From cover-up to global donor: China’s soft power play

With its economy showing signs of life, Beijing aims to restore a reputation damaged by coronavirus

James Kynge and Hudson Lockett in Hong Kong


© FT montage

Just one month ago, China appeared to be reeling under the impact of the coronavirus epidemic. Its economy was in freefall and the death of a whistleblower doctor from Wuhan had unleashed an online revolt against the country’s communist authorities.

Just how quickly the situation has changed was demonstrated last week by Aleksandar Vucic.

With the virus now classified as a pandemic and its epicentre having shifted from Asia to Europe, the Serbian president issued a public appeal that has become a much-needed propaganda boost for Beijing.

Citing the “centennial and strong-as-steel friendship” between Serbia and China, he called on his “brother and friend” Xi Jinping, his Chinese counterpart, to assist in battling the disease.

Serbian President Aleksandar Vucic talks in front of medical experts from China after they arrived to the Nikola Tesla airport with medical supplies to help country's fight against coronavirus (COVID-19) outbrake in Belgrade, Serbia, March 21, 2020. REUTERS/Marko Djurica
Serbian president Alexander Vucic called on his 'brother and friend' Xi Jinping of China to assist in battling coronavirus © Marko Djurica/Reuters


“I am asking that you send us anything you can,” Mr Vucic was quoted as saying. “We need everything, from masks, gloves to ventilators, literally everything, and most of all we need your knowledge and people who would be willing to come here and help.”

It was just what China had been looking for — an opportunity to start reframing its role from that of the country that accelerated the virus’s spread through cover-ups, to that of the magnanimous global power offering leadership at a time of panic and peril in much of the rest of the world.

“China is trying to turn its health crisis into a geopolitical opportunity,” says Yu Jie, senior research fellow on China at Chatham House, a UK think-tank. “It is launching a soft power campaign aimed at filling the vacuum left by the United States.”

The aim of its new propaganda push, analysts say, is mostly to repair the serious damage that the pandemic — which originated in China — has done to its reputation at home and abroad. China is intent on showing itself as a responsible power, just as it did in the aftermath of the 2008 financial crisis when Beijing’s economic stimulus helped lift global demand.

Charts of the FT China economic activity index and its subindices, showing China's slow recovery from coronavirus

But this time, it is also displaying a much harder edge. Whereas in 2008 Beijing co-ordinated its efforts with those of the US, China is now mixing its humanitarian donations to hard-hit countries with stinging tirades against the US. The impression given is that of a rising superpower trying to show the incumbent which is the more important nation.

While US president Donald Trump lashes out over the “Chinese virus” as he fights criticism and a market meltdown at home, China has launched a high-tempo programme of pandemic diplomacy, winning headlines around the world for the good deeds it is doing in Europe, Africa and elsewhere.

Beijing has much ground to make up. Many people around the world blame China for multiple mis-steps that helped make the coronavirus such a potent threat. But with its economy starting to bounce back after a disastrous three months and its financial markets becoming a refuge for skittish global capital, there is a chance that Beijing may end up enhancing its international standing — something that would have seemed unthinkable a month ago.

China’s play rests upon its claim to have all but halted the virus’s spread domestically. In spite of scepticism over the accuracy of official statistics, the number of people newly-infected with coronavirus each day has fallen to double digits recently. In countries such as Italy, Spain, Iran and Germany, the new case count is running at well over 1,000 a day.



The impression that China is turning a corner is reinforced by economic data. A China Economic Activity Index compiled by the Financial Times to track the country’s progress in getting back to work shows a steady uptick in areas such as real estate sold, power plant coal consumption and traffic congestion. However, cinema admissions, a proxy for consumer demand, remains very weak.

If China can avoid a second wave of outbreaks, it will probably become the first large country to recover from the pandemic. Most economists are now forecasting an unprecedented contraction in gross domestic product during the first quarter of the year, followed by a sharp snapback in the second quarter.

For instance, Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong, expects a bounce of 8 per cent for the second quarter from the previous three-month period.

If such growth materialises, then China could stand as a rare example of growth in a world racked by economic crisis, boosting both its soft power appeal and giving it room to intervene on behalf of countries that are stricken and request assistance, such as Serbia.


“With China’s domestic demand-driven economy set to rebound and mainland investors avoiding the panic that has smacked western markets, its economy could put a floor under global growth and offer a safe haven to investors,” says Andy Rothman, an investment strategist at Matthews Asia, an investment fund.

The potential for such “safe haven” status does not seem far fetched. Offshore investors poured Rmb90bn ($13bn) into China’s government bond and policy bank securities market in the year to the end of February, according to figures from the company that operates Hong Kong’s bond trading scheme with the mainland — and inflows have accelerated further in March, traders said. This brought total foreign ownership of sovereign renminbi bonds to a record Rmb2.27tn.

“Global investors are not going to stop piling in,” says Hayden Briscoe, Asia-Pacific head of fixed income at UBS Asset Management. “They need a safe market that’s actually offering them a nominal yield.”

Opinion differs on whether Beijing, confronted with a sharp contraction in growth in the first quarter, will unleash a stimulus package reminiscent of the one that dragged the global economy back to growth in the aftermath of the 2008 financial crisis. Some analysts think China’s high debt levels preclude such an option but others, such as Mr Rothman, regard such a package as a distinct possibility.

“I have no doubt that if the domestic economy fails to show clear signs of reawakening in April, the government will step in with some of the bazooka-like measures deployed during the [financial crisis],” he says. “Interest rates in China are relatively high, so there is room to cut [and] there is room to . . . ramp up infrastructure construction.”

An airport employee, wearing a facemask for protective measures, unloads cardboard boxes, at the Athens international airport, on March 21, 2020. from an Air China airbus carrying 500.000 protective masks as part of aid measures from China, to help the country and Europe to fight against the spread of the Covid-19, the novel coronavirus. (Photo by ARIS MESSINIS / AFP) (Photo by ARIS MESSINIS/AFP via Getty Images)
An airport worker unloads Chinese anti-coronavirus equipment in Athens. China has offered similar kit to several other countries in Europe, Africa and the Middle East © Aris Messinis/AFP/Getty


With its economy recovering, Beijing is at liberty to hand out assistance to affected countries — not forgetting to play their gratitude back to home audiences. In the case of Serbia, for example, some 300m Chinese have watched a video in which Mr Vucic says that without “our Chinese brothers”, Serbia would be incapable of defending itself against the virus, Chinese officials said.

Serbia has been far from the only recipient of Chinese goodwill. In a phone conversation last week, Mr Xi told Pedro Sánchez, the Spanish prime minister, that China will do its best to provide support. He added that “sunshine comes after a storm”, suggesting that the two countries should step up co-operation after the outbreak is over.

Italy, which has suffered more than 6,000 deaths — a higher toll than China — appealed to its EU neighbours this month to send face masks for medical workers. But it was China that stepped up first. It dispatched masks, ventilators and 300 intensive care doctors to reinforce overwhelmed hospitals in the country.

Luigi Di Maio, Italy’s foreign minister, said last week: “We will remember those who were close to us in this difficult period.”Watching the Chinese example, Russia has also followed suit, announcing on Sunday that it was sending planeloads of medics and hospital supplies to Italy.

Chinese President Xi Jinping waves to residents who are quarantined at home and sends regards to them at a community in Wuhan, the epicentre of the novel coronavirus outbreak, Hubei province, China March 10, 2020. Picture taken March 10, 2020. Ju Peng/Xinhua via REUTERS ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. CHINA OUT. NO RESALES. NO ARCHIVES.
Chinese president Xi Jinping waves to quarantined residents in Wuhan. Mr Xi has lost no time in linking anti-coronavirus aid to the Belt and Road Initiative © Ju Peng/Xinhua/Reuters


China has made similar overtures — supplying medical equipment, advice and in some cases staff — to several other countries in Europe, Africa and the Middle East. Xinhua, the official Chinese news agency, reported that each of 54 African nations will receive 20,000 testing kits, 100,000 masks and 1,000 protective suits for medical use from the Jack Ma Foundation, a charitable organisation led by China’s wealthiest individual and former Alibaba chief.

Mr Xi lost no time in linking such efforts last week to the Belt and Road Initiative, his signature policy to win influence around the world by building infrastructure. Mr Xi was quoted as telling Giuseppe Conte, Italy’s prime minister, by phone that Beijing was willing to contribute to a “health silk road” — a clear reference to the fact that Italy is the only country in the G7 to have signed up to the BRI.

“China is trying to capitalise now in terms of soft power,” says Joshua Kurlantzick, senior fellow at the Council on Foreign Relations, a US think-tank.

U.S. Donald Trump speaks while Vice President Mike Pence, right, and Seema Verma, administrator of the Centers for Medicare and Medicaid Services, left, listen during a Coronavirus Task Force news conference in the briefing room of the White House in Washington, D.C., U.S., on Wednesday, March 18, 2020. Trump invoked the Defense Production Act, allowing the government to boost production of masks and protective equipment. Europe surpassed China in the number of coronavirus infections. Photographer: Kevin Dietsch/UPI/Bloomberg
US president Donald Trump lashes out over the 'Chinese virus' as he fights criticism and a market meltdown at home © Kevin Dietsch/Bloomberg


As it portrays itself as a saviour, China is also emphasising a telling difference between this and previous global crises: Beijing is going it alone, with no hint of US co-operation.

Even as recently as 2014, when the Ebola virus ravaged west Africa, killing at least 10,000 people, the US and China co-operated closely. Chinese and Americans worked side by side in laboratories in Sierra Leone and at an airport offloading emergency supplies, according to a Carter Center report.

Beijing and Washington also joined relief efforts in the aftermath of the 2004 south-east Asian tsunami. Following the 2008 financial crisis, both countries agreed on the causes of the crisis and took concerted measures to boost global demand. It was China’s $586bn stimulus programme in 2009 that helped lead the world out of the downturn.

But after years of trade disputes, this time things are very different, says Ryan Hass, a former senior White House and state department official who is now at the Brookings Institution think-tank.

“The spread of the coronavirus has held a mirror up to the bilateral relationship and the image that has emerged is ugly,” says Mr Hass. “Now, leaders in both countries are consumed by arguments over where the virus emerged and who is to blame for its spread, rather than on what must be done, collectively, to stop it.”

The clearest example of what Mr Hass calls a “downward spiral” in US-China relations has come in a bitter argument over what to call the coronavirus pandemic. Donald Trump, the US president, has repeatedly called it the “Chinese virus”, eliciting a “strong condemnation” from Beijing’s foreign ministry.

But Mr Trump has not been unprovoked. Zhao Lijian, a Chinese foreign ministry spokesperson, has pushed theories — without providing supporting evidence — that the virus may have been hatched by the US military. This claim has been repeated by China’s official media and by Chinese ambassadors around the world, although Cui Tiankai, China’s ambassador to the US, appeared to distance himself from the claim this week.

Not content with starting a war of words with the US president, China’s state media has also claimed that its authoritarian governance system is better suited to cope with a viral outbreak than democratic systems, even though this ignores the performance of Taiwan and South Korea, which arrested the virus’ spread far more effectively than China.

Such moves, say analysts, are undermining the soft power projection that Beijing is aiming for.

“China will struggle to persuade the world that it is a benign major power coming to the aid of those in need when it simultaneously is pushing out fringe conspiracy theories,” says Mr Hass.

“It would be much wiser of Beijing to let its aid to others speak for itself, but it is unclear whether it has the discipline to do so at the moment.”

Minxin Pei, a professor at Claremont McKenna College in Los Angeles, says China’s recent actions, including the expulsion of US journalists this month, made potential co-operation with the US to combat the virus more difficult.

“Instead of touting the superiority of its one-party regime, China will do well to be a generous global leader that shares its medical resources and supplies with other countries, especially developing countries in desperate need of help,” he says.

And whatever kudos China wins from its humanitarian gestures will be set against its early mis-steps and cover-up.

“Its progress was achieved at horrendous cost. Since arguably China could have prevented the outbreak in the first place if it had a more transparent system and greater press freedom, Beijing could try to cite its success as proof of the capabilities of its political system, but not many people outside China would buy it,” he adds.

It is clear that the pandemic is compounding deep fractures in a US-China relationship that has sunk to its lowest ebb since the 1989 massacre of pro-democracy demonstrations around Tiananmen Square in Beijing. Bill Bishop, a Washington-based China expert and author of the newsletter Sinocism, says the relationship is approaching a “precipice”.

Mr Bishop says a toxic mix of economic downturns in the US and China, nationalistic citizens and political leaders trying to deflect blame on to an external rival has the potential to deepen the crisis. He wrote last week: “The carnage from the coronavirus has barely begun in the US.”

Why $2 Trillion Could Be Just the Start

If federal stimulus isn’t distributed quickly enough, or if the fear of coronavirus infection drags on too long, even the mammoth government package may not be enough to avoid huge job losses

By Justin Lahart


Shoppers at a New Jersey mall last year. Many Americans will run into financial distress quickly without a steady paycheck or cash buffer./ Photo: Gabby Jones/Bloomberg News .



The U.S. government is about to pour $2 trillion on the pandemic-stricken economy. It might not be its last trip to the well.

The Senate and the White House have hammered out an agreement on an estimated $2 trillion stimulus package aimed at blunting the fallout from what is looking like the sharpest economic downturn in most Americans’ living memory.

Pending a Senate vote, approval by the House and President Trump’s signature, it will send one-time checks to many Americans, expand unemployment benefits, provide loans and relief to businesses large and small and provide funding to state and local governments.

What will matter most, once the package is enacted, is speed. With job losses likely to run into the millions, many Americans won’t be drawing paychecks, and many of them, lacking any sort of cash buffer, will run into financial distress quickly.

Many of the small businesses that have experienced a collapse in sales as a result of social-distancing measures and state shutdowns can’t last long without cash flow, either. If they fail, then the jobs they once provided will vanish, too.



If the federal government can’t figure out how to distribute funds quickly and efficiently, the economic damage the stimulus is meant to offset will only deepen. Even if it succeeds, it might not be enough.

Small businesses, in particular, have emerged as the epicenter of this crisis. There are millions of them and they employ about half of the U.S. workforce. The expected $350 billion in loans that the package apportions to small businesses may be insufficient.

The biggest problem is that until the spread of the novel coronavirus is contained, the economic damage it is wreaking will continue. Businesses that have closed as a result of the virus aren’t going to open until state and local governments deem it safe, and many of them won’t log much in the way of sales until their customers feel the same way.

At the very least, the country will need to register a clear peak in the daily number of newly confirmed coronavirus cases, adequate hospital-bed and ventilator capacity and easy access to tests before it is really ready to open for business again.

That will take time. The $2 trillion package is a lot of money, but it might not be enough.

China’s Progress Against Coronavirus Used Draconian Tactics Not Deployed in the West

General lockdowns aren’t enough, experts say, without systematic testing and quarantining of carriers

By Jeremy Page


BEIJING—U. S. and European leaders are looking at China’s progress in curbing the coronavirus pandemic to guide them on how to beat the virus within their own borders.

They may be drawing the wrong lessons, doctors and health experts say.

The cordon sanitaire that began around Wuhan and two nearby cities on Jan. 23 helped slow the virus’s transmission to other parts of China, but didn’t really stop it in Wuhan itself, these experts say. Instead, the virus kept spreading among family members in homes, in large part because hospitals were too overwhelmed to handle all the patients, according to doctors and patients there.

What really turned the tide in Wuhan was a shift after Feb. 2 to a more aggressive and systematic quarantine regime whereby suspected or mild cases—and even healthy close contacts of confirmed cases—were sent to makeshift hospitals and temporary quarantine centers.

The tactics required turning hundreds of hotels, schools and other places into quarantine centers, as well as building two new hospitals and creating 14 temporary ones in public buildings. It also underscored the importance of coronavirus testing capacity, which local authorities say was expanded from 200 tests a day in late January to 7,000 daily by mid-February.

The steps went beyond what’s envisioned in many hard-hit Western cities. As a result, many doctors and experts say the recent lockdowns in the U.S. and Europe may slow the rise in new infections—if properly enforced—but still won’t be enough to stop it or prevent many hospitals from being overwhelmed, as they were initially in Wuhan.

“A lot of the lessons have been lost,” said Devi Sridhar, professor of global public health at the University of Edinburgh. “A lockdown helps buy time: The only way it will work is if you actually backtrack and start figuring out who has the virus.”



The intensive-care unit at Wuhan pulmonary hospital on March 19. Photo: Xiao Yijiu/Xinhua/Zuma Press .


The U.S., Britain and some European countries will ultimately, like Wuhan, have to establish multiple makeshift hospitals and quarantine centers to isolate more cases if they are to bring the virus under control, she said.

“Absent of divine intervention, I don’t think there’s any other way out of it,” she said. “We’re heading in that direction: We’re just doing it too slow.”

In New York City, federal authorities plan to set up mobile hospitals, with a total capacity of 1,000 beds, at the Jacob K. Javits Convention Center in Manhattan. New York has also been looking into converting entire hotels into hospitals, but it is unclear how many beds will be made available.

Zhang Jinnong, head of the emergency department at Wuhan’s Xiehe Hospital, said the most important thing was to separate the infected from the healthy, and recommended hotels as quarantine centers where people could be isolated in separate rooms.

“You just need to turn off the central air conditioning,” he said.

He also said that in recent days he saw a handful of patients who had developed antibodies to the virus without knowingly being infected. That suggested to him that Wuhan might have already developed a level of “herd immunity.”





More than 50,000 confirmed cases of coronavirus have been identified in Wuhan—61% of China’s total—since it was first detected in December, according to Chinese health authorities. Early cases mostly involved people connected to a food market selling wild animal meat.

The virus had killed 2,524 people in the city as of Tuesday, representing 77% of China’s national toll, and a mortality rate of almost 5%.

Since late February, however, the official number of new confirmed cases in Wuhan has been declining. In the past six days, it has reported only one, prompting Chinese authorities to close all temporary hospitals and start relaxing the lockdown.

China said on Tuesday that from Wednesday it would relax its mass quarantine to allow healthy people to leave the central province of Hubei, except Wuhan, its capital, where travel restrictions would be similarly eased on April 8.

Many foreign governments that initially ruled out lockdowns, saying they wouldn’t work in democracies, are now implementing similar, though less draconian, restrictions, but without corresponding efforts to identify and isolate cases.

Some foreign experts and officials are skeptical of Wuhan as a model. They cite local authorities’ early efforts to cover up the scale of the problem, and the fact that more than five million people were able to leave Wuhan in the run-up to the lockdown.


Food gets delivered over a barrier that discourages people from entering or leaving a residential compound in Wuhan on March 15. Photo: Agence France-Presse/Getty Images .


Some also still have doubts about China’s official figures. Wuhan’s health commission said on Monday that asymptomatic cases were being isolated in quarantine centers but not included in the public tally of confirmed cases, even if they tested positive.

Others think China could suffer a big second wave of infections if it continues to relax curbs on travel and work, and that the Chinese approach would be too economically costly to replicate.

Among doctors and residents in Wuhan, meanwhile, some feel the lockdown of the city was too sudden and strict, as well as too late, and contributed to the high mortality rate there as hospitals were ill-prepared for the flood of patients that followed.

Many medical workers were also infected because they initially lacked protective gear and infectious disease training, doctors and nurses in Wuhan say.

Still, the more systematic quarantine and testing regime in Wuhan after Feb. 2 is similar to measures that also appear to have been effective in South Korea and Singapore, according to many experts.

South Korea, which has tested more people than any other country, originally tried to hospitalize all confirmed cases. But as wards became overloaded, from March 1 it divided coronavirus patients into four categories: asymptomatic, mild, severe and critical.

Only severe and critical cases were hospitalized, while mild and asymptomatic cases were placed in makeshift hospitals known as “residential treatment facilities.”

In Singapore, all suspected cases have been isolated in hospitals, while close contacts of confirmed cases have been systematically tracked and quarantined in government-run facilities or at home.

Mike Ryan, the World Health Organization’s emergencies head, warned on Sunday that lockdowns wouldn’t be enough to control the pandemic and urged governments to focus on identifying and isolating infected people and their contacts.

“It’s not just about physical distancing, it’s not just about locking down,” he said. “In China, and in Singapore, in Korea, they really focused on having that comprehensive strategy.”


Security guards man the entrance of an exhibition center-turned field hospital in Wuhan.


After Wuhan closed its supermarkets, workers had to deliver prepackaged bags of food to residents.


Ian Lipkin, an infectious disease expert at Columbia University who visited China in January and has been advising health officials there, says the U.S. should immediately implement a nationwide stay-at-home policy and then move to a “stratified isolation system” until a vaccine is ready.

“We must isolate separately those with disease who need immediate medical attention, those known to be infected who have no or only mild disease, those who are suspected to be infected based on exposure history, and those who have no known exposure and are well,” he said.

Chinese authorities did aim to filter cases when it first locked down Wuhan on Jan. 23. Confirmed and suspected cases were supposed to be quarantined in hospitals, with close contacts self-isolating at home.

The problem was that local hospitals, which had just 4,000 beds for suspected and confirmed cases, were soon overwhelmed by patients. Experts using mathematical models estimated at the time there were already tens of thousands of people infected.

By Jan. 27, some 15,000 people were going to the city’s fever clinics every day, more than five times the usual number, according to the official Xinhua News Agency. Many were sent home without being tested.

By early February, there were 20,629 people quarantining themselves at home having visited fever clinics—and that excluded sick people who hadn’t yet visited a hospital, Hu Lishan, the city’s vice party secretary, told a news briefing.

“We feel very worried and distressed,” he said, likening the pent-up demand for hospital space to a “dammed lake.”

The critical change came on Feb. 2, when Wuhan’s health authorities tasked community leaders with dividing cases into different categories, sending only confirmed patients to hospitals, and others to makeshift hospitals or quarantine centers.

Under the new policy, which took some two weeks to implement, suspected cases were also quarantined separately from other categories such as those recently discharged from the hospital and those who had close contact with confirmed cases, local officials and doctors say.

Some 12,000 people ended up staying in temporary hospitals.

“When you have the opportunity to isolate all suspected patients and close contacts, this is the turning point of the outbreak here in Wuhan,” said Du Bin, head of the intensive care unit at Peking Union Hospital, who has been working in Wuhan in recent weeks.

He also echoed the World Health Organization in stressing the importance of testing. “Apart from testing, I just have no idea how you can identify the suspected cases and how to quarantine the close contacts.”


Health-care workers from Xi'an International Medical Center Hospital bid farewell to their colleagues before setting off for Wuhan in early February.
Photo: Zhang Bowen/XINHUA/Zuma Press .


Another critical factor was the deployment to Wuhan of thousands of extra doctors and nurses from elsewhere in China. Among them was Meng Xinke, a doctor from the intensive care department of the No. 2 People’s Hospital in Shenzhen.

He arrived in Wuhan on Feb. 9 and was put to work in an exhibition center newly transformed into a makeshift hospital with 40 doctors and 1,461 beds, for confirmed mild coronavirus cases. Separating milder cases “is a great way to save resources,” he said, adding that five doctors were able to look after 400 patients during each shift.

His daily routine included checking patients’ vital signs, giving them medication, conducting tests, and identifying those developing severe symptoms. After about two weeks, he said, his team noticed that about 10%-15% of patients discharged from some makeshift hospitals were later testing positive again—a possible indication they hadn’t fully cleared the virus.

On Feb. 22, Wuhan required all discharged patients to go to quarantine sites for another two weeks instead of heading home.

Health experts say other countries short of testing kits can also learn from Wuhan’s experience. Unable to test thousands of suspected cases, on Feb. 4, health authorities allowed doctors to use chest scans to make coronavirus diagnoses in Hubei.


A medical worker in protective gear inspects a CT scan image at a ward of Wuhan Red Cross Hospital in Wuhan. Photo: china daily/Reuters .


That resulted in a spike in confirmed cases, stunning the outside world. By Feb. 19, however, the number of newly confirmed cases in Wuhan had dropped into the hundreds and by March 11, it was down to single digits. The number of deaths has declined steadily since Feb. 18.

A recent study led by doctors at Wuhan’s Tongji Medical College estimated that the reproduction number of the virus—the average number of people infected by each infected person—was about 3.68 in Wuhan before the lockdown began on Jan. 23.

That number, which has to be reduced to below one to stop an epidemic, dropped to 0.32 between Feb. 2 and 18, the study found.


—Fanfan Wang and Qianwei Zhang in Beijing, Dasl Yoon in Seoul and Feliz Solomon in Singapore contributed to this article.

This Time Truly Is Different

The vast uncertainty surrounding the possible spread of COVID-19 and the duration of the near-economic standstill required to combat it make forecasting little different from guessing. Clearly, this is a “whatever-it-takes” moment for large-scale, outside-the-box fiscal and monetary policies.

Carmen M. Reinhart

reinhart40_JOHANNES EISELEAFP via Getty Images_usstockmarket


CAMBRIDGE – While pandemics are comparatively rare, and severe ones rarer still, I am not aware of a historical episode that can provide any insight as to the likely economic consequences of the unfolding global coronavirus crisis. This time truly is different.

A key feature of this episode that makes it unique is the policy response. Governments around the world are giving priority to measures that limit the spread of disease and save lives, including the complete lockdown of a region (as in China) and even of entire countries (Italy, Spain, and France, for example). A much longer list of countries, including the United States, have imposed strict international travel bans and prohibited all manner of public events.

These measures could not be further from the policy response to the deadliest viral outbreak of modern times, the 1918-19 Spanish influenza pandemic (see chart). That pandemic, which claimed 675,000 lives in the US and at least 50 million worldwide, occurred against the backdrop of World War I.

This fact alone precludes drawing any meaningful comparisons regarding the effects of the COVID-19 pandemic per se on the US or global economy.



In 1918, the year in which influenza deaths peaked in the US, business failures were at less than half their pre-war level, and they were lower still in 1919 (see chart). Driven by the wartime production effort, US real GDP rose by 9% in 1918, and by around 1% the following year even as the flu raged.



With COVID-19, by contrast, the vast uncertainty surrounding the possible spread of disease (within the US and globally) and the duration of the near-economic standstill required to combat the virus make forecasting little different from guessing.

But, given the scale and scope of the coronavirus shock, which is simultaneously cratering aggregate demand and disrupting supply, the initial effects on the real economy are likely to surpass those of the 2007-09 global financial crisis (GFC).

While the coronavirus crisis did not start as a financial crisis, it may well morph into one of systemic severity. At least until reduced economic activity results in job losses, US household balance sheets do not appear problematic, as they were in the run-up to the GFC. Banks, moreover, are much more strongly capitalized than they were in 2008.

Corporate balance sheets, however, look far less healthy. As I observed over a year ago, collateralized loan obligations (CLOs), issuance of which has expanded briskly in recent years, share many similarities with the notorious subprime mortgage-backed securities that fueled the GFC.

The search for yield in a low-interest-rate environment has fueled waves of lower-quality lending – and not just in CLOs. Unsurprisingly, therefore, the recent stock-market crash has exposed high leverage ratios and increased default risks.

As if the coronavirus shock were not enough, the Saudi-Russian oil war has nearly halved oil prices, adding to the predicament of the US energy sector. With much of manufacturing hit by supply-chain disruptions, and broad segments of the service sector more or less paralyzed, corporate defaults and bankruptcies among small and medium-size businesses are set to spike, despite fiscal and monetary stimulus.

Furthermore, as the 2020 coronavirus crisis unfolds, the similarities between high-yield corporates and developing-country sovereigns appear to be sharpening.

While the financial and debt crisis of the 1980s affected emerging markets, the GFC was a financial crisis (and in some cases also a debt crisis) in advanced economies. China’s average annual GDP growth of over 10% in 2003-2013 lifted global commodity prices, boosting emerging markets and the global economy. And, unlike advanced economies after the GFC, emerging markets enjoyed V-shaped economic recoveries.

In the last five years, however, emerging-market balance sheets (both public and private) have deteriorated, and growth has slowed significantly. Other things being equal, the US Federal Reserve’s recent significant interest-rate cut and other measures in response to the pandemic should ease global financial conditions for emerging markets, too. But other things are far from equal.

For starters, the classic flight to US Treasuries in times of global stress, and the surge in the VIX volatility index, reveal a sharp increase in risk aversion among investors. These developments usually coexist with sharply widening interest-risk spreads and abrupt reversals of financial flows as capital exits emerging markets.

In addition, the crash in oil and commodity prices reduces the value of many emerging-market exports, and hence affects these countries’ access to dollars. In the more extreme (but not unique) case of Ecuador, for example, these risks have translated into a sovereign spread approaching 40 percentage points.

Finally, China’s economic growth was an important driver of its significant lending to over 100 lower-to-middle-income developing countries in the last decade, as I showed in a recent paper with Sebastian Horn and Christoph Trebesch. The spate of weak Chinese economic data for early 2020 thus raises the likelihood of substantially reduced outward loans.

Not since the 1930s have advanced and emerging economies experienced the combination of a breakdown in global trade, depressed global commodity prices, and a synchronous economic downturn. True, the origins of the current shock are vastly different, as is the policy response. But the lockdown and distancing policies that are saving lives also carry an enormous economic cost.

A health emergency can evolve into a financial crisis. Clearly, this is a “whatever-it-takes” moment for large-scale, outside-the-box fiscal and monetary policies.


Carmen M. Reinhart is Professor of the International Financial System at Harvard University's John F. Kennedy School of Government.

Warren Buffett’s Death-Spiral Deal

Berkshire Hathaway’s financing of Occidental Petroleum’s Anadarko deal could see it own a large chunk of the company if it gets paid in shares

By Spencer Jakab


Warren Buffett last year threw Occidental Petroleum a costly lifeline to support its purchase of Anadarko Petroleum. Photo: johannes eisele/Agence France-Presse/Getty Images .



The Oracle of Omaha wouldn’t stoop to a borderline-legal financing technique associated with penny-stock financiers.

Yet, while it was never his intention, Berkshire Hathaway BRK.B 3.72%▲ might wind up with a chunk of discounted shares in Occidental Petroleum OXY 3.31%▲ in a pattern similar to so-called death-spiral financing. The technique involves a company that is unable to raise public equity directly and instead issues debt privately to an outside source; the debt becomes convertible into stock for a fixed dollar amount rather than a fixed number of shares. The share price declines in anticipation of dilution, giving the financier much of the company.

Last year, Occidental found itself in a bidding war with much-larger Chevron for Anadarko Petroleum. To win and to avoid having its own shareholders vote to approve it, Occidental paid for much of the $37 billion purchase with $10 billion in preferred stock bearing an 8% coupon issued to Berkshire.

While perpetual and not convertible, dividends can be paid in common stock at a 10% discount.



A year ago, when Occidental’s bidding war was heating up, its market value was $50 billion.

Now its value is $11.4 billion, it has slashed its dividend and capital expenditures and its debt prices signal distress.

A logical but painful way of staying afloat is to pay Mr. Buffett in shares at next week’s dividend declaration. Occidental can do so at 90% of the volume-weighted average price of Occidental’s shares for 10 days after the declaration.

At today’s price, paying the next four quarterly dividends in discounted stock would give Berkshire 7.3% of the company. Occidental also could ax its remaining common dividend and defer quarterly payments on the preferred shares, but then it would owe Berkshire dividends on the unpaid amount that compound ad infinitum.

Even Mr. Buffett wasn’t oracular enough to see this year’s coronavirus-induced oil-price collapse, and if there were a market price for his preferred stock then it would trade below par value. But he was smart enough to throw Occidental a costly lifeline.

The ideal outcome for Berkshire would be for Occidental to avoid a true death spiral but remain on the ropes long enough to give the conglomerate a chunk of a once-great oil company at a bargain Price.