CORONA: THE UNEVEN ECONOMIC RECOVERY AND GEOPOLITICAL RIVALRY

The summer holidays are approaching, and suddenly with life almost back to normal people are starting to come under the illusion that the disease and the lockdown were a distant story from a long time ago. The total Coronavirus cases around the world amount to 9,2 million official cases with officially 472,520 lives taken, with the USA on top of the table followed by Brazil, Russian and India, and China has dropped this month from the 14th to the 21st position as I am writing.

Europeans have gradually started spending their savings and the stimulus money and are planning to spend more as we dive into the summer, however the press and media keep talking about the doom and gloom.

The IMF (International Monetary Fund) has lowered its global growth forecast for this year; instead of the 3% forecasted in April it now predicts a 4.9% contraction of the global economy, also this is the first time the world GDP is negative since 1980.
The largest change is for India, from initially a slower growth to finally – 4.5%, and in the developing countries the UK seems to be the deepest impacted with – 10%. The best projection is that for China with a 1% growth this year. A continued scarring (companies going out of business) and the future uncertainty that hurdle the consumer spending are the main underlying reasons of the contraction.

 
IMF headquarters Washington DC © Wikicommons

The recovery currently is uneven, with 75% of the countries reopening while the pandemic in the emerging markets and developing economies intensifies. As long as there is no vaccine or treatment in sight, the increase in spending and mobility gets offset by the new waves of the infections around the world. Furthermore, with most of the spending currently happening in the retail sector, the spending in tourism and hospitality sectors are still subdued, and so countries depending on those sectors as the main source of income will suffer much more. These projections imply a cumulative loss of 12 trillion dollars for 2020-21, in front of which the governments have put a global fiscal support of nearly 10 trillion dollars deployed mainly in the developed economies, so the uneven recovery is likely to continue.

In the meantime, the European leaders have still not managed to strike an agreement on the final amount and the terms of the unprecedented stimulus package of 750 billion Euros. The main obstacle of the deal is still the division between the member states on

how the package is going to be disbursed by the weaker member states, and other hurdles on the way are the questions on whether or not Europe should issue more debt, and if it did how to calculate who gets what and how to oversee it because no European taxpayer wants to see their money arriving in dodgy hands. The talks are likely to continue during the summer holidays.

To add salt to the mix there is the constant danger of the pending trade and geopolitical tensions. So far the trade is expected to collapse by 12% this year due to the fragile global relationships hurting the export-dependant economies.

Recently Lancet Medical Journal, a study by the Hong Kong researches reported that the amount of real corona cases in China are likely to be four times more than officially reported, based on the idea that the true number would have been far greater if the definition of a Covid-19 case that was later used had been applied from the outset. For information the diagnostic criteria for identifying the disease was revisited seven times between 15 January and 3 March by China’s national health commission.

The new estimates come amid a mounting clamor for an independent international inquiry into the coronavirus outbreak’s origins with the United States and Australia being the loudest voices calling for the investigation.
As a tit for tat recently China ratcheted up a bilateral trade rift by placing tariffs on the Australian barley, before accusing Australia of parroting the United States. The critics of the Australian government have expressed their concerns with the government’s wordings and the country’s relations with its economical allies and warning that the trade dispute may result in losing the country’s most prominent trade partner and inviting China to boycott Australian exports.

Since the beginning of the health crisis this is the first time that China is using access to its massive markets as a grip to deflect the blame since the Corona virus outbreak. However, in the last decade China as the powerhouse has used the same tactic in political disputes with Norway and Canada.

Back in 2010 China and Norway had a falling out after the Nobel prize went to the jailed dissident Liu Xiaobo. Back then the Foreign Ministry said that Norway – the Nobel Institute’s home country – has shown “disrespect for China’s judicial system” by supporting the awarding of the prize to Liu, a pro-democracy activist who at the time was serving an 11-year prison term on charges of inciting subversion.

Liu Xiaobo, winner of the 2010 Nobel Peace Prize © Wikipedia

Consequently, the shares of Norwegian salmon exporters went down and their fish, largely excluded from the Chinese market, was called “Unhealthy”. According to the

reports with the Norwegian fish being kept for days outside China’s borders, it was obviously no longer fresh when it arrived in the distribution channels. And while the competitors from Faroe Islands and Scotland started taking up the lost Norwegian market share, the Norwegian farmers had no other choice than campaigning internationally that the Nobel Committee had nothing to do with the country of Norway.

In the Canadian case the dispute broke out in 2018 after Canada’s detention of Huawei Technologies Co.’s Chief Financial Officer Meng Wanzhou on a U.S. warrant, and Beijing’s subsequent arrest of two Canadians accused of spying. China ever since has blocked imports of some Canadian commodities (canola, pork and beef) which did pinch the Canadian breeders and meat processors.

Also in response to what Beijing calls the US hostility, since the beginning of June 2020 China has halted buying American soybeans and pork meat, State purchases of bulk volumes of U.S. corn and cotton have also been suspended.

If China’s leverage lies in access to its massive markets summed up by its 1.5 billion habitants, the US leverage lies in access to its capital markets, summed up by 34 trillion dollars only in the equities.
The largest stock exchanges in the world are in the US with the NYSE (New York Stock Exchange), Nasdaq Stock Market and OTCQX U.S. Market holding in 2019 a total market value of 37 trillion dollars. As of February 2019, some 156 Chinese companies are reportedly listed on the U.S. exchanges with a total market capitalization of 1.2 trillion dollars. But in the last week of May a bill passed by the senate that if approved the US authorities can delist Chinese companies from the American exchanges, and thus cutting their access to the US capital markets, and so to the liquidity and the large investors base.

Luckin Coffee, located in a Chinese Mall © Wikicommons

The delisting bill came after reports of Luckin Coffee (the Chinese Starbucks) – which joined the Nasdaq over a year ago with a market value of 4 billion dollars back in the day – and its chairman Lu Zhengyao who was cut on falsifying the company sales numbers and consequently trying to recoup losses on more than 500 million dollars in margin debt that soured after the accounting scandal. Subsequently lenders led by Credit Suisse Group are targeting the family assets of Luckin Coffee chairman. In the meanwhile the market value of the company is reduced to 700 million dollars with shares falling up to 45%.

The Luckin case is the first to serve as an example for the rest of the Chinese companies using access to global markets enabled by the US. The alleged lack of

transparency seems to be only one of the factors pushing the US senate to pass such a bill; the technology transfer and intellectual property rights violations seem to be another issue surfacing in the recent reports, as well as Chinese protectionist practices of their domestic markets where for example the digital and telecom sectors being completely out of reach of international companies, on top of the government subsidies to state-owned companies.

WIthin just three decades the world has witnessed a major shift in wealth from the West to the East, and more precisely to China essentially thanks to globalization and the free markets (Western ideals). China was able to regain the title of superpower mainly because of the free market access, and secondly through the US direct investments and technology enabled on the listed markets and beyond.

The China-US geopolitical rivalry goes further than soybeans and pork meat. Today’s trade war between America and China is in fact a small fraction of a much larger power struggle, and that is the fact the two are becoming increasingly strategic antagonists.

The real boon lies in the technology, and the silent ongoing war of 5G wireless technology made by Chinese telecom giant Huawei versus the Western providers such as Ericsson, Nokia, Oracle and Cisco. If the 5G is enabled by China it will impact the global value chain in the most fundamental ways.

The technology is the new geopolitics, and the more the world advances the more we will be witnessing the notion of tech-nationalistism and tech-nationalistic policies. By then we will understand that the tariffs and the trade war were little things compared to the global landscape alteration, and the complete new world model that is waiting for us at the end of the line.

Vianne Savoli

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