The Long Darkness Before Dawn

With vaccines and a new administration, the pandemic will be tamed. But experts say the coming months “are going to be just horrible.”

By Donald G. McNeil Jr.

Some epidemiologists predict that the death toll from Covid-19 could be close to twice the 250,000 figure that the nation surpassed last week.Credit...Tim Gruber for The New York Times

Each week, good news about vaccines or antibody treatments surfaces, offering hope that an end to the pandemic is at hand.

And yet this holiday season presents a grim reckoning. The United States has reached an appalling milestone: more than one million new coronavirus cases every week. Hospitals in some states are full to bursting. The number of deaths is rising and seems on track to easily surpass the 2,200-a-day average in the spring, when the pandemic was concentrated in the New York metropolitan area.

Our failure to protect ourselves has caught up to us.

The nation now must endure a critical period of transition, one that threatens to last far too long, as we set aside justifiable optimism about next spring and confront the dark winter ahead. Some epidemiologists predict that the death toll by March could be close to twice the 250,000 figure that the nation surpassed only last week.

“The next three months are going to be just horrible,” said Dr. Ashish Jha, dean of Brown University’s School of Public Health and one of two dozen experts interviewed by The New York Times about the near future.

This juncture, perhaps more than any to date, exposes the deep political divisions that have allowed the pandemic to take root and bloom, and that will determine the depth of the winter ahead. 

Even as the Centers for Disease Control and Prevention urged Americans to avoid holiday travel and many health officials asked families to cancel big gatherings, more than six million Americans took flights during Thanksgiving week, which is about 40 percent of last year’s air traffic. 

And President Trump, the one person most capable of altering the trajectory between now and spring, seems unwilling to help his successor do what must be done to save the lives of tens of thousands of Americans.

President-elect Joseph R. Biden Jr. has assembled excellent advisers and a sensible plan for tackling the pandemic, public health experts said. But Mitchell Warren, the founder of AVAC, an AIDS advocacy group that focuses on several diseases, said Mr. Biden’s hands appeared tied until Inauguration Day on Jan. 20: “There’s not a ton of power in being president-elect.”

A fatal inaction

Refrigerated trucks parked outside the Office of the Medical Investigator in Albuquerque, N.M., serve as makeshift morgues.Credit...Adria Malcolm for The New York Times

By late December, the first doses of vaccine may be available to Americans, federal officials have said. Priorities are still being set, but vaccinations are expected to go first to health care workers, nursing home residents and others at highest risk. 

How long it will take to reach younger Americans depends on many factors, including how many vaccines are approved and how fast they can be made.

In mid-October, I surprised some New York Times readers by shifting from pessimism to optimism, with the epidemic in the United States most likely ending sooner than I expected. Now that at least two vaccines with efficacy greater than 90 percent have emerged, I am even more hopeful about what 2021 holds.

But even as the medical response to the virus is improving, the politics of public health remain a deeply vexing challenge.

The regions of the country now among those hit hardest by the virus — Midwestern and Mountain States and rural counties, including in the Dakotas, Iowa, Nebraska and Wyoming — are the ones that voted heavily for Mr. Trump in the recent election. The president could help save his millions of supporters by urging them to wear masks, avoid crowds and skip holiday gatherings this year. But that seemed unlikely to occur, many health experts said.

“That is outside of his DNA,” said Dr. William Schaffner, a preventive medicine specialist at Vanderbilt University medical school. “It would mean admitting he was wrong and Tony Fauci was right.”

President Trump speaking with reporters at the White House on Thanksgiving.Credit...Erin Schaff/The New York Times

In a bitter paradox, some experts noted, Mr. Trump could have been the hero of this pandemic. Operation Warp Speed, which his administration announced in May, appears on track to deliver vaccines and therapies in record-breaking time. 

The United States may well become the first country to bring the virus to heel through pharmaceutical prowess.

Had Mr. Trump heeded his medical advisers in late spring and adopted measures to curb new infections, the nation could now be on track to exit the epidemic next year with far fewer deaths per capita than many other nations.

But during his campaign, Mr. Trump spent little time explaining the importance of Operation Warp Speed; it has invested more than $12 billion in six vaccines based on three complex new technologies, as well as antibody therapies with nearly unpronounceable names like bamlanivimab.

Some health experts expressed concern that Mr. Trump might continue to undermine the coronavirus effort after he leaves office, by contradicting and diminishing any measure proposed by Mr. Biden.

“The thinking over here,” said Dr. David L. Heyman, a former C.D.C. official who now oversees the Center on Global Health Security at Chatham House in London, “is that he will continue to harass the White House to mobilize his people for 2024 for himself or his daughter or sons.”

The fight over masks

Masks for sale in Melrose, Minn. A study by Goldman Sachs estimated that universal use of masks would save $1 trillion that may be lost to business shutdowns and medical bills, in addition to saving lives.Credit...Tim Gruber for The New York Times

The antidote to hopelessness is agency, and Americans can protect themselves even without Mr. Trump’s advice by wearing masks and keeping their distance from others.

Reluctant officials are finally coming around to ordering such measures. The governors of Iowa and New Hampshire issued mask mandates for the first time in mid-November; the governors of Kansas, North Carolina and Hawaii strengthened theirs. 

But average Americans are sharply divided over masks.

“There is pretty broad support for mask mandates even among Republicans,” said Martha Louise Lincoln, a medical historian at San Francisco State University. “But among extreme right-wing voters there’s still a perception that they’re a sign of weakness or a symbol of being duped.”

The Centers for Disease Control and Prevention issued new guidelines on Nov. 10, advocating more clearly than before that everyone, infected or healthy, should wear a mask.

Various studies, involving machines puffing fine mists, have shown that high-quality masks can significantly reduce the spread of pathogens between people in conversation.

         A mask-wearer in Albuquerque.Credit...Adria Malcolm for The New York Times

And the common-sense evidence that masks work has become overwhelming. Dozens of “superspreader events” have taken place in venues where most people were not masked — in bars and restaurants, at summer camps, at funerals, on airplanes, in churches, at choir practice.

In contrast, none have been known to occur in venues where most people wore masks, such as grocery stores. One well-known C.D.C. study showed that, even in a Springfield, Mo., hair salon where two stylists were infected, not one of the 139 customers whose hair they cut over the course of 10 days caught the disease. A city health order had required that both the stylists and the customers be masked.

Even in the most dangerous environments — hospital emergency rooms — there have been no reported superspreader events since personal protective gear became widely available. (Many individual doctors and nurses have been infected, however; an incident in South Bend, Ind., in which multiple nurses were infected turned out to be related to a wedding.)

By contrast, the White House, where masks have been shunned, has been the scene of at least one, and possibly more superspreader events.

A study by the Institute for Health Metrics and Evaluation at the University of Washington estimated that 130,000 lives could be saved by February if mask use became universal in the United States immediately. Masks can also preserve the economy: A study by Goldman Sachs estimated that universal use would save $1 trillion that may be lost to business shutdowns and medical bills.

A new year, and new health advice

A Covid testing site at the Minneapolis-St. Paul International Airport.Credit...Tim Gruber for The New York Times

Mr. Biden has said that he intends to tackle the pandemic from his first full day in office, on Jan. 21. But because coronavirus deaths follow new cases by some weeks, any results of his actions may not be apparent before early spring.

The experts generally praised the panel of advisers chosen by Mr. Biden, depicting them as reputable scientists who could credibly reach out to many groups hard-hit by the pandemic, including Black and Hispanic Americans.

But several experts, some of whom spoke anonymously to avoid offending friends and colleagues, said the panel needed different skills and a different kind of balance.

Some felt that it should have more scientific expertise, and suggested recruiting more vaccinologists, such as Dr. Paul A. Offit of Children’s Hospital of Philadelphia, and more epidemiologists, such as Harvard’s Marc Lipsitch and Natalie E. Dean of the University of Florida.

Others said the panel needed more behavioral scientists adept at fighting rumors, which have been a major obstacle.

“We’re facing extremely complex and poorly understood dynamics around disinformation, conspiratorial theories, paranoia and mistrust,” Dr. Lincoln noted.

President-elect Joe Biden gave a Thanksgiving address on Nov. 25 from the Queen Theater in Wilmington, Del.Credit...Anna Moneymaker for The New York Times

Among the suggested names with those skills were Heidi J. Larson of the Vaccine Confidence Project in London, Carl T. Bergstrom of the University of Washington and Zeynep Tufekci of the University of North Carolina.

Others said the panel had too many members tied to the Obama-Biden administration. Dr. Ezekiel J. Emanuel, for example, was an architect of the Affordable Care Act and Dr. Eric Goosby was Mr. Obama’s global AIDS coordinator. To reach Mr. Trump’s base, they said, the panel needs credible Republican experts.

“Otherwise,” said Dr. Leana Wen, a former Baltimore health commissioner, “there will be even more of a mistaken perception that this is Democrats and doctors trying to shut down the economy, when actually controlling the virus is key to economic recovery.”

Experts suggested adding Dr. Bill Frist, a transplant surgeon and former Republican senator, or Dr. Marc K. Siegel, an internist and Fox News opinion writer.

Mr. Warren suggested consulting marketing experts and recruiting “everyone from Santa Claus to LeBron James” as trusted spokesmen.

Another expert suggested adding Dr. Mehmet C. Oz, a heart surgeon and television personality who was criticized for promoting hydroxychloroquine on Fox News (he later relented), and possibly even asking Sean Hannity and Tucker Carlson to join, because they are popular with Mr. Trump’s base and might be persuaded to accept science that would save the lives of their own viewers.

Mr. Biden’s plan

    Experts say that the pandemic has raged so far out of control that it can be contained only with deeply unpopular but necessary measures. Credit...Adria Malcolm for The New York Times

Mr. Biden’s plan for tackling the pandemic is outlined on his website.

It calls for far more widespread testing, delivered free; a ban on out-of-pocket costs for medical care for the virus; having the military build temporary hospitals if necessary; cooperation with American businesses to create more personal protective gear and ventilators; more food relief for the poor, and other measures.


The Road to a Coronavirus Vaccine

Words to Know About Vaccines

Confused by the all technical terms used to describe how vaccines work and are investigated? Let us help:

    • Adverse event: A health problem that crops up in volunteers in a clinical trial of a vaccine or a drug. An adverse event isn’t always caused by the treatment tested in the trial.
    • Antibody: A protein produced by the immune system that can attach to a pathogen such as the coronavirus and stop it from infecting cells.
    • Approval, licensure and emergency use authorizationDrugs, vaccines and medical devices cannot be sold in the United States without gaining approval from the Food and Drug Administration, also known as licensure. After a company submits the results of  clinical trials to the F.D.A. for consideration, the agency decides whether the product is safe and effective, a process that generally takes many months. If the country is facing an emergency — like a pandemic — a company may apply instead for an emergency use authorization, which can be granted considerably faster.
    • Background rate: How often a health problem, known as an adverse event, arises in the general population. To determine if a vaccine or a drug is safe, researchers compare the rate of adverse events in a trial to the background rate.
    • Efficacy: A measurement of how effective a treatment was in a clinical trial. To test a coronavirus vaccine, for instance, researchers compare how many people in the vaccinated and placebo groups get Covid-19. The real-world effectiveness of a vaccine may turn out to be different from its efficacy in a trial.
    • Phase 1, 2, and 3 trials: Clinical trials typically take place in three stages. Phase 1 trials usually involve a few dozen people and are designed to observe whether a vaccine or drug is safe. Phase 2 trials, involving hundreds of people, allow researchers to try out different doses and gather more measurements about the vaccine’s effects on the immune system. Phase 3 trials, involving thousands or tens of thousands of volunteers, determine the safety and efficacy of the vaccine or drug by waiting to see how many people are protected from the disease it’s designed to fight.
    • Placebo: A substance that has no therapeutic effect, often used in a clinical trial. To see if a vaccine can prevent Covid-19, for example, researchers may inject the vaccine into half of their volunteers, while the other half get a placebo of salt water. They can then compare how many people in each group get infected.
    • Post-market surveillance: The monitoring that takes place after a vaccine or drug has been approved and is regularly prescribed by doctors. This surveillance typically confirms that the treatment is safe. On rare occasions, it detects side effects in certain groups of people that were missed during clinical trials.
    • Preclinical research: Studies that take place before the start of a clinical trial, typically involving experiments where a treatment is tested on cells or in animals.
    • Viral vector vaccines: A type of vaccine that uses a harmless virus to chauffeur immune-system-stimulating ingredients into the human body. Viral vectors are used in several experimental Covid-19 vaccines, including those developed by AstraZeneca and Johnson & Johnson. Both of these companies are using a common cold virus called an adenovirus as their vector. The adenovirus carries coronavirus genes.
    • Trial protocol: A series of procedures to be carried out during a clinical trial.
  • ----------------------

Approval, licensure and emergency use authorization: Drugs, vaccines and medical devices cannot be sold in the United States without gaining approval from the Food and Drug Administration, also known as licensure. 

After a company submits the results of  clinical trials to the F.D.A. for consideration, the agency decides whether the product is safe and effective, a process that generally takes many months. If the country is facing an emergency — like a pandemic — a company may apply instead for an emergency use authorization, which can be granted considerably faster.

Mr. Biden has said he supports a national mask mandate, although his plan calls on governors to impose state ones.

All the experts interviewed by The Times praised the plan, but several felt it was not aggressive enough. 

The pandemic is raging so far beyond control, they argued, that it can be contained only with deeply unpopular but necessary measures, such as rigorously enforced mask laws, closing bars and restaurants, requiring regular testing in schools and workplaces, isolating the infected away from their families, prohibiting travel from high-prevalence areas to low ones, and imposing quarantines that are enforced rather than merely requested.

Many other countries have imposed such measures despite fierce opposition from some citizens, they said, and they have helped.

“Colleges are the Wuhans of this fall surge,” said Dr. Howard Markel, a medical historian at the University of Michigan’s medical school. Universities, he and other experts said, must stop students from going back and forth between their hometowns and college towns, both of which have many vulnerable residents.

A member of the National Guard working a Covid-19 testing site at the Ted M. Gallegos Community Center in Albuquerque.Credit...Adria Malcolm for The New York Time

The key to enforcing mask laws, noted Dr. Robert Klitzman, a psychiatrist and bioethicist at Columbia University’s Mailman School of Public Health, is to punish not people but the owners of buildings that ignore restrictions; Quebec, he noted, fines stores $4,500 if customers are unmasked.

But after a very divisive election, other experts said, it will be hard to get many Americans to cooperate, especially if Mr. Trump encourages resistance.

Also, there are legal limits on what the federal government can do. American “sanitary codes” and quarantine laws are overwhelmingly based on state and local powers, many of which were granted in the 19th century, when epidemics constantly swept the nation’s cities. The federal government’s powers generally extend to interstate matters.

So, for instance, while the Biden administration could easily make it a federal crime to refuse to wear a mask on a cross-country flight — or put offenders on the “no fly list” that was created after the Sept. 11, 2001, attack on the World Trade Center — it probably cannot make every resident of South Dakota wear a mask if Gov. Kristi Noem and the State Legislature oppose the measure. Ms. Noem has said that she will not enforce mask mandates or lockdowns even if Mr. Biden, as president, orders them.

The hope for vaccines

A mural honoring health care professionals and other essential workers by artists from the HomeGrowNM Trading Post in Albuquerque.Credit...Adria Malcolm for The New York Times

The health experts interviewed by The Times all expressed excitement that the Pfizer/BioNTech and Moderna vaccines were reported to be 95 percent effective with no serious safety problems. On Nov. 23, a third vaccine, from AstraZeneca, also appeared to be effective, although exactly how effective is disputed.

“This is an amazing feat of science we’ve just seen, to go from a gene sequence on Jan. 10 to a vaccine by Nov. 10,” said Dr. Lawrence Corey, who is harmonizing disparate vaccine trials so their results can be easily compared.

However, experts still want to read the data, not just what Dr. Offit called “science by news release.”

(Pharmaceutical companies often wait until they have publishable data before announcing clinical trial results. But when news is likely to jolt a stock’s price, it is released immediately to reduce the chance of anyone connected to the company engaging in insider trading, or even appearing to.)

Mr. Biden will inherit the fruits of Operation Warp Speed and oversee their distribution. Members of his transition team, speaking anonymously because they were not authorized to reveal its deliberations, said they were already discussing two sensitive topics: whether to create a secure way for vaccinated individuals to prove they have received both shots, and whether Covid vaccines should ultimately be made mandatory — either by the federal government, or by state governments, employers, school systems or the like.

An experimental Covid-19 vaccine administered at the Research Centers of America in Hollywood, Fla.Credit...Chandan Khanna/Agence France-Presse — Getty Images

Making vaccines mandatory may be a political struggle, but it is within the scope of American law. In 1905, in a landmark case, Jacobson v. Massachusetts, the Supreme Court upheld the right of a state government to make smallpox vaccination mandatory, on the grounds that it protected the public health — despite the fact that the crude smallpox vaccines of that era could cause severe side effects in some people.

It is also within American religious tradition. Virtually every major religion has held that vaccines are permitted, and some even hold that their members are obliged to be vaccinated for the common good.

Some experts not on the committee were adamant that, once Covid vaccines are proven to be both effective and safe, they should be made obligatory.

Dr. W. Ian Lipkin, director of the Center for Infection and Immunity at Columbia University’s Mailman School of Public Health, noted that his institution already has mandatory testing for all students and staff. He said that companies he advises would like to eventually make vaccination mandatory for all employees, but would prefer the government took the lead by requiring them.

At Dr. Offit’s pediatric hospital, every member must have had all routine vaccines and get an annual flu shot — or face dismissal.

“It’s not optional,” he said. “You’re taking care of children. And yes, down the line, I think vaccination will have to be mandatory. It’s your responsibility as a citizen.”

The next dozen weeks will be long and painful. But spring is likely to bring highly effective vaccines and a renewed commitment to medical leadership, something that has been missing under Mr. Trump.

“The C.D.C. will have to be rebuilt, and its guidelines and the F.D.A.’s have to be promptly re-evaluated,” said Dr. Robert L. Murphy, director of the Institute for Global Health at Northwestern University’s medical school. “The Biden team will move quickly. It’s not like they don’t know what to do.”

      Tim Gruber for The New York Times

Donald G. McNeil Jr. is a science reporter covering epidemics and diseases of the world’s poor. He joined The Times in 1976, has reported from 60 countries and is a winner of the John Chancellor Award.  

The risks of the global Covid debt bridge

Markets seem unconcerned that the pandemic has left borrowing at all-time highs

Gavyn Davies

Mario Draghi: effectively ended the euro crisis in 2012 by promising to do ‘whatever it takes’ as president of the European Central Bank © Johannes Eisele/AFP/Getty

Early in the Covid-19 pandemic, it became clear that the global economy would require a massive extension of public and private debt to avoid an extraordinarily deep and persistent depression.

Because this unprecedented explosion in debt provided a “bridge” over the collapse in world output, corporate bankruptcies and economic hardship for households have been significantly mitigated.

In light of the progress on vaccines, investors can be more confident that the end of the debt bridge is in sight. Nevertheless, this year’s surge in borrowing has been called the largest wave in a great “debt tsunami”.

The Institute of International Finance recently reported that the ratio of global debt to gross domestic product will rise from 320 per cent in 2019 to a record 365 per cent in 2020. The IIF concludes starkly: “more debt, more trouble”. 

Financial markets have ignored these warnings. Global equities have reached new highs and credit spreads have been narrowing, almost as if extreme debt is a good, not a bad, economic development.

It is a stretch to share this optimism over the long term. As the World Bank explained in December 2019, previous waves of debt have frequently ended in global financial meltdowns, including in Latin America in the 1980s, Asia in the mid-1990s and US housing in the 2000s. 

The World Bank says another wave of emerging market and global debt started in 2010, but this has shifted to an entirely new level this year.

Is this a serious near-term threat to the stability of financial markets? Here, the verdict seems more encouraging.

Macroeconomic conditions offer some support for higher debt ratios. The forces of secular stagnation have created a further excess of global savings over investment, reducing equilibrium real interest rates and inflation. 

This has encouraged central banks in advanced economies to purchase about 63 per cent of the rise in their government debt, mitigating the risks of funding crises.

The safety net offered by central bank support, notably by the US Federal Reserve, has been greatly extended compared with previous crises. Market-maker of last resort functions have prevented liquidity problems that would otherwise have tightened global financial conditions. 

These actions have made debt crises far less likely.

The immediate provision of large-scale dollar swaps to emerging economies has reduced the severity of dollar shortages. Many emerging market central banks have started their own quantitative easing, despite weakening currencies that might trigger inflation.

The Fed has also provided direct lending to corporates, state and local governments, and households, supported by capital injections from the US Treasury. Although these facilities have not been greatly used, they have been a game changer by providing a backstop for credit markets, unlocking trillions of dollars of private sector lending.

Economist Paul Krugman has correctly compared the effect of these initiatives with the “whatever it takes” speech of Mario Draghi in 2012 when he was president of the European Central Bank, which effectively ended the euro crisis by promising unlimited central bank intervention if needed.

While Treasury secretary Steven Mnuchin has now started to withdraw this support in defiance of unambiguous advice from the Fed, it seems probable that expected new secretary Janet Yellen will keep the facilities operating by using the Exchange Stabilisation Fund in any new emergency.

A final contrast with the 2008 financial crisis is that households now account for a much smaller fraction of the extra global debt, and the banking sector seems better capitalised and less leveraged. 

But global debt should not be treated as a homogenous commodity. Its distribution is perhaps more important than its total and, clearly, some categories should cause concern. 

These include US corporate debt, already a headache, and now greatly increased in the consumer sectors most damaged by Covid-19. Small and medium-sized companies are facing severe bank funding stress, especially in the EU.

China has also been a dominant contributor to the 2020 debt surge, and the authorities are trying to dampen a property boom by restricting credit growth, thus slowing the expansion in GDP. Other emerging market debt is clearly a potential problem, especially in the low-income group.

A far more dangerous, systemic debt crisis probably requires a reversal of secular stagnation, and a rise in world inflation, forcing the Fed to tighten monetary policy significantly. 

Luckily, that still seems a very long way off.

The writer is chairman of Fulcrum Asset Management

China state-owned group caught in default storm owes banks billions

Revelation that Huachen borrowed $5.1bn could prompt concerns over credit system

Sun Yu in Beijing

A run of defaults has shattered a longstanding belief among investors that local governments in China will bail out troubled state-backed groups © Reuters

A state-owned Chinese group caught up in the country’s spate of defaults owes billions of dollars to lenders, raising concerns that bond market tremors could sweep through the banking sector.

According to a creditor document viewed by the Financial Times, almost 70 Chinese and foreign banks, as well as trust companies, had Rmb33.5bn ($5.1bn) in outstanding lending to Huachen Automotive Group as of last year. 

The revelation comes as the country’s multi trillion-dollar debt markets have been rocked by defaults at government-backed companies.

The defaults have shattered a longstanding belief among investors that local governments in China will always bail out troubled state-backed groups and have prompted fears about the health of the broader financial system.

Some creditors said they are reassessing their exposure to Huachen, whose subsidiaries include BMW’s partner in its China manufacturing joint venture, after it defaulted on a Rmb1bn bond in October. Huachen, based in the northeastern city of Shenyang, is controlled by the Liaoning provincial government.

“We worked with Huachen because it is the biggest state-owned enterprise in Liaoning and the local government can’t afford to let it go under,” a banker at one of Huachen’s creditors told the FT.

Those that extended credit to Huachen include China Construction Bank and Industrial and Commercial Bank of China, two of the country’s “big four” state banks. Huachen owed them Rmb2bn and Rmb642m, respectively, according to the creditor document, which tallied the group’s loans through to September last year.

Huachen’s largest foreign creditor is Singapore’s DBS, which was owed Rmb779m.

According to people directly involved in discussions between Huachen, Liaoning province and the group’s creditor banks, the lending figures have not changed substantially since then.

Wei He, an analyst at Gavekal Dragonomics, said that the flurry of recent defaults could result in a deterioration in asset quality at Chinese banks. 

These lenders’ operations are heavily influenced by the government and they have a strong incentive to support local SOEs. 

“Gone are the days when Chinese banks could roll over troubled debt indefinitely to make their financial statements look good,” said Mr He.

Huachen had also borrowed a total of Rmb2.5bn from two large, centrally-controlled state policy banks: China Development Bank and Export-Import Bank of China. Foreign investors have rushed into Chinese policy bank bonds at a record pace this year.

CDB’s brokerage arm underwrote Huachen bonds worth more than Rmb9bn, including the one on which it defaulted. CDB Securities itself held Rmb1bn worth of Huachen debt.

Bank of Jinzhou, a small Liaoning-based lender that was rescued by ICBC last year, was owed Rmb950m. Jinzhou was one of three small banks that were either closed or restructured in 2019. Small banks, which have come under increasing pressure over recent years, account for more than 30 per cent of Huachen’s outstanding borrowings.

Issues at Huachen and elsewhere could have wider implications for how credit flows through China’s financial system.

Chinese banks typically assign annual lending quotas for provinces and cities. Liaoning’s state-dominated industrial sector has traditionally been backed by state-owned financial institutions, based on the assumption it enjoyed rock-solid support from the province’s government.

But the banker at one of Huachen’s creditors said that if provincial officials did not broker a “good solution” between the group and those it owes, “we will significantly cut our Liaoning lending quota”.

One bondholder told the FT that Huachen and Liaoning officials have taken a hard line in negotiations with creditors. “Huachen and the local government think banks should make concessions to support [Liaoning’s] economy,” they said.

DBS said: “A failure to deal with [Huachen’s] debt issue will shake the confidence of foreign institutions and global investors, including DBS, in the business environment and economic prospects of Liaoning and northeastern China.”

Additional reporting by Tom Mitchell in Singapore

Bank Mergers Are No Panacea

As domestic deals become a popular strategy for dealing with Europe’s low banking returns, the resignation of Unicredit’s CEO highlights the risks

By Rochelle Toplensky

Bankers love to think about mergers, but they aren’t a simple solution to the problems of Europe’s lenders, even within the same country.

UniCredit shares plunged Tuesday after Chief Executive Jean Pierre Mustier said he was stepping down over a disagreement about the strategic direction of Italy’s second-largest bank. A widely respected figure, Mr. Mustier had pushed back against board pressure to do deals, favoring capital returns to shareholders.

Last week, talks between Spanish lenders Banco Bilbao Vizcaya Argentaria and Banco de Sabadell collapsed due to disagreements over pricing, also highlighting the shaky case for deals.

Jean Pierre Mustier focused on making UniCredit leaner and more profitable./ PHOTO: HOLLIE ADAMS/BLOOMBERG NEWS

Bank mergers have long been seen as a way for European lenders to boost profitability in the face of persistent ultralow interest rates, sluggish growth and fierce competition from larger U.S. rivals.

A patchwork of European and national regulations all but block cross-border mergers, but domestic tie-ups have been possible. This summer, Intesa Sanpaolo bought UBI Banca to create Italy’s largest bank. Plus, CaixaBank agreed in September to merge with Bankia to create Spain’s largest domestic lender.

The logic even for domestic European banking mergers isn’t straightforward. Deals offer potential for cost-cutting and market-share gains, particularly in over-banked Germany, Italy and Spain. However, rationalizing branch networks can be very expensive and integrating a web of legacy systems is a challenge, particularly as customers increasingly expect to bank online.

Valuation is a barrier to getting deals over the line, particularly now. They are generally all-share exchanges, and the poor stock-market performance of banks this year has muddied the relative weight of different players. There is also a lot of uncertainty about what loan books will be worth in a post-pandemic world as the economy restarts, working patterns readjust and government support programs roll back.

There had been speculation that UniCredit, itself the product of three decades worth of banking mergers, might do a deal with Germany’s Commerzbank, France’s Société Générale or troubled domestic lender Banca Monte dei Paschi di Siena. However, during his 4½ years in charge, Mr. Mustier focused on making the bank leaner and more profitable. His performance earned him plaudits: He was a serious contender to run HSBC or Deutsche Bank, though both ended up picking other candidates.

Mergers clear a half-plausible path to profit growth in a sector with few alternatives. That is enough for some European banks, but the latest ructions at others serve as a warning that the strategy is fraught with difficulties. Success is far from guaranteed, even for those deals that go ahead.