As COVID-19 cases hit new highs in the U.S., it’s clear this scourge isn’t going away anytime soon. Besides all the short and medium term issues, another point to consider is the disease’s impact on bigger trends.
The coronavirus’ effect on the digital revolution for instance has been much discussed—basically the pandemic serves as an accelerant—Exhibit A being the fortunes of the FANG companies and their ilk. Much less recognized though is how the pandemic is reshaping another mega-trend, that being the rise of China and more particular to us, our relationship with the Chinese.
It’s a complicated scenario because there’s the effect of COVID on China’s economic growth and ambitions, mixed in with an on-going trade war, plus President Trump’s campaign rhetoric. Teasing this out is tricky, but bottom line: I think that China is going to end up in better shape than the U.S. after COVID.
First some basic facts. The U.S. still has the biggest economy in the world (a position it’s held since 1871) with a GDP of $21.4 trillion last year. China is of course No. 2 at $14.1 trillion, so yes by that measure, the U.S. economy is still 50% bigger.
But just to give you an idea, in 1990 the U.S. was at $5.9 trillion and China at $360 billion, meaning 30 years ago the U.S. economy was 16 times bigger. The Chinese are catching up fast.
On a GDP per capita basis according to the IMF, the U.S. is the seventh richest country with $65,000 of GDP per person, (Luxembourg is No. 1 with $113,000) while China (with its massive population) comes in at No. 65 with $10,000 per person. Chinese officials often point to this per capita comparison to suggest the country has a long way to go before it catches the U.S.—and why it’s still a developing country.
Returning to plain vanilla GDP though, if the U.S. continues to grow at 2% to 3% and China does so at two to three times faster (its growth rate has been slowing btw), the Chinese economy could become bigger than the U.S between 2025 and 2030.
To be sure, China has issues. “As many problems as the U.S. has economically and otherwise, China has far more: economic structures, level of growth which are nowhere near levels of announced growth, a system saddled by too much debt,” says Leland Miller, CEO of the China Beige Book, a research firm that collects data from surveys of thousands of Chinese companies. China has also made billions in loans to other countries for infrastructure projects that now might not get paid back.
High profile China bears like Kyle Bass and Jim Chanos will tell you that China is risky at best and a house of cards at worst, but all they’ve really accomplished so far is attract the attention of state run media. “Instead of living in a bubble of disillusion,” reads an editorial in the Xinhua News. “China short sellers should do their homework: it is not the time to short sell the Chinese market, and it will never be.”
Actually some time it will be, just not so far.
After Nixon’s visit to China in 1972, U.S. policy has been to help China grow and liberalize its economy. This was a slow process initially but accelerated after China joined the World Trade Organization in 2001. Shortly thereafter, countries began lobbing in complaints about China’s unfair trade practices such as export restrictions, subsidies, intellectual property protection and discriminatory taxes.
At first China’s noncompliance didn’t particularly capture the attention of the U.S. government or the private sector. In fairness to previous presidents, this was small potatoes 20 years ago. Big U.S. companies too turned a blind eye to these transgressions, because it was seen as the price to pay to gain entry into the Chinese market. Unfortunately this served to effectively train the Chinese that not following the rules was acceptable.
“If I heard it once, I heard it a thousand times. You have to be patient with China,” Senator John Kennedy (R-La) told Yahoo Finance this week. “Eventually free enterprise will change China. No, China changed free enterprise. If China wants to be a leader in the world they have to agree to abide by international rules.”
‘Best of both worlds’
Some policy-makers, like those at the libertarian Cato Institute, say China's trade record is actually not that bad and any disputes can be resolved within the framework of the WTO. “China does a reasonably good job of complying with WTO complaints,” a Cato paper notes, which also pointed out that “China was second only to the United States in the number of complaints it faced.”
Cato does acknowledge that forced technology transfers and Chinese government subsidies to domestic businesses is still an issue and that “China still falls far short of fulfilling its WTO obligations to protect intellectual property rights. Millions of Chinese live on the illegal gains of widespread counterfeiting of U.S. and other foreign products.”
But President Trump said he was done with the WTO process, created a trade war, and then set up a trade deal to end the war. In typical Trump fashion, there was little subtlety.
“Trump and China is like that line from ‘The Big Lebowski,’ one of the nation’s leading financiers said to me. “‘You’re not wrong Walter. You’re just an asshole.’”
Well, it’s a bit more complicated than that. Sure, everyone from China super-hawk Senator Tom Cotton (R-Ark.) (more on him later) to Senator Chuck Schumer (D-NY) agrees the economic relationship crafted between the U.S. and China 20 years ago is outmoded and needs serious revamping. But the economic fallout and kabuki of creating and then fixing a trade war are better for Twitter folderol than actual policy-making.
“Adhering to the deal and trying to keep agricultural purchases going, while having pretty inflammatory rhetoric is like having the best of both worlds,” says Mary Lovely, senior fellow at the Peterson Institute for International Economics and a professor of economics at the Maxwell School at Syracuse University.
Trump’s animus towards China has always been a bit of a straw man, hasn’t it? Sure I remember Eric Trump telling us at Yahoo Finance’s All Market Summit last year that “China, quite frankly, is one of the reasons I think my father got into the race.” Meaning China’s behavior really did stick in the Donald’s craw. And yet at the same time, China’s Trademark Office granted 16 trademarks to Eric’s sister Ivanka for “Ivanka-branded fashion gear including sunglasses, handbags, shoes and jewelry, as well as beauty services and [not sure I get this one] voting machines,” according to the AP. And of course the president has all sorts of business ties to China and donors from there too.
Fact is, the Trumps need China—and so does America, for billions of reasons. The Chinese are the second largest holder of U.S. debt after Japan, holding some $1 trillion of Treasuries (down from $1.3 trillion a year ago.) And China is currently our largest goods trading partner “with $659.8 billion in total (two way) goods trade. Goods exports totaled $120.3 billion; goods imports totaled $539.5 billion,” according to the Office of the U.S. Trade Representative.
Still, Trump and his men (Peter Navarro, Larry Kudlow and Steven Mnuchin) are spinning the “China-as-bogeyman” narrative with its myriad subplots; the trade war, the Hong Kong protests, the case against Huawei (with a top executive still facing extradition to the U.S. from Canada), an effort to delist Chinese companies from U.S. exchanges—and the painting of Joe Biden as soft on China.
But now the administration has in COVID-19—or as Trump and his insiders call it by turn, the “China-virus,” the “Wuhan-virus” or the “Kung-flu”—a more urgent point of attack. (A better name might be the “NYC-virus” since there have been four times as many cases in Gotham than in all of China.)
Calling out China for COVID serves as a deflection, of course. “There is a Republican strategy document put together in April called the ‘Corona Big Book,’” says Stephen Roach, a senior fellow at Yale University and former chairman at Morgan Stanley Asia. “And that strategy documents it very clearly: Don’t defend Trump on COVID-19, instead attack China. So the worse we do in addressing the virus — and it’s clear that we’re going from bad to worse right now — the more aggressive Trump and his minions become in attacking China.”
Navarro and Cotton have gone so far as to suggest that China allowed the virus to spread as an economic weapon to weaken the world. Intentionally, I asked Navarro? “I'm not saying that. What I'm saying is what they're doing now is leveraging this virus, which they did unleash upon America and the rest of the world, [and] that this virus is creating economic upheaval in this country is something that China is willfully and willingly exploiting.”
“Never listen to one word Peter Navarro says,” counters Roach. “He’s the least credible spokesman of U.S. policy or an understanding of the economic relationship with China.”
Cotton for his part has introduced the $43 billion FORCE (Forging Operational Resistance to Chinese Expansion), which would build up our military in the Pacific to check China and provide tax breaks to pharmaceutical and medical supply companies to move their operations from China to the U.S.
Like Trump with China’s trade practices, Cotton has identified the problem but has the wrong solution. What I mean is that China, which has been skipping ahead of us on so many fronts, (telecom, payments, infrastructure), may end up coming out of the pandemic in better shape than the U.S.
But is re-arming the Pacific a la 1942 the answer? Probably not.
What do I mean when I say coming out in better shape?
For one thing China has many fewer deaths. According to the World Health Organization just 4,600 people have died in China from coronavirus. Even if the Chinese are undercounting by say 10X, that would still be a little more than a third of the number of cases as the U.S., (currently 127,000) in a country that has four times the population. The cost to the U.S. here versus China is almost impossible to calculate, but you get the point. And by the way, this death gap will surely widen. Of course China was able to clamp down through rigorous testing, quarantining and tracing, the degree to which would be difficult to implement here.
“There’s a general view that the Chinese approach is not consistent with our more democratic and free enterprise system,” says Roach. “We’re just not willing to compromise personal freedom for virus mitigation. So we pay a price for that. Of all major countries in the world — our performance is the worst by a longshot. This is just one reason, of many, to believe that a sharp decline in the U.S. dollar is at hand.” (Roach’s latter point is a subject for another day...)
Emerging from the virus
Next let’s look at money the two countries are spending. Like the U.S. China is pumping hundreds of billions of dollars into fast-tracking medical research for vaccines and therapeutics, but it is also spending more on contact tracing, hospitals and equipment. That spend could be considered an investment for when the next epidemic comes along.
Then there’s the money spent to prop up the economy. According to a report by the World Economic Forum, China appears to be spending some $900 billion on COVID related economic stimulus, or some 6.5% of its GDP. That compares to “34% [of GDP] for Germany, 20.5% for Japan and 11.1% for the U.S.” (That 11.1% is essentially the $2.2 trillion CARES Act.) It should be noted btw, that the Chinese are reluctant to spend at least in part because they are loath to aid more debt onto an already strained economy.
To be clear, China has a big mess to clean up. The Chinese state propaganda machine has been working overtime. First it suppressed news about the coronavirus. Then went on the offensive. After being attacked and criticized for its handling of the outbreak, the Chinese launched a social media campaign praising Chinese medical efforts, oh, and highlighting social unrest in the U.S.
But China is also trying to heal wounds by promising to share its vaccines if and when they come (a pledge made by Xi Jinping himself) and sending PPE around the world. “We are seeing that countries have turned to China for help when the country was able to control the spread of its virus: Spain, Italy, Serbia have all accepted Chinese medical teams,” says Chunjuan Nancy Wei, a professor focused on East Asia at the University of Bridgeport.
Now despite a recent outbreak in Beijing now seemingly contained, China is showing signs of emerging from the worst of it. Spending on luxury goods is rebounding and according to a report this week “Morgan Stanley economists expect China to be the only major economy to grow its GDP in 2020, and the middle and upper middle classes are expected to continue to grow very strongly over the next decade.”
And so even with its structural problems, China, with tens of thousands of fewer deaths, a trillion less spent on stimulus, new advances in medicine, health care and related technology and new global relationships, could end up emerging from COVID-19 not necessarily stronger than before, but certainly stronger relative to the U.S.
“China will recover faster than the U.S.,” says Lovely of the Peterson Institute for International Economics. “The U.S. is on the economic ropes longer than China is. Yes, they are able to take advantage of this.”
Cotton is right to sound the alarm, but the answer isn’t more missiles and armament, it’s us getting our own house in order when it comes to listening to our scientists, preparedness and leadership.
It doesn’t sound like such a tall order.
This article was featured in a Saturday edition of the Morning Brief on June 27, 2020. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter: @serwer.