Emerging market investors should take heed of Trump-Thunberg clash

Longer-term shifts can affect capital markets ahead of time

Jonathan Wheatley

- AFP PICTURES OF THE YEAR 2019 - Youth Climate activist Greta Thunberg speaks during the UN Climate Action Summit on September 23, 2019 at the United Nations Headquarters in New York City. (Photo by Johannes EISELE / AFP) (Photo by JOHANNES EISELE/AFP via Getty Images)
Reports from Davos, where climate campaigner Greta Thunberg was a guest speaker, suggest US president Donald Trump’s assault on environmental 'alarmists' received a frostier reception than it would have done a couple of years ago © AFP via Getty Images

The virtual face-off between Greta Thunberg and Donald Trump in Davos this week caught the spirit of the times: on the one hand, a call to action to avert the world’s impending climate catastrophe; and on the other, a dismissal of evidence and an exhortation to optimism. Their audiences, meanwhile, faced the more pressing concern of restoring growth and confidence to a flagging global economy.

Emerging market investors are in a similar position. Now that the immediate threats of the US-China trade war have been eased by last week’s “phase one” agreement, they should really be turning their attention to the coming drawn-out battle for hegemony between the world’s two largest economies, and to other long-term risks.

Unsurprisingly, though, many are worried about how to keep last year’s rally going in an environment of slowing global growth. This is pushing many investors into unfamiliar parts of the developing world.

“What used to be the frontier has almost become mainstream,” said Paul Greer, portfolio manager for EM debt at Fidelity International in London.

The likes of Serbia, Ukraine, Egypt and Pakistan are among his preferred plays this year, he says, as part of a portfolio designed to limit the damage from any surprises.

The temptation to diversify is strong. In the big EMs, the stimulus provided by interest rate cuts last year has mostly run its course. While slow or slowing growth in many countries means that policymakers will have to stay supportive, such support may not be as effective.

Governments with room to spend more will use it, but there are not many of those.

That means investors should not lose focus on the bigger picture. With the turn of the decade, the annual rash of forward-looking reports from analysts has taken the longer view. A “World in 2050” report from consultancy PwC makes the standard case: the world economy will double in size in the next three decades, with EMs growing at twice the pace of DMs; China and India will become the world’s biggest economies.

In contrast, a similar report from Capital Economics suggests China’s share of global GDP will hardly change at all in the period, largely because increasingly centralised government will stifle reform and make the allocation of resources less efficient. Climate change will be a headwind for many EMs, though the application of green technology may bring productivity gains for some.

We may not have to wait so long. Simon Quijano-Evans of Gemcorp Capital warned in a note on Wednesday that changes in fossil fuel dynamics may happen “quicker than we think” and will be felt first in EM currencies, of both commodity exporters and importers.

Reports from Davos suggest President Trump’s assault on environmental “alarmists” received a frostier reception than it would have done a couple of years ago. We may have reached the point at which change speeds up.

EM investors should take note, and lift their heads above the short-term data.

Will Sniffle Become a Flu for World Economy?

How the Coronavirus Made Globalization a Deadly Threat

The new coronavirus in China has spread at an alarming rate, unsettling citizens and epidemiologists alike. It poses substantial challenges for our modern way of life – and threatens our globalized world where it is most vulnerable.

By Georg Fahrion, Kristina Gnirke, Veronika Hackenbroch, Martin Hesse, Martin U. Müller, Katharina Graça Peters, Michael Sauga and Bernhard Zand

Kevin Frayer/ Getty Images

On the evening of Dec. 30, a young doctor in the Chinese city of Wuhan sent a short text message to a group of colleagues. "Seven cases of SARS have been confirmed at the seafood market in Huanan," he wrote. SARS, the viral disease that broke out in November 2002, claimed 774 lives.

"It was clear to me that we were dealing with a public health issue," the doctor said.

The name of the doctor and the hospital where he works have not been made public. But the story that he told the Beijing Youth Daily newspaper has been shared tens of thousands of times online in China. At 1:30 a.m. on Dec. 31, the municipal health commission summoned the doctor and questioned him several times throughout the day.

Where did he get his information, officials wanted to know? Did he realize he was breaking the law? Did he understand that spreading that kind of information was a punishable offense?

"Understood," he wrote on a form, signing his statement with his fingerprint.

But the doctor never got punished. Instead, he got sick.

"On Jan. 10, around noon, I began to cough. The next day, my fever rose. That was when I knew I was in trouble," he said. On Jan. 16, he started having trouble breathing. On Jan. 24, he was transferred to the intensive care unit. From there, he typed out his story on his phone on Jan. 27. He couldn't speak and could only breath with the help of a respirator.

Extreme Measures

The coronavirus, the viral disease the doctor had warned about at the end of December and which he ultimately contracted himself, has spread from the Chinese city of Wuhan around the world. As of Tuesday, Feb. 4, there have been more than 20,630 confirmed cases in 24 countries, according to the World Health Organization (WHO). China has reported more than 420 deaths so far. That's more than during the SARS outbreak in 2002 and 2003, which claimed 349 lives in mainland China.

The epidemic is worrying scientists, politicians and entrepreneurs alike. Chinese markets reopened Monday after being closed since Jan. 23 for the Lunar New Year and stocks immediately plunged. The virus has also begun to change people's everyday lives, the way they do business and how they travel. The fear of new infections has made its way around the world. Sports events have been postponed. British Airways and Lufthansa were the first airlines to cancel all flights to China. Cathay Pacific stopped handing out pillows, blankets and magazines in its aircraft to prevent the virus from spreading. What's next?

China, the world's most populous country and its second-largest economy, is facing a "complicated and serious" crisis, according to a group of Chinese officials headed by Prime Minister Li Keqiang. The country exports more than $2.3 trillion worth of goods annually and is responsible for about one-third of global economic growth.

A street in Wuhan: As ground zero of the epidemic, what happens in the Chinese city could determine whether the virus can be contained or not.
A street in Wuhan: As ground zero of the epidemic, what happens in the Chinese city could determine whether the virus can be contained or not.

What if, now that the first airports have been closed, China also shutters its ports? This would disrupt countless supply chains around the world, both big and small. And what if, after the initial coverup and subsequent quarantine of cities with populations in the millions, the Chinese lose confidence in their government?

The epidemic has already shown just how vulnerable our interdependent 21st century economy really is. China boasts the world's largest manufacturing industry. Yet many of the assembly lines aren't running. The government extended the Lunar New Year holiday by a few days in an effort to combat the spread of the virus. Meanwhile, preschools, schools and universities remain closed indefinitely. This suggests that factories in China will also remain closed for the time being.

A Globalized Virus

Experts are divided on when the virus will reach its peak. China's best-known epidemiologist, Zhong Nanshan, has said he expects new infections to reach their high point in early February, whereas experts in Hong Kong and London say they think it will be closer to April or May. Manufacturers of everything from electronics to textiles are likely facing shutdowns of several weeks.

Tech giant Apple, which has a production facility in Wuhan, quickly began looking for alternate suppliers "to make up any expected production loss,” CEO Tim Cook said last week. The French carmaker PSA, which has several factories in Wuhan, is facing a similar situation.

China exports more than 80 percent of that which it produces -including industrial and consumer goods, raw materials and food – by sea. If the ports were closed, it would lead to a massive disruption of global trade comparable to a stop in oil deliveries from Saudi Arabia. To a certain extent, China has "swing capacity" in the manufacturing industry. An interruption in production could bring a large part of the global economy to a standstill, although this still seems a long way away.

Globalization has lifted millions of people in countries like China, Indonesia and Vietnam out of poverty. It has provided people in industrialized nations with cheap televisions and laptops not to mention clothing and textiles, yet at the same time, it makes the world more vulnerable to all sorts of disruption, from terrorist attacks to natural disasters – and epidemics.

A panel of experts from the World Bank and the WHO wrote of a "world at risk" when they examined the economic consequences of a serious global health emergency last year. A pandemic like the Spanish flu, which killed as many as 50 million people between 1918 and 1920, would depress global economic output today by around $3 trillion (2.7 trillion euros), the experts calculated.

Even a comparatively mild epidemic could cause damages adding up to more than 2 percent of GDP. "The world is not prepared for a fast-moving, virulent respiratory pathogen pandemic," the report states.

Chinese Prime Minister Li Keqiang during a visit to Wuhan after the outbreak of the novel coronavirus: Fears of the virus are spreading around the world.
Chinese Prime Minister Li Keqiang during a visit to Wuhan after the outbreak of the novel coronavirus: Fears of the virus are spreading around the world.

Chinese President Xi Jinping, has compared the virus to a "demon," thus stirring up one emotion that spreads even more quickly than the virus itself: fear. In Malaysia, South Korea and Singapore, hundreds of thousands of people have signed petitions demanding entry bans for Chinese.

In France, people of Asian origin have taken to Twitter to complain about discrimination, using the hashtag #JeNeSuisPasUnVirus ("I am not a virus"). Some people have even refused to be served by Asians in supermarkets. In France, there had been six confirmed cases as of Tuesday, Feb 4. In South Korea, there had been 15; in Malaysia, 10; and in Singapore, 18.

Increasing Interdependence

The story of the coronavirus is about more than just medicine and China. It is a lesson on the increasing interdependence – and the political, economic and social dimensions – of today's world. It is a story about the globalization of danger.

Wuhan, a city of 11 million people in central China, remains at the center of the crisis. For Christian Drosten, the director of the Institute of Virology at Berlin's Charité university hospital who also helped discover the SARS virus, one thing is certain: In Wuhan, the place where it all began and where new infections and deaths have been increasing from one day to the next, the coming weeks will show whether the new virus can be stopped – or whether the world will simply look on helplessly as the virus jumps around from country to country and continent to continent.

Drosten says the decisive factor in the fight against the new coronavirus won't be a few hundred additional doctors or a hospital that was built in just over a week, but residents' everyday behavior. "SARS could only be stopped in Hong Kong in 2003 because people consistently stayed home out of fear," he explains. If people stay away from one another, they can't spread their germs.

What epidemiologists refer to as "social distancing" – i.e. minimizing contact with other people, avoiding unnecessary walks or travel, working from home, etc. – is more effective than anything against dangerous new viruses, Drosten says. If the number of new infections in Wuhan were to decrease in the coming weeks, it would certainly be due to people's behavior there.

Disciplined Residents

Weeks have passed since the outbreak of the virus and it's still not known where exactly it originated in Wuhan. One guess that gained wide traction – that the virus originated at the Huanan seafood market – is now being called into question again. "The virus was immediately and rapidly transmissible from person to person," Drosten says. "That’s why I could imagine it being an infected person rather than an animal that spread the virus at the market." The virus could have even originated at another market altogether and could have spread from there to the Huanan seafood market.

WHO head Adhanom Ghebreyesus and Chinese President Xi during a meeting in Beijing: It may sound counterintuitive, but the crisis actually provides a useful opportunity for the Chinese government.
WHO head Adhanom Ghebreyesus and Chinese President Xi during a meeting in Beijing: It may sound counterintuitive, but the crisis actually provides a useful opportunity for the Chinese government. NAOHIKO HATTA / GETTY IMAGES

So far, the city's residents have strictly heeded the call to stay home. "People are only going outside to run errands that are absolutely necessary," says Han Li, 62, a resident of Hamburg who was surprised to learn on Jan. 23 that the city in which he was staying had been quarantined. Until last Saturday, he had been holed up in a hotel in the city center, waiting for the German government to fly him, his wife and around 90 other German citizens out of Wuhan.

In Wuhan, the government's transportation ban and curfew have been highly effective. The streets are all but deserted. On New Year's Eve, many residents could be seen and heard at their windows or on their balconies, singing the national anthem and shouting words of encouragement to one another. "Wuhan!" they yelled. And: "Jia you!" which literally means to "add oil" but is used as an expression of support. It's the same battle cry that protestors in Hong Kong have been using for months.

Last week, WHO Director-General Tedros Adhanom Ghebreyesus praised Chinese leaders for their discipline, though it has really been the medical professionals and residents of Wuhan and the 15 worst-hit cities in Hubei Province who have been the most disciplined.

"We appreciate the seriousness with which China is taking this outbreak, especially the commitment from top leadership," Tedros said during a meeting with Chinese President Xi Jinping. He went on to say that he was "very encouraged and impressed by the president’s knowledge of the outbreak and his personal involvement in the response." And he responded to criticism of his lavish praise for the Chinese leader by insisting that he "would praise China again and again." Beijing's actions had "helped prevent the spread of coronavirus to other countries," Tedros said. He also noted that China had been proactive in alerting the German authorities after a woman infected with the disease had returned to China following a visit to Bavaria.

Welcome Praise

Xi had no trouble accepting the praise. Flanked by a floor-to-ceiling painting of a mountain landscape, Xi nodded approvingly as Tedros commended him for his engagement in fighting the virus. It was welcome reinforcement for Beijing. It may sound counterintuitive, but the crisis actually provides a useful opportunity for the Chinese government to make the case for its system of rule. As if to say, "You in the West may call our measures draconian. We call them efficient.”

In fact, what China is asking of its people would be difficult to imagine in any other country. For Europeans, it may be reminiscent of some blockbuster movie about a natural disaster. More than 50 million people are trapped in Hubei province. That's more than the entire population of Spain. Major cities including Beijing and Tianjin were quick to suspend long-distance bus services.

Travelers who returned from Wuhan were urged to quarantine themselves and report their body temperature to the authorities twice a day. In Beijing's subway stations, security guards in white full-body suits could be seen scanning every passenger with infrared thermometers.

"We will definitely overcome this disease," Xi said during his meeting with Tedros – just as long as his policy was "precisely implemented." His words conveyed confidence, but they were also a warning: If containment wasn't achieved quickly, it would only mean that someone hadn’t sufficiently implemented the directives from Beijing.

There's a Chinese proverb that goes, "Heaven is high and the emperor is far away." Basically, it means that the idea of the central government having absolute power over every last city, town, village and farm simply isn’t true. High-ranking provincial leaders enjoy considerable freedom – say, to ignore processes and rules. Harvard professor Elizabeth J. Perry has called this a "guerilla policy style." Economically, this approach has produced bold experiments that have contributed to China's rise.

The flip side, however, is that the central government often doesn’t have an exact picture of what’s going at the periphery – and that China's regional leaders are often held to account if something goes wrong in their jurisdiction. This could be one reason why the authorities in Wuhan waited so long to sound the alarm. On Jan. 1, the city government closed the Huanan market and the police initiated "legal action" against eight internet users who had "spread rumors" about a new viral disease, including the doctor who had been called in by the health commission the day before.

Almost three weeks later, and only a few days before Wuhan was sealed off, the city administration held a New Year's banquet. Some 40,000 people reportedly helped themselves to bowls of shrimp and hot and spicy duck necks. Later, the mayor of Wuhan said it had been assumed at the time that the virus was not being transmitted from person to person. But he did admit to doing too little for too long. He has since offered to resign.

Administrative failures like this are especially threatening to a regime that does not derive its legitimacy from elections, but instead rules repressively and then points to the achievements of its style of governance. Social media in China have been flooded with expressions of displeasure, testimonies of human suffering and eyewitness accounts – but it's usually the provincial authorities that are held responsible and rarely the central government.

A Sharp Jump

As the crisis first unfolded, the debate over it was extremely open by Chinese standards. Since Xi's public statement about the virus on Jan. 20, he has been trying to present himself as being in charge of containment efforts. Public health took priority, he said, adding that it was "extremely crucial." At the same time, he suggested "strengthening the guidance of public opinion."

So far, the strategy seems to be working. Indeed, the spectrum of what can be said is narrowing again. Particularly drastic reports from Wuhan are being expunged more quickly now than at the beginning of the outbreak. But criticism cannot be completely silenced. This became apparent when a video uploaded by a chief physician went viral last week.

Security personnel guard the Huanan seafood market where the coronavirus was detected in Wuhan on Jan. 24.
Security personnel guard the Huanan seafood market where the coronavirus was detected in Wuhan on Jan. 24. Hector Retamal/ AFP

The doctor, Zhang Wenhong, said he wanted to give his overworked colleagues in the infectious diseases department at Huashan Hospital in Shanghai a break. Instead, he said he would send Communist Party members like himself into the sick wards. "Didn't the members of the Communist Party take an oath to put the interests of the people above everything and not to let difficulties stop them? So, I say: Now march forward, comrades, and do your best."

China's Foreign Minister Wang Yi surprised doctors last week with his statement that the epidemic was "generally controllable and curable.” Indeed, the virus continues to spread at a high rate. The number of infected jumped sharply over the weekend. As of Tuesday, China alone had recorded more than 17,238 confirmed infections.

A Race Against the Clock

On Thursday of last week, after the virus had spread to a total of 24 countries, WHO declared an international public health emergency. "We must all act together now," Tedros said. WHO's primary concern at the moment is that the virus could spread to countries that don’t have good health systems. The organization did not, however, call for further travel restrictions, with Tedros saying on Monday that there was no need for measures that "unnecessarily interfere with international travel and trade" in trying to get ahead of the virus. Instead, he called for the rapid development of vaccines and medicines. Researchers around the world are racing against the clock to come up with a vaccine. But it will take time – at least three months for human testing of any vaccine to begin.

No drug has yet proven to be effective against the virus, either. There are plans for doctors to start experimenting with different drugs in the hope that something may prove helpful. If the virus were to spread uncontrollably, the world would have few means of protecting itself, and the result would be far more infections and deaths than seen up to this point.

What has been particularly worrying is that it is not yet clear what scientists and doctors are up against. Even though the gene sequence of 2019-nCoV has been decoded and Australian researchers have succeeded in growing the virus in the laboratory, it is not clear how contagious or how deadly the new pathogen really is. "At the moment, we’re dealing with things as they come,” University of Marburg virologist Becker says, summing up the situation. 

"It is extremely difficult to make any reliable predictions for a virus that only recently came into the human population," explains David Heymann of the London School of Hygiene and Tropical Medicine, who helped fight the SARS outbreak for WHO back in 2003. Technology, for its part, can only help in determining the characteristics of the virus. So, epidemiologists are now focusing on the careful study of so-called clusters, groups of sick people, and trying to find out how these individual cases correlate with each other.

That’s why experts are attaching great importance to the early cases that have emerged in Germany. In contrast to Wuhan, where it is now often difficult to trace who actually contracted the disease from whom, the chains of infection can still be tracked very closely in this country.

In Bavaria, a 33-year-old employee of Webasto, an automotive supplier, contracted the virus from a Chinese colleague who had traveled to the company’s headquarters in the village of Stockdorf near Munich for a training event.

The initial findings in the German case are both reassuring and disturbing. Contrary to initial reporting on the case, the colleague from China likely did have early symptoms when she infected the first Webasto employee and possibly also a second. The first employee, in turn, infected the third and fourth, before getting diagnosed himself.

Even after he felt completely healthy again, the man still had a large amount of the virus in his saliva, meaning he was possibly still infectious. So, it may be that simple exposure to a person who doesn't appear to be very sick or to a person who appears to be fully recovered is enough to get infected - making it difficult to prevent the global spread of 2019-nCoV.

As of Tuesday, a total of eight Webasto employees had tested positive for the coronavirus, and two children of one employee had also come down with it. Together with two people who had returned to Germany from Wuhan and were infected there, the total number of infections in Germany has risen to 12.

The health of the first four who fell ill in Germany quickly improved after they suffered brief fevers. "The four are in great shape now, with no symptoms, no fever and no cough,” Clemens Wendtner, the senior physician attending to the patients at a hospital in Munich, announced at a press conference on Wednesday.

"More Difficult than We Thought"

Elsewhere, though, the virus struck harder, even among younger people. In Wuhan, a 36-year-old man died after getting infected. And in France, the condition of an infected male around the age of 30 deteriorated.

And yet, it’s not unconceivable that the infections will ultimately be contained. "We will still have to wait a bit to see whether the strict quarantine measures imposed by the Chinese government will work,” says Marion Koopmans, professor at the Erasmus Medical Center in Rotterdam. It would definitely be a good sign if there were only a few more cases in the coming days in the affected countries outside China.

It’s becoming more likely, however, that a pandemic will emerge in which the virus will spread around the world. Stephan Becker, director of the Institute of Virology at the University of Marburg, says, "In any case, containing the virus will be more difficult than we thought." Lee Hyuk Min, a professor at the Yonsei University College of Medicine in South Korea, points to another aspect. "I don't want to provide any estimate on how many people might get infected,” he says, "but this outbreak could last for several months." He fears the virus could spread unnoticed for a long period and cause considerable damage, especially in developing and emerging countries.

But even if a pandemic does ensue, it wouldn’t automatically be catastrophic, because mortality is often overestimated at the beginning of epidemics. Public health authorities are currently estimating a mortality rate of between 2 and 4 percent for the coronavirus, compared to around 10 percent for SARS and 35 percent for MERS (the Middle East Respiratory Syndrome that first emerged in 2012).

China, Ultra-Competence and Coronavirus

By: George Friedman

The Communist revolution brought to power Mao Zedong. It created a state based on ideology, the belief that what would emerge from the long revolution would be a nation based on communism, and that with that China would experience both a prosperity and community it had never had. But the price that had to be paid to reach that goal would be ruthless oppression and suffering.

This was designed both to build communism and expunge the anti-communist habits that were ingrained in the Chinese people. Mao was the prophet of this transformation of the human condition, and the Communist Party would be his instrument. But since bad habits were to be found in the Communist Party as well as among workers and peasants, the party itself had to be periodically and ruthlessly cleansed.

China experienced multiple campaigns for purification, each more intense, and these outlived Mao himself. The Chinese people endured them for two reasons. First, they, or at least their children, would enter the new world. Second, the Chinese Communist apparatus and the forces it mobilized were pitiless and powerful. They could not be defeated.

After Mao’s death there was a political struggle, and Deng Xiaoping emerged. He was an enemy of Maoism when Maoism was gone, and he took a different approach to the future of China. It would be a state still ordered by the Communist Party, but its ends would not be millenarian. His goal was simply prosperity, achieved by empowering entrepreneurs to become rich. They would become rich because they would be free to employ their competence, and their competence would cascade on the Chinese people.

He gave the Chinese people not only hope in a real future, but also the opportunity to exploit their talents. The Communist Party was still there, guaranteeing stability and practicing a systemic corruption in which the party and its senior members benefited disproportionately, but it was a small price to pay for a competent regime. 
China's Recent Areas of Tension

The 2008 global financial crisis raised the question of the party’s competence. China had built its wealth on exports, and in 2008 the appetite for Chinese goods around the world contracted. The Chinese economy could endure this, but the financial system was destabilized. China’s economy existed on bank debt, and the failure of exports put enormous pressure on the banks. The competence of the state was no longer assured.

The solution emerged over the past decade of a powerful China searching for economic balance. The solution had to increase the power of the state, root out corruption (or at least unsanctioned corruption) and create a dictator whose claim to legitimacy was his knowledge of how to be competent in governance, economics and foreign policy.

The Chinese public on the whole was far more interested in prosperity than in abstract liberty, and Xi Jinping came to power promising to combine the power of the state with the desire for economic growth, and to increase Chinese power.

Xi has had a difficult time. He has failed to stabilize the banking system sufficiently; he has failed to manage China’s biggest customer, the United States, as his predecessors did; his actions in Xinjiang cost China some of the international respect that it craved; and Hong Kong rose up against his will. Competence is a difficult ideology. Its successes and failures are far more evident than in other ideologies. The competent leader must demonstrate his competence in all things, for if he is not competent, and he does not have visions of a future redemption of all things, then he is just another time server, making speeches.

The problem with competence-based governments is that the public frequently expects competence to produce miracles, and when disappointed, the public can turn vicious. The case of the coronavirus is an example. Xi and his staff know as little of epidemiology as I do, and even the epidemiologists are taken by surprise about new diseases. And when diseases are new, their behavior is unpredictable. The new virus may be as deadly as the common cold, or it might match the Black Death. The very novelty of the disease creates one of two responses. One is panic. The other is dismissal.

For a competent politician, there are three risks. First, failing to notice in a timely manner the existence of a new disease in the midst of daily work. Second, ordering measures that enrage the public, perhaps unnecessarily. And third, failing to order measures to limit a disease that turns out to be extremely serious. Starting from the point of ignorance, and having heard many claims on many subjects by experts, the tendency is to avoid overreacting, for which he is rarely thanked, but will be pilloried if he makes the wrong move.

Xi is president because he has sold himself as ultra-competent. Events such as the coronavirus outbreak eat ultra-competence alive. As the minor disease shows itself to be more deadly, and the opening casualness misplaced, the ultra-competent politician has as his primary goal retaining his reputation. Step one is to ignore the event. Step two is to say it is under control. Step three is to silence those who say it is not under control. The ultra-competent leader doesn’t have a step four. The disease will take its own course, practicing its own style of competence.

The doctor who was one of the first to sound the alarm about the virus died of it. It is not an unreasonable outcome when you think of it, but the theory arises that he was silenced by Xi (step three) in order to hide the truth. If he was silenced by anything other than the disease, it didn’t work anyway. The fear that the disease strikes in us must be blamed on someone. No one would dare have blamed Mao, who would have answered that the disease was a useful lesson on the road to communism. But the ultra-competent politician doesn’t have that “out.”

It has to be remembered that Xi has created a powerful sense of both omniscience and competence. His performance has been far less impressive. Given the state of the economy prior to the coronavirus, and his relationship with China’s biggest customer, he had problems. But he could cover the failures with bombast and illusion. Disease doesn’t allow that. Xi’s job is to manage China competently, and managing a new disease is hard. It is still not clear – to me, at least – what kind of disease it is on the cold or Black Death scale, but ignorance has created a kind of global quarantine on China, although freighters still sail.

So the question is whether Xi can retain his reputation as the ultra-competent leader after trade wars with the United States, the Uighur camps in Xinxiang, riots in Hong Kong and now coronavirus, and what will happen in China if he can’t. It is not so much that the disease appears so deadly as the way it was handled. And paradoxically, it seems to be Xi’s inability to handle something that by its nature can’t be handled, while failing to control things that could be handled, that poses the extreme risk for him.

Politics in China is as vicious as politics anywhere. It is merely more circumspect. But the public needs someone to blame for this crisis, and a leader who lives by the claim of competence is a likely target.

Dollar’s surge adds to coronavirus risks for US economy

Currency’s attraction as a safe haven poses a further threat to growth, say analysts

Colby Smith and Jennifer Ablan in New York

FILE PHOTO: U.S. one hundred dollar notes are seen in this picture illustration taken in Seoul February 7, 2011. REUTERS/Lee Jae-Won/File Photo
Since investor concern about the coronavirus outbreak began to move markets four weeks ago, the dollar has climbed 1.65 per cent against a basket of other major currencies © Reuters

A surge in the dollar to a four-month high against other currencies has added another potential barrier to US growth, as the Federal Reserve weighs the risks to the economy of the intensifying coronavirus outbreak.

Since investor concern about the impact of the outbreak began to move financial markets four weeks ago, the dollar has climbed 1.65 per cent against a basket of other major currencies.

The currencies of emerging market countries, whose fortunes are most closely linked to the Chinese economy, have shed 2.36 per cent over the same period, according to a JPMorgan index.

Tom Lee, head of research at Fundstrat Global Advisors, said the dollar’s attraction as a safe haven currency introduced a risk to the US economy on top of any disruption caused by the coronavirus outbreak itself.

“The strong US dollar is ultimately a headwind for US growth because it makes exports less competitive, so it actually also puts some pressure on the Federal Reserve to keep monetary policy bias easy,” he said.

Line chart of US dollar index showing Strong dollar poses growth headwind

Officials at the Fed, including chairman Jay Powell, have been warning since last month that the effects of the coronavirus in China have presented a new risk to the outlook for the global economy. But they have not so far signalled a change in their expectations that US interest rates will stay on hold throughout 2020.

Market expectations for a quarter-point rate cut as early as July have climbed as the outbreak has intensified, however, according to calculations by the CME Group. At the start of the year traders had been pricing an interest rate cut during the second half of the year, most likely in September.

Most analysts began the year expecting a weaker dollar, with Deutsche Bank, Goldman Sachs and Bank of New York Mellon among other investment banks calling for a decline. A de-escalation of trade tensions between Washington and Beijing in the latter part of 2019 had raised hopes for global growth relative to growth in the US.

That bet has been upended since the beginning of the year, however, first because of a rise in tensions between the US and Iran, which sent investors to safe haven assets such as US Treasuries, gold and the dollar.

Marc Chandler, chief market strategist at Bannockburn Global Forex, said the coronavirus had the potential to keep the dollar elevated. “Other geopolitical issues were more like shooting stars,” he said. “This is more like a comet with a big tail.”

Last week S&P Global Ratings revised down its growth forecast for China to 5 per cent from 5.7 per cent due to the virus.

Calvin Tse, senior currency strategist at Citigroup, said the economic outlook for the rest of the world looks much more difficult than that for the US — adding fuel to the dollar’s rise.

“We believe that the theme of US exceptionalism is one that is not going to end any time soon,” he said.

Chinese New Year 2020: The Year of the Coronavirus

By: Phillip Orchard

Grappling with internal political pressures, a slowing economy, an open rebellion in Hong Kong and an unresolved trade war with the U.S., Chinese leaders may have already been in a less-than-celebratory mood heading into this year’s Lunar New Year festivities, which begin Jan. 25.

The last thing the government needed was an outbreak of infectious disease, particularly when hundreds of millions of people are expected to travel throughout the country and beyond. Not only is that exactly what happened, but the disease – a new type of coronavirus – is unknown to science.

The severity of the virus (known as nCoV or the Wuhan Virus) is uncertain, nor is it clear if it will mutate and spread. The World Health Organization has yet to label it a global health emergency. But it’s certainly not yet contained. As of Thursday, there were more than 653 confirmed cases across seven countries, including the United States, and 18 people had died.

And despite repeated assurances that it had matters under control, the government on Wednesday began locking down Wuhan, the provincial capital of Hubei, where the outbreak started, and three nearby cities. Doctors in Wuhan are reportedly expecting the number of infections to exceed 6,000, and local authorities are planning to build a special hospital in just six days to handle the epidemic.

There’s reason to believe the disease isn’t nearly as big a threat to public health as the one posed by the SARS outbreak in 2003, which killed nearly 800 people. Inevitably, though, the biggest political and economic effects of pandemics come from public panic and panicked government responses, not the disease itself.

And given Beijing’s checkered track record for managing these sorts of emergencies over the past two decades, the Communist Party of China’s very legitimacy might just prove to be on the line.

How Bad Is It?

Coronaviruses come in a variety of strains. Some, such as the one that’s one of the many causes of the common cold, are relatively harmless. Others, such as those responsible for SARS and MERS, are potentially lethal. The dangerous coronaviruses seem to be linked to animals. SARS may have originated in bats and then spread to humans via civets, which are eaten as a delicacy in China.

MERS also came from bats but spread to humans via camels, once again, perhaps through consumption of raw camel milk or meat. It is therefore reasonable to suspect that the new coronavirus is linked to animals that are eaten. Indeed, the reason China is always likely to be ground zero for the next influenza pandemic is that millions of people regularly come into contact with livestock. As Smithsonian Magazine wrote, “Many Chinese people, even city dwellers, insist that freshly slaughtered poultry is tastier and more healthful than refrigerated or frozen meat.”

Whatever the source, it’s now been confirmed to be capable of being transmitted from one human to another. Even so, the new coronavirus will have a limited direct impact on public health. SARS appeared in 2002, spread quickly around the globe in 2003, infected 8,096 people and killed 774.

Then, with the exception of a handful of cases, it mostly disappeared. MERS has infected 2,442 people and killed 842. It still lingers throughout much of the world, particularly in the Arabian Peninsula. And though the reported case-fatality rates for both seem high – 9.6 percent for SARS and 34.5 percent for MERS – bear in mind that many mild cases probably went unreported. The real case-fatality rate is likely lower.

Worldwide Spread of Novel Coronavirus

The damage inflicted directly by the disease is therefore highly unlikely to have much long-term impact. But, particularly in China, the potential economic and political implications can’t be dismissed.

Economic Impact

The problem with new outbreaks is that the public and public officials alike can’t exactly wait until all the facts become clear before taking preventative measures. And it doesn’t take much for fear of the unknown to grind public transportation systems to a halt, empty out shopping centers, movie theaters and restaurants, and, most important, persuade revelers to just stay put this year during the Lunar New Year rather than join the hundreds of millions of people who take part in the world’s largest annual human migration.

The costs add up quickly. The SARS outbreak in 2003, for example, dented Chinese gross domestic product by as much as $30 billion, reducing annual growth by between 1-2 percent. Globally, the bill for the pandemic ran up to as much as $100 billion.

Not all economic activity will be lost for good. Short-term hits to the sorts of sectors most exposed to the epidemic – mostly ones tied to consumer spending – often lead to supercharged recoveries.

Chinese growth drivers where short-term disruption would have longer-lasting effects, such as manufacturing exports, industrial production and investment, stayed mostly intact in 2003. Indeed, while Chinese GDP growth dropped from 11.1 percent in the first quarter of 2003 to 9.1 percent in the second, it bounced all the way back to 11.6 percent a year later.

Still, even if nCoV proves more manageable than SARS, there are reasons to think the impact this year will be worse. For one, the SARS epidemic occurred on the heels of the dot com crash, when consumer spending across the region was already somewhat suppressed. (Incidentally, the resulting reduction of international travel may have helped contain the spread of the virus.)

For another, locking down an urban area as large as Wuhan – a city at the center of one of China’s most important internal shipping routes along the Yangtze – will be immensely disruptive.

Moreover, a substantial portion of the lost holiday spending will never be recovered. This is a problem for Asia Pacific nations that, unlike in 2003, are now highly dependent on Chinese tourists.

All told, Chinese people took an estimated 130 million more trips abroad in 2018 compared to 2003, and before the outbreak, the China Outbound Tourism Research Institute predicted that more than 7 million Chinese people would head overseas during the Lunar New Year this year.

In Thailand, which has already reported four cases of nCoV, foreign tourism accounts for as much as a fifth of economic growth. Around 57 percent of visitors to Thailand last year were Chinese, including more than 2 million in January and February alone. Japan, which hosts the 2020 Summer Olympics, is estimating an economic loss of nearly $25 billion if the virus spreads as widely as SARS.

The biggest difference for China this time around is that the economy can’t as easily shrug off a major shock. In the early 2000s, annual GDP growth was still climbing well above 10 percent.

Today, with a long structural slowdown well underway, Beijing is running up staggering debts just to keep growth from swan-diving below 6 percent. Add to this an unresolved trade war with its largest export customer – along with its scramble to implement critical but growth-sapping measures to stave off a financial meltdown before the next global slowdown strikes – and the epidemic starts to look like the sort of thing that could derail Beijing’s best-laid plans for avoiding an economic reckoning.

Political Impact

The outbreak will also complicate a broader, existential challenge weighing on the CPC: preserving its very legitimacy with the public. Delivering steady gains in prosperity is, of course, at the center of this challenge. But breakneck economic growth has become impossible to sustain – and was never going to be sufficient, anyway.

The wealthier a country becomes, the more its citizenry demands quality of life that can’t be sourced solely from rising GDP, things like clean air and water, medical services, social safety nets and responsive, corruption-free governance. This is why President Xi Jinping has encouraged the party to shift its focus to “high-quality growth,” and it’s why he’s put environmental and emergency management initiatives at the center of his sweeping reform agenda. No amount of propaganda or censorship can convince his people that a smog-choked sky is actually blue or make devastation from an earthquake disappear.

The 2003 SARS outbreak laid bare the political risks of mismanaging a public health emergency. The government came under withering public criticism for covering up the scale of the epidemic (inadvertently worsening panic), impeding the World Health Organization’s investigation, and moving slowly to contain the outbreak.

Bungled government responses to a number of other crises, such as the 2008 Sichuan earthquake, a high-speed rail accident in 2011, and a string of scandals involving tainted milk, tainted vaccines and fiery industrial accidents likewise prompted fierce public outcry.

Beijing received higher marks in subsequent health scares, particularly the H171 bird flu outbreak in 2013. And this time around, initially at least, it received international praise for its improved transparency and swiftness in moving to contain the virus.

Chinese authorities had isolated and published the nCoV genome by the second week in January, allowing foreign governments to develop critical testing procedures for the virus. Xi addressed the emergency personally last week, ordering “all-out prevention and control efforts.” China’s top political body responsible for law and order said officials who withheld information would be “nailed on the pillar of shame for eternity.”

But facts on the ground are once again giving the public reason to doubt its government’s candor and capability. Authorities have been claiming for more than a month that the virus is “preventable and controllable.”

Now, they’re taking extreme measures like locking down the Wuhan metro area, home to some 19 million people, and making belated mea culpas. The government has also struggled to abandon its practice of reflexively cracking down on independent sources of information, despite commands to do so from on high.

This has led to contradictory messaging and suppressed information that might have helped contain the virus. Chinese censors initially ordered local media outlets to stick to reprinting official reports, according to the Financial Times, effectively silencing independent reporting.

And in early January, eight people were reportedly detained for posting information about the outbreak on social media. As also happened in the SARS outbreak, moreover, the government’s rigidly enforced top-down decision-making structure has once again worsened matters by incentivizing, for example, hospitals to under-report cases and local authorities to go forward with high-profile public gatherings deemed politically important.

For all the criticism they are receiving, authorities in Beijing are trying to address a problem that would bedevil any government. China is very large and very dense. As happened with SARS, panic would almost certainly do more damage than the disease itself.

And Beijing may reasonably conclude that resorting to drastic measures may truly be in the public interest, even if they’re at odds with public sentiment. Perhaps more than any government, Beijing has given itself the power to surveil its citizenry, to shut down cities, to silence unfounded rumors on social media – all without permission. Such powers certainly could come in handy in this sort of crisis.

But by hoarding authority – by insisting on the right to micromanage the country – the CPC has raised the bar for what the public expects in response when the country is under attack, whether from foreign powers, economic forces or viral mutations. This is a problem when tight centralization has also, paradoxically, created a rigid top-down institutional culture that’s ill-suited to respond nimbly to public demand.

When faced with a crisis, the machinery of the state is programmed to default to the tools it knows best. Censorship, disinformation and problem-solving by brute force are hardwired into the Chinese system, often making it at once flat-footed and prone to overcorrection. Yet, the more pressure intensifies, the more Beijing is doubling down on this model. And the stakes riding on its bet are getting higher.

miércoles, febrero 12, 2020



The War on Talent

A growing body of research suggests that CEOs share more relevant traits with Chief Human Resources Officers than with those of any other C-Suite position. But while CHROs may have a seat at the table, that seat’s occupant – more often than not a woman – is still least likely to become CEO.

Anne-Marie Slaughter , Monica Chellam

slaughter74_Feodora ChioseaGetty Images_genderinequalitybusinessscale

WASHINGTON, DC – In the 1950s, during a very tight postwar labor market, American business executives voted Human Resources (HR) the most glamorous area in business. As Wharton School professor Peter Cappelli recounts, “90% of positions (and virtually all those in the top ranks) were filled from within – and 96% of large companies dedicated an entire department to planning for workforce needs.” When companies need talent, he argues, the prestige of HR goes up; when labor markets go slack, HR returns to benefits administration.

The labor market is very tight today, with unemployment rates in the United States at or below 4% since March 2018. In their popular 2018 book Talent Wins, former McKinsey global managing director Dominic Barton and his coauthors urge every aspiring CEO to gain serious HR experience and every corporate board to spend significant time on talent issues.

Likewise, Ellie Filler of the consulting firm Korn Ferry and Dave Ulrich of the University of Michigan have found that CEOs’ relevant traits are more closely matched with those of Chief Human Resources Officers (CHROs) than with those of any other C-Suite position. CHROs, they suggest, should be considered when selecting CEOs.

This war for talent should be great news for women, because women dominate HR. In the US, there is also a much higher percentage of women of color in HR than in any other corporate department.

Overall, despite advances, women still account for only about 10% of top executive positions in US corporations. Only 4% of C-Suite leaders are women of color. In HR, by contrast, women are actually in the majority: 73% of HR managers, and 55% of CHROs. Roughly one-third of US HR professionals identify as non-white, and more than 10% of Fortune 100 CHROs are women of color.

So we have our solution to the women’s leadership gap, right?

Not so fast. The groundbreaking McKinsey study that predicted talent would be the most valuable corporate resource – and in short supply – was published more than 20 years ago.

Growing appreciation for the value of talent has not been matched by growing appreciation for the value of HR. Despite efforts at rebranding (as “People,” “Employee Experience,” or simply “Talent”), HR’s reputation as a functional backwater persists. CHROs may have a seat at the table, but that seat’s occupant is still least likely to become CEO.

Moreover, HR leaders are paid far less than their C-Suite peers, indicating that they are valued far less. According to the Chief Executive Group, CHROs at public companies earn less than 10% of what their C-level counterparts earn.

In short, human capital is highly valued, but the people in charge of human resources are not. One likely reason is that HR professionals are viewed as lacking business acumen. There is some merit to this perception. A historical focus on functions like employee relations and benefits administration has left HR with a reputation for straddling the line between risk-averse and mundane, hardly the function you’d want to lead innovative and forward-looking efforts that might determine the fate of the business. And relatively low pay has made it harder for HR – a rare path for graduates of top business schools – to attract top talent.

HR is also the functional embodiment of “office housework.” It is a discipline that has been asked to manage the lion’s share of hard-to-measure administrative tasks that advance the business but not the careers of those who perform them. It’s not surprising, then, that CEOs are only too happy to increase diversity (marginally) by hiring women, including a large number of women of color, for the housework job, one that requires lots of focus on messy relationships among employees.

And, like all other professions dominated by women, it is then paid less and valued less. Under-resourced and inundated with transactional work, HR leaders have historically struggled to perform the strategic work now demanded of them.

The good news is that HR’s role is changing. For starters, it is much more quantitative. People analytics, popularized by former Google executive Laszlo Bock, is now an established tool, and HR departments routinely hire data scientists to inform critical business decisions.

In addition, the HR tech field has exploded, creating an ecosystem of more than 4,000 software providers catering to HR professionals. This evolution, along with a trend toward outsourcing benefits administration, is fundamentally reshaping the HR function.

But when more technology and data are involved, requiring more quantitative skills, CEOs turn to men. Instead of tapping into the talent pool of women in HR, business leaders are tilting toward hiring “strategic” HR executives from non-HR backgrounds. Job descriptions for HR leadership roles increasingly cite “business acumen” as a necessary prerequisite.

Other companies have responded to a perceived talent gap in the HR field by taking pieces of the function and distributing them to other, male-dominated functions: payroll and benefits to the CFO, analytics to the CTO, software systems to the CIO, and so on.

Bringing fresh talent into the HR field and increasing cross-functional involvement in and support for HR is not all bad. It could mean more resources devoted to HR, more attention paid to what HR leaders actually do, and more competition for top HR roles. But it could also mean that we squander an opportunity to recognize the talent that already exists among HR leaders who have been systematically undervalued, and to empower and upskill the existing HR talent pool.

Last August, the US Business Roundtable announced its members’ intention to pursue “an economy that serves all Americans.” Central to that vision is an investment in fostering diverse and inclusive workforces.

As talent takes center stage, and as stakeholder capitalism gains momentum, women in HR, the most diverse function in corporate America, are poised to rise. It is up to their bosses to let them.

Anne-Marie Slaughter, a former director of policy planning in the US State Department (2009-2011), is CEO of the think tank New America, Professor Emerita of Politics and International Affairs at Princeton University, and the author of Unfinished Business: Women Men Work Family.

Monica Chellam, former US State Department Foreign Service Officer, works in the technology industry.

Good down, bad up

India’s economy risks swapping stagnation for stagflation

Inflation is not only an onion phenomenon

Mumbai’s chefs were quick to spot the latest threat facing India’s economy. As they foraged for ingredients in Crawford market, where hawkers sell fruit, vegetables and other kitchen staples, they began hearing prices quoted not per kilogram, but per quarter-kilo—a forlorn attempt to mask price increases.

Returning from a recent shopping spree, one prominent chef checked off the items rising sharply in price: tomatoes, cabbages, aubergines, fish, spices—almost every ingredient, in fact, in the Indian cookbook.

The hawkers had some plausible excuses. The weather has been erratic, and delivery systems unreliable. But although an increase in inflation was widely foreseen, the severity of it was not. Consumer prices rose by over 7.3% in December, compared with a year earlier, the biggest jump since July 2014. Onion prices, up by 328%, contributed 2.1 percentage points to the headline figure all by themselves.

But India’s inflation is not only or everywhere an onion phenomenon. A Mumbai tea-vendors’ association recently recommended a price rise because of the increased cost of sugar and tea leaves, as well as the gas that fuels vendors’ stoves. The National Pharmaceutical Pricing Authority allowed sharply higher charges for 21 drugs, including treatments for leprosy, malaria and tuberculosis, which were in short supply because prices had failed to cover rising costs.

Indian Railways, a government entity, announced an increase in ticket prices in December. Its eroding finances apparently left it no choice. Complaints about rising air fares have been circulating since the collapse of Jet Airways last April. India’s mobile-phone operators have raised tariffs sharply after losing a court battle with the government over licence fees and spectrum charges. Despite a collapse in sales, vehicle prices are rising, a result of costly new regulations. Rajiv Bajaj, managing director of Bajaj Auto, a motorcycle-maker, has complained that the government “is killing the industry”.

This miscellany of misery will complicate the government’s efforts to fight an economic slowdown. India’s gdp grew by only 4.5% in the third quarter compared with a year earlier.

That figure would have been as low as 3.1% were it not for a hurried government-spending spree. Yet another splurge is expected in the budget on February 1st. But any increase in demand could prompt an offsetting response from the Reserve Bank of India (RBI), the central bank. It may choose to prolong stagnation so as to avoid the uglier scenario of stagflation.

Stagflation usually begins with a setback to supply, such as India’s unseasonal rains. These misfortunes both lower output (the “stag” part of the phenomenon) and lift costs (the “flation” part). But once prices have increased sufficiently to reflect the scarcer supply, they should in principle stop rising. Some economists expect inflation to begin falling as soon as February.

After all, core inflation, which excludes food and fuel prices, remains below 4%.

The problem is that before inflation disappears, Indians may start believing it will stay, making it more likely to persist. In most rich countries that have adopted inflation-targeting, headline inflation usually falls back into line with core measures, which reflect the strength of demand better. But in India the opposite is true. Core inflation usually converges towards the headline number, which reflects more accurately the drain on people’s pockets.

The RBI’s inflation-targeting framework, which it adopted in 2015, was supposed to fight this tendency. It was meant to convince people that the central bank’s inflation target of 4% was a better guide to future inflation than the prices quoted at Crawford market and other emporiums across the country.

But the framework has “yet to be fully tested”, according to a recent lecture by Raghuram Rajan, the former rbi governor who introduced it. Mumbai’s chefs will hope it passes the thorough examination it will now undergo.