanks.  But if such a measure isn't taken, the epidemic can spread.  Given the nature of communist governments, China will probably try to escape this dilemma by lying.  The Chinese will claim that the virus has burned itself out even if it hasn't, just to get people back to work and foreign businessmen re-entering the country again.  This runs the risk of allowing the coronavirus to spread not only throughout China, but also to even more foreign countries than it already has.

The coronavirus has given China's global image a black eye.  This will make China's dealings with Hong Kong and Taiwan more difficult than they already are.  Other countries are going to be ever more reluctant to do business with China or to accept Chinese investments in their countries.  Some countries have even started to ban Chinese travelers from their shores.

That's not the end of it.  The damage the coronavirus will do extends beyond health concerns.  China is the world's second largest economy.  Many countries depend on exporting raw materials to China.  This trade will diminish, and if those countries are over-leveraged with debt, they could well go bust.  

There are other countries like the U.S. and those in Europe that rely on the output from supply chain factories in China.  One example of this is how regrettably dependent the United States is on China for pharmaceuticals, medical equipment, and supplies.  Peter Navarro says this is a national security issue, and he's right.

And then there's Germany.

One of the most significant threats to Europe's economy is parts shortages from China.  This could effectively cause major production lines in Germany and across the continent to shut down.

Also, Daimler sold 700,000 Mercedes-Benz cars in China last year, twice as many as it sold in the U.S.  If two thirds of China's economy remains frozen, and more than 400 million people remain in quarantine, this could damage car sales.

Europe's industrial production downturn continued to accelerate in late 2019, but now it could crash because of the virus shock.

Another source of concern is the question of how exposed Wall Street and U.S. pension funds are with investments in China.  It is probably not insignificant.  Wouldn't it be terribly ironic to hear that the Fed might to want to help bail out China "for the good of America" somewhat like what it did for Europe in 2008?

A prolonged slowdown in China will send ripples throughout the world, perhaps leading to a global recession.  The political fallout in China and elsewhere from such a severe economic shock is impossible to predict other than to say nothing positive can come from it.  Such is the nature of a black swan.  When one lands, all bets are off.

Image credit: Pixabay, public domain.

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