It took Boris Johnson to test positive for COVID-19 for Britain to get its act together in tackling the contagion. There’s lockdown, there’s increased testing, retired NHS workers are being called back to work and fines are being levied for anyone breaching the Coronavirus Act. But here’s the real deal. Britain has declared there will be ‘reckoning’ for China when this thing gets over besides accusing it off peddling lies and false pandemic statistics that could be off by an order of 40. The gloves seem to be off. Churchill had once said – “America will do the right thing after it has exhausted all other options.” He might have been speaking of modern-day Britain.
Anyway, Britain seems to have opened the dam for criticism of China in Western Europe. The Netherlands recalled a huge consignment of Chinese masks for being defective. There are complaints in Italy and Spain about their testing kits being defective. And, multiple countries from Europe to Australia have brought in laws to ensure domestic distressed assets are not picked up by Chinese firms. As the deaths pile up, the anger among people about Chinese mismanagement and disinformation will continue to rise. Globalisation might not retreat after this is over, but China could be paying a price if things continue this way.
China seems to have gone easy on its propaganda as well sensing the tide turning. There are more notes of hope than triumphalism on the Xinhua website. “The restart of the ‘World’s Factory’ will not only help China put its economic and social development back on track, but also relieve pressure on the world economy and safeguard the common interests of the global community”, reads an article. The focus seems to be now on consolidating the Party’s position within China with news reports on Xi’s trips to Zhejiang to oversee resumption of work and increase in electricity consumption data to show how things are getting back to normal.
China’s economic miracle is one of the strongest pillars supporting the legitimacy of CPC. Xi’s pivot towards making the party more salient in every aspect of Chinese society has helped maintain order but it also makes it vulnerable to be blamed for anything that goes wrong. While a collective withdrawal of the West from China’s manufacturing hubs might not be a reality, a substantial redistribution of manufacturing capacity from China to other locations is almost inevitable. Further, a redrawing of lines on what’s essential for national security among countries will move production of a lot of goods back home. Lastly, China’s aim to move up the manufacturing value chain and set ‘standards’ in areas like telecom, infrastructure and engineering will be impacted. Huawei’s role in 5G rollout anywhere in the West is pretty much ruled out, for instance.
These don’t bode well for an economy that’s already under significant strain of debt (almost 300 per cent of GDP) and signing up BRI projects at unviable economics. There have been questions on need to spend money on such projects when China still remains a middle-income economy with wide income disparities. The Q1 supply shock and the Q2 demand shock will show up in the numbers soon. But if the mood in the western world after Q2 is to have China face a ‘reckoning’, the CPC will have some interesting problems on hand. Watch the China space closely.
Moral hazard phir se
U.S. senate is preparing ground for another fiscal package to help sectors that were left out in the previous package and to hold up the economy as the COVID-19 cases rage on. Since the general sentiment right now is for the Fed to follow QE infinity, it is open season for all kinds of demands. Meanwhile, Trump has suggested a $2 trillion infrastructure bill to be passed to spur demand. Caution hasn’t just been thrown to the winds. It has been shot to space.
The profligacy is creating interesting moral hazard problems. Like we mentioned here, a laid off worker can earn up to $900-1100 per week because of the aid package. This was more than what a lot of them earned while they were employed. It will take some doing to get them back to work at lower wages than this. That’s not all. This is more than what workers who are currently working at the frontlines in healthcare, utilities and essential services earn weekly. So, you risk infection and deliver essential services and you earn less than someone who is sitting at home. It hasn’t taken time for these workers to demand a higher salary or hazard incentives. This is a spiral that will continue to go up.
Also, the huge amount of liquidity pumped into the system distorts market in another way (apart from the ‘crowding out’ effect that we have spoken here). In the normal course of things (no COVID-19), companies would have gone bankrupt in this and the next quarter like they normally do in the US. This creative destruction is necessary for efficient allocation of assets (poor firms die, and better run firms get access to the assets). The QE infinity has put a pause to this process for a foreseeable future. Nobody is assessing a business based on whether they’d have survived if there was no COVID-19 to hurt them. That equation is too difficult to solve for the whole economy. So, zombie firms will be kept up using this money.
Anyway, how does it matter if you have decided to open the tap without worrying about how much water is flowing out. You won’t run out of water. Your future generations will.
Bollywood is in complete standstill. Barring a few, the entire workforce works on either a limited period contract or on daily payments. There’s no shooting on and the films that were readying for release are sitting in the cans (or wherever they sit in the digital mode). The industry is terribly unorganised and notorious for delays in payments to its workers. The benefits of loan moratorium won’t be reaching to many production houses because of the way they are organised. You would expect a concerted effort from all the leading stars to pool together a fund to help their own industry.
But no. All they are doing (based on their Instagram profiles) is bartan manjhing, jhaadu phatka and lockdown workout routines.
Blessed are those who see and are silent.