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Coronavirus poses crucial test for Chinese Communist Party

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      By Emerging Markets Debt TeamEaton Vance Management

      Boston - The impact of the new coronavirus, now formally dubbed Covid-19, on China will take time to fully emerge. Since the SARS epidemic struck in 2003, the only constants have been the Communist regime, the secrecy of its operations and pervasiveness of its control. The internet was in its infancy then and China's economy was substantially smaller and much less crucial to global supply chains.

      Following is an overview of the facts and implications, as we currently understand them at the emerging markets debt team:

      Virology

      Fatality rates are trending on the lower side. While the mortality rate of 2% to 3% appears to be higher than the normal flu, that is still substantially less than the 10+% some alarmists had feared. However, the transmissibility of the virus is quite high, which makes it difficult to control.

      The spread of the virus outside of province of Hubei, where the virus originated in its capital city, Wuhan, has been rising steadily, but not exponentially. Outbreaks in the rest of Asia also appear to be relatively contained. If the virus starts ramping up more in the big centers of Beijing, Shanghai and Chongqing, that would signal substantial elevation in the epidemic.

      The confidence level of any assessment of the epidemic is always reduced by the possibility of underreporting by the Chinese government. Since the central government took ownership of the situation, underreporting has probably become more of an issue.

      Economy

      The extensive and tight lockdown has severely reduced economic activity. There's also a partial seasonal effect, in that it has coincided with the Lunar New Year, when the economy is normally in a lull. However, by now, industrial activity is usually back to about 100%, but anecdotal reports lead to a "guesstimate" of just 25%.

      The authorities have marginally pushed stimulus measures. For example, the People's Bank of China (PBoC) is guiding rates lower, and the strict controls on shadow banking, environmental regulation, etc. have been loosened, at least temporarily. More anecdotally, there is enough fear of the virus that people will be tentative for quite a while.

      Onshore financial markets reopened on February 3. The first day was essentially "limit down" for the stock market, but there have been steady gains since then. In all likelihood, the government and government-controlled entities were behind much of the demand, but private sector flows appear decent as well. From anecdotal reports, on-the-ground opinion seems less complacent than the stock market.

      Politics

      China President Xi Jinping was absent in the initial stages of the virus, causing speculation there may be something afoot, like a coup. However, Xi is back in public and seems to be demonstrating that he is personally handling the situation. There is an extensive propaganda campaign to blame the local officials. A doctor who tried to sound the alarm early on, but was suppressed by the authorities, died from the virus. Given the public outrage following his death, there is some thought he could become a martyr.

      Bottom line: Historically, the Communist Party's legitimacy has come from a demonstrated track record of improving living standards. Whether the fallout from Covid-19 will ultimately erode that legitimacy is the biggest question mark to arise, but without doubt it is one of the party's biggest challenges of the past three decades.