I'm as suspicious of the two-day rally in Chinese shares as I am of the bulk of the claims in U.S. President Donald Trump's State of the Union address. But I have to admit the strength of mainland markets has taken me by surprise.
As a Brit, I'm now one of 30,000 U.K. citizens being told to evacuate China. "If you're in China and able to leave, you should do so," the Foreign Office has instructed.
It's drastic advice that applies to mainland China. I'm in Hong Kong, the next-best/worst thing. Our airport, cruise terminal, Shenzhen Bay port and the bridge to the mainland city of Zhuhai, via Macau, remain open. That's even though Macau has taken the extraordinary measure of shutting down its casinos, the lifeblood of the city's economy, for two weeks.
All 101 branches of the Hong Kong Jockey Club have also pulled down the shutters. In other words all bets, literally, are off as to how the WARS outbreak will proceed. But there are signs it is getting out of control in the mainland, despite frenzied efforts to curb movement around the country. The knee-jerk response is to shut down free communication about the outbreak, too.
Wuhan Acute Respiratory Syndrome began in the Hubei provincial capital. But only two-thirds of the 24,000 cases in mainland China are inside Hubei. The remaining one-third of infections continue to spread China-wide. And that's according to the official statistics, which are sure to underreport the true picture. By how much, we know not.
We are starting to see direct international impact on companies; Hyundai Motor (HYMTF) has been forced to stop production at its South Korean factories, unable to get the necessary parts from China even at home.
Hong Kong's flagship airline, Cathay Pacific (CPCAY) , is now asking 27,000 staff to take three weeks of unpaid leave. It has slashed flights to China by 50% but is suffering drastically lower traffic on flights transiting through Hong Kong, too.
Walt Disney (DIS) says it is preparing for its parks in Shanghai and Hong Kong to remain closed for at least two months. That, CFO Christine McCarthy says, will hit not only Q2 but full-year results, as well. Nike (NKE) and Starbucks (SBUX) have closed at least half their outlets in China. Apple (AAPL) has closed them all, and isn't sure when its production in China can resume.
So the strength of Chinese shares is more than a little odd. After a near-limit 9.1% selloff at the start of Monday's trade, the CSI 300 of the largest stocks in Shanghai and Shenzhen has now climbed 5.2% by the end of Wednesday. Investors are clinging to the prayer that the central People's Bank of China will lower interest rates and deliver other stimulus. I'm sure there's been state-sponsored buying of equities, too, to prop up shares.
China's ring-fenced financial markets are far from free, just like its people, millions of whom are now confined by force to their homes. A better indication of what's happening should come from Hong Kong and Taiwan stocks. But they too are feeling improved health. The Hang Seng here is up 2.2% since Monday, and the Taiwan market has regained 3.3%.
The Macau casino closures has ensured their international listings have taken a beating. Shares of MGM China (MCHVY) are off 14.9% in 2029, Melco Resorts (MLCO) is down 14.3%, while Wynn Macau has dropped 11.9% and Galaxy Entertainment (GXYYY) has lost 7.8%.
It's clear Chinese officials blocked off information about the outbreak early in its onset. John Mackenzie, an expert in infectious tropical diseases at Curtin University who advises the World Health Organization on this new coronavirus, says Beijing's early response was "reprehensible." There was a period of "very poor reporting, or very poor communication," he tells the Financial Times, partly so the Communist Party could hold political meetings in Wuhan.
We can be sure the information released now is still being just as carefully "curated." But worldwide awareness is at fever pitch.
The intensity of the media coverage surrounding WARS is 8x greater than that for the recent outbreaks of SARS, Ebola or the Zika virus, according to State Street's MKT MediaStats data. It's unclear if that's because of the severity of the virus or stronger measures taken by the Chinese government.
Standard & Poor's warns that the outbreak will put an extra financial burden on already-weak local and regional governments in China. They ran a deficit of around 15% of revenues in 2019, the rating agency estimates, and are now faced with both worse tax income as well as higher expenditures.
"China local and regional government budget deficits are widening, and their official debt burdens are rising, across the sector," S&P credit analyst Susan Chu says. The ability to deliver further stimulus may not be there even if the will is.
The direct costs have so far been contained but not fully realized. Chinese authorities have announced 47 billion yuan ($6.7 billion) in medical-related expenditures to cover the cost of treating the victims, likely to be split between the central and local governments. But the shutdown in industrial activity is sure to hit government budget streams. Property transactions, a primary source of government income, are plummeting.
Despite China's sophisticated surveillance state, it has resorted to the old-fashioned Communist playbook as well. That involves asking neighbors to report if people under quarantine leave their homes, even locking them into their apartments by barricading the door from the outside. One county government in Hebei Province, a 10-hour drive from Wuhan, is reportedly offering a bounty of 1,000 yuan ($140) for each Wuhan citizen reported by local residents.
Once the disease peaks, we can expect a V-shaped economic recovery in China. The issue now is that infection numbers continue to rise, and the disease is not contained.
It looks like we have 21 cases of infection here in Hong Kong as of Wednesday. While all the initial cases involved people who have traveled to Wuhan, the latest instances appear to involve people who had not traveled to mainland China at all.
It is "highly probable" those people were infected locally, according to the head of communicable diseases at Hong Kong's Centre for Health Protection says. "There could be invisible chains of infection happening within communities," Chuang Shuk-kwan said. "We do not rule out a large spread [of the virus] in the future."
Late Wednesday, Hong Kong's beleaguered leader, Carrie Lam, said the city would quarantine for 14 days anyone traveling from China, starting Saturday.
UBS has one of the most-pessimistic takes on activity so far. It's predicting that China's growth will slow from 6.1% last year to 3.8% in Q1. If the virus is not contained by the end of March, which looks likely, full-year growth will decline to 5% or below.
We won't know until the number of infections stops rising. The global impact is limited now; it will be more severe if the disease takes root in Hong Kong, or beyond.