Australia Reportedly Faces Secret Trade Ban by China

This story first appeared on TheStreet.com.

https://realmoney.thestreet.com/politics/australia-reportedly-faces-secret-trade-ban-by-china-15481731

Is China punishing Australia by imposing a secret ban on a series of Aussie imports? That appears to be the case, with November 6 reportedly set as the day for the ban to begin.

Beijing has ordered a halt to the import of a wide range of Australia products, with at least seven product categories temporarily banned, according to a Bloomberg report citing “people familiar with the situation.”

The hit list would stop inbound shipments into China of coal, barley, copper ore and copper concentrate, sugar, timber, wine and lobster, the report states. The sources asked to remain anonymous because the information is sensitive.

Any temporary ban on commodities such as coal and copper would go much further than previous one-product restrictions, normally on high-profile consumer goods. China is Australia’s top trading partner, accounting for A$136 billion in imports into China in 2018, according to figures from the Australian government, with A$78 billion in Chinese goods heading the other way. That total two-way volume is up 35.8% since 2016.

Ore shipments explain why Australia punches above its weight as China’s sixth-largest source of imports, on par with Germany. Australia’s total trade ranks it as China’s 14th largest partner, matching the size of the Aussie economy.

China often changes visa restrictions for its citizens without any public notice. It often tries out policy changes in the securities industry by letting industry insiders experiment without any official announcement of a change in the rules to see how things go. And it occasionally restricts permissions for the import of certain specific goods in retaliation of perceived slights.

But China normally publicizes its punishments on trade. So it is unusual that Aussie exporters are in the dark on any trade ban about to come down.

The effects are already being felt.

Lobsters languish

Tons of live Australian lobsters have been left stranded on the tarmac of a Chinese airport, The Sydney Morning Herald reports, with customs clearance taking too long for the shellfish to reach restaurants before they are spoiled.

Australian Trade Minister Simon Birmingham says he knows about the reports of “customs clearance issues” on premium shellfish shipments into China. Paperwork suddenly becomes hard to come by if China wants to punish companies from a particular nation or multinational. So-called “health and reliance checks” have been holding up shipments into Shanghai, with China the destination for 94% of Australian rock lobster exports.

The trade minister said “discriminatory screening practices” imply a breach of World Trade Organization rules and a breach of the China-Australia Free Trade Agreement.

I doubt Beijing’s bigwigs are going to let that bother them. World Trade Organization (WTO) and United Nations rules and protocols are very useful when China wants something, less so when they don’t suit Beijing.

Virus vitriol

China and Australia are at odds diplomatically after Australia requested an independent investigation into the origins of the coronavirus. Australia has also sent its warships to participate in “freedom of navigation” trips through waters that China claims in the South China Sea.

China pushes dodgy evidence of centuries-old fishing trips by Chinese vessels as justification for a land grab over the oil-and-gas-rich waters right up to the shores of the Philippines, Brunei, Malaysia and Vietnam. All those nations are fighting China with legal challenges over their territorial rights.

The trade restrictions began in May, when China introduced heavy tariffs on Australian barley and suspended imports of beef from some Australian slaughterhouses.

China has since launched an investigation into whether Australia’s wine producers are dumping bottles at cut-rate prices on the Chinese market. The Australian cotton industry says Chinese spinning mills have been told to stop buying Australian cotton.

Pressure tactic

The China International Import Expo is taking place this week in Shanghai, at which President Xi Jinping sung the praises of international trade. Officially, China’s commerce ministry has denied that Australian goods are under a ban.

Trade analyst Jeffrey Wilson told The Guardian this is a classic example of “gray zone” diplomacy, where China is attempting to scare Australian companies over access to a key market, using trade to exert political pressure.

“The ambiguity is by design,” he says. “It’s not a trade war, it’s psychological war.”

Shares in Treasury Wines Estates fell 8% in Thursday trading in Sydney after the maker of Penfolds wines said China’s drinks industry is requesting Beijing to impose unprecedented retrospective tariffs on Australian wine already sold in China. That’s part of an anti-dumping investigation launched in August by China’s commerce ministry.

Spying spat, too

Besides their public diplomatic spats, China and Australia are also engaged in a clandestine fight over spying and undue political influence over Aussie politics.

Sunny Duong, a Chinese-Australian community organizer, on Thursday became the first person charged over foreign interference in Australian politics under new Australian national security laws. Duong, who heads the Oceania Federation of Chinese Organisations from Vietnam, Cambodia and Laos, has been a prominent donor to the pet projects of various Australian politicians.

There are no details as yet as to what Duong, who has been very public with his appearances alongside Australian politicians, is supposed to have done wrong. But the Australian Federal Police raided several properties in Melbourne on Oct. 16 in relation to the investigation.

Australia’s spy agency, the Australian Security Intelligence Organisation (ASIO), has worked with the FBI-equivalent federal police on a counter foreign interference (CFI) taskforce in a year-long investigation.

“The CFI taskforce has taken preventative action to disrupt this individual at an early stage,” Australian Federal Police deputy commissioner Ian McCartney said, according to The Guardian. “Foreign interference is contrary to Australia’s national interest, it goes to the heart of our democracy. It is corrupting and deceptive, and goes beyond routine diplomatic influence practiced by governments.”

ASIO began warning in 2017 of Chinese influence attempts to control Australian politics through donations and sympathetic politicians.

In a blockbuster 2019 allegation, ASIO said it was investigating evidence that Beijing attempted to plant its operative as an elected official into the national Australian government. ASIO went public after news media broke the story. A Melbourne luxury car dealer, Bo “Nick” Zhao, reportedly told ASIO he was offered a “seven-figure sum” to run for government by a Chinese spy ring. Zhao was found dead in March 2019 from unexplained causes in a Melbourne hotel room.

As is typical, China has countered that Australia has been spying on China on a mass scale, instigating defections, spying on students and feeding false stories to the news media. A foreign ministry spokesman, Zhao Lijian, said in response to a report that Australia has tried to bug the Chinese embassy in Canberra that Australia is playing the “part of the victim, peddling rumors and stoking confrontation by staging a farce of the thief crying ‘stop thief.'”

Chinese exiles say they have faced intimidation from pro-Beijing squads while sheltering in Australia. It is a similar situation to what other Chinese exiles say has been happening in the United States. It appears these shadowy squads are sent to silence Beijing’s critics or force them to return to face Chinese courts through threats against their families in China or abroad.

Australia was the first country to ban the Chinese tech giant Huawei Technologies from involvement in the country’s 5G mobile phone network. It cited national security concerns.

However, China is particularly angry over Australia’s demand for an investigation into the roots of Covid-19. It has worked very hard behind the scenes to force concessions from the World Health Organization as to how it will investigate the virus, with the WHO leaving many key decisions to China, and hobbled in its attempts to send its own scientists to the virus epicenter in Wuhan.

‘The End of Hong Kong’ in New Treason Law

‘The End of Hong Kong’ in New Treason Law

Beijing has given up playing the game of pretending that Hong Kong is governing itself. You could potentially be charged under the city’s new national-security law.

China’s showcase political conflab, the National People’s Congress, began today. First item on the agenda? A full-frontal attack on Hong Kong freedoms.

The second order of business was an item of non-business. Premier Li Keqiang opted not to set a growth target for 2020, something that’s always established when the meeting normally meets in March.

It had planned to set a rate of “about 6%.” But the uncertainties surrounding the Covid-19 recovery and global growth, not to mention the rekindled U.S.-China trade war, have scotched all that.

That first item is sending Hong Kong stocks south, with the Hang Seng plummeting 4.6% in early afternoon trade. The benchmark started lower, and just keeps going down. Shareholders should be very worried about their holdings in Hong Kong.

Chinese shares are also dragged down, with the CSI 300 of largest stocks in Shanghai and Shenzhen down 1.6%. There should be intense political pressure on China over this issue. We will see how far Britain and the United States are prepared to push Beijing over rights when money and trade is at stake.

Don’t be fooled by the coverage of this issue, which mainly indicates that a “controversial” new law has been proposed.

It’s not just controversial, it’s illegal. Pro-democracy lawmaker Dennis Kwok is only slightly exaggerating that “This is the end of Hong Kong.” It means Beijing will directly rule Hong Kong.

When China got its hands on Hong Kong in 1997, it promised that the former British territory would be allowed to keep its laws and operate autonomously for 50 years, until 2047. It signed the Sino-British Joint Declaration to that effect, a legal contract lodged with the United Nations. Hong Kong also established its constitution, the Basic Law, and elected its own government.

That government decides Hong Kong’s laws. It says so in the Basic Law. The government is stacked to Beijing’s favor, with half its members appointed rather than elected. Even then, the pro-Beijing camp struggle to shove through their legislation.

With this new law, the mainland government is simply enacting a new law of its own directly, in Beijing, and imposing it on Hong Kong. It plans to write the new “security” law into the Hong Kong constitution directly, bypassing the Hong Kong government altogether.

So Beijing is dispensing with any pretence that Hong Kong governs itself. It says it got “frustrated” with waiting for the proper legal process to occur.

It would be, I suppose, similar to the federal government bypassing states altogether and writing a sedition law, perhaps with capital punishment, directly into the state constitution of all 50. It would mean the end of any power for state governments.

That is vitally important in the case of this new law. Hong Kong, which guarantees free speech, has a totally different view of what kind of conversations about the government are allowed. Mainland China restricts free speech massively, censors discussion, leaving no one comfortable in criticizing the Communist Party in public. You can get locked up for decades for doing so, potentially executed. The international coverage of this issue is being blacked out on TV screens and blocked online as I write.

I can currently criticize the Communist Party all I want, here in Hong Kong. With this new law, my ability to write these articles will be severely curtailed.

All this is being done under the guise of “national security,” the catch-all phrase beloved by dictators and authoritarian governments the world over. “National security is the bedrock underpinning the stability of the country,” Zhang Yesui, the spokesman for the National People’s Congress, said as the Communist Party’s flagship meeting kicked off on Friday.

It’s a poorly run, unstable and weak country if its bedrock is stopping criticism of that country. A proud, strong nation should be able to take criticism on the chin.

We don’t yet know what will be in the new law. The central government is today due to table a resolution to allow the Standing Committee of the National People’s Congress to craft and pass the new national security law for Hong Kong. Translation: the rubber stamp government will approve the top leaders writing a treason law for Hong Kong.

The new law will ban secessionist and subversive activity, as well as foreign interference and terrorism, according to the sources at the South China Morning Post. So foreign entities and people can also be charged.

It presents a real dilemma for Secretary of State Mike Pompeo. He has delayed a report on how autonomous Hong Kong actually is until after this meeting in Beijing. He must certify an annual assessment that Hong Kong is self-governed enough to justify separate trade status. That is very much in doubt.

China is already referring to last year’s pro-democracy demonstrations as terrorism, and says anyone flying a foreign flag at a march is promoting Hong Kong independence. Of course, the Communist leaders are furious that people have been burning and stamping on the Chinese flag, booing the national anthem, and even breaking into the government chambers here to spray-paint over the Hong Kong flag.

Hong Kong’s constitution does state that the city has to pass a national security law, in its Article 23. So-called Article 23 legislation was put forward by the Hong Kong government in 2003, but pulled after 500,000 people marched in opposition to it in the streets.

Now the Beijing government has lost patience with playing the rigged game that it set up. It figures that it will simply directly rule Hong Kong in this case, banning criticism of itself, how China is governed, how Hong Kong is governed. Presumably you, in the United States, could be prosecuted for “foreign interference” should you criticize the party and step foot in Hong Kong.

So beware. This law really does mean the end of Hong Kong’s autonomy. It is dangerous for us all.

This story originally appeared on Real Money.

Chinese Investors Doubt Trump’s Talk Over Virus ‘Proof’

It seems Chinese investors have called President Trump’s bluff.

Markets in Shanghai and Shenzhen resumed trade on Wednesday with early losses, after a five-day long weekend. That was the first time for investors to respond to renewed hostilities that again threaten China-U.S. trade.

But Chinese shares ended the day with modest gains. The CSI 300 blue-chip index rose 0.6%. Chinese punters are paying more attention to the likelihood of Chinese stimulus. The Communist Party is keen to keep its citizens happy ahead of its major political meeting now due to start on May 22. The central People’s Bank of China also appeased U.S. hawks by setting the Chinese yuan at a neutral rate, at 7.07 to the U.S. dollar.

At this stage, Trump’s attacks amount to hot air. In Chinese, we call it “blowing water,” or chit chat, idle talk.

Trump last Thursday threatened China with new tariffs. This week, U.S. Treasury Secretary Steve Mnuchin warned of “very significant consequences” if China doesn’t follow through on commitments to buy U.S. goods made in its “Phase 1” trade deal with the U.S. Those are worrying sounds here in Hong Kong, bashed last year by trade war winds.

On Tuesday, Trump said the U.S. is ready to dish the dirt about how a Chinese lab mishap led to Covid-19 cursing the world. He earlier told a reporter he has seen evidence that gives him a high degree of confidence that the virus originated from a Wuhan lab. But when asked what the evidence is, he said “I can’t tell you that. I’m not allowed to tell you that.”

Trump now says the U.S. will issue a full report on the origins of the virus. “We will be reporting very definitively over a period of time,” Trump said on Tuesday.

Trump has yet to prove that he is not propagating yet another conspiracy theory when he claims that the SARS-CoV-2 coronavirus leaked from the Wuhan Institute of Virology, China’s first biosafety level 4 lab. Numerous scientists have stepped forward to say the DNA indicates the virus is of natural origin, not man-made.

There are plenty of people here in Hong Kong who believe the lab theory too, without a shred of evidence. I’m sorry, but when U.S. Secretary of State Mike Pompeo says he has “enormous evidence” that Chinese lab technicians messed up, show us the proof. Otherwise keep quiet until you are ready to do so. It’s not just hot water, it’s irresponsibly vague.

For the rest of this story, check out Real Money on TheStreet.com.

Australia and India Lead Mid-Week Selling for an Asia in Recession

There are country-specific reasons why Australia, India and Thailand are leading Asia’s plunge, but the whole region is in recession, S&P correctly says.

The wildly unpredictable movements of equity markets continued apace on Wednesday. Despite the strong rally on U.S. markets the day before, when the S&P 500 rose 6%, almost all Asian markets again posted sizable losses here on Wednesday.

The biggest losers are in Australia and India. I’ll briefly explore why each of those two markets is performing particularly poorly.

In Australia, there are massive daily moves in either direction, sometimes even intraday. The S&P/ASX 200 was down 6.4% at the close Wednesday after posting its biggest single-day gain in 20 years on Tuesday. Now that gain has been wiped out! Since hitting a record high on Feb. 20, the index has corrected 31.2%.

Australian equities are dominated by the Big Four banks – Commonwealth Bank CMWAY, Westpac Banking (WBK) , ANZ ANZBY and NAB NABZY – all of which are seeing their shares oscillate as central banks shift policy globally. The Oz market also has a healthy dose of commodity stocks such as the gold miners BHP Group (BHP) and Rio Tinto (RIO) , and commodities are getting crushed, even gold. There’s also a hefty listed real estate sector and renters are going to start struggling to pay up. Oh, and let’s not forget that Australia’s main customer is China, which isn’t buying.

India follows suit

Indian shares again sold off hard on Wednesday, with the Sensex down 5.6% at the close. Indian shares have now corrected 30.1% in the month since Feb. 19, one of the worst performances in Asia. Foreign institutional investors have been heavy sellers, placing a higher risk premium on Indian stocks than before the outbreak.

India only has 137 declared Covid-19 cases so far, and it’s a bit of a mystery why the world’s second-largest country by population has been spared so far. It may be that only a few people are being tested. While ultraviolet light does kill viruses in general, there has been no scientific proof that hot weather deters Covid-19, so it may be that developing markets that often are hot either haven’t been hit yet or tested well. Of course, developing nations will struggle the most in a health care sense if the disease sets in.

Here in Hong Kong, we’ve had virus cases confirmed among Hong Kong tourists returning from India trips. State governments in India are starting to shutter schools, malls, movie theaters and so on, an economic danger because domestic consumption accounts for around 60% of the economy. Travel and tourism, around 7.5% of GDP, will suffer immensely with tourism visas being cancelled.

There are some India-specific issues that add an extra layer of worry. Yes Bank, a private bank established in 2004 as an alternative to state-backed institutions, has collapsed and is being bailed out by the Reserve Bank of India, the nation’s central bank. Also, violent attacks against Muslim minority by radical Hindu nationalists have left scores dead. Those ethnic tensions are not going to be helped by any downward spiral in the economy.

It isn’t pretty elsewhere, either

While Australia and India have fared worst here on Wednesday, other markets alternate to outdo each other in poor performance. Japan was one of the only sources of green on screens, with the Topix up a narrow 0.2% on Wednesday after the Bank of Japan announced it will support the market by buying ETFs. But the Topix, a broad measure of all big Japanese stocks, is down 26.2% this year.

Thailand’s SET index has fallen 33.7% in 2020, by a small margin the worst year-to-date performance in Asia. Thailand gets 11% of its GDP from tourism, and that’s dead – technically, down 44% and getting worse. The Philippines, where stocks are down almost as much, 31.7% in 2020, has simply shut down its stock exchange, saying it couldn’t guarantee the health of folks on the floor. The blood pressure of investors is another health disaster altogether.

It’s going to take a coordinated global response when it comes to fiscal and monetary stimulus to get everyone on the same page. It also will take cooperation among medical bodies and addressing transportation links if we’re going to get out of the coronavirus mess. The unilateral, single-nation responses are firing buckshot when we need a .458 Winchester Magnum, the kind of Big Game rifle the ranger carries when I’ve been on walking safaris in South Africa.

Investors are sensibly responding to economic disruption rather than simply rates of infection. Korean stocks lost 4.9% in a market dominated by big exporters and heavy industry.

Hong Kong’s Hang Seng index closed down 4.2% on Wednesday, even though the rate of new infections is now slow in East Asia. Most of Hong Kong’s new cases are coming from abroad as Hong Kongers hurry home ahead of travel shutdowns around the globe. The Hang Seng hadn’t risen as high as other Asian indexes due to the pro-democracy protests here last year, so the benchmark is down “only” 20.9% in 2020.

Mainland China, where this all started, is seeing its stocks spared the worst of the selling. The CSI 300 index of the largest shares in Shanghai and Shenzhen fell 2.0% on Wednesday, and the whole index is down only 11.2% this year. That’s half the size of the general selloff around Asia. But treat Chinese share movements with skepticism. Domestic retail investors drive the trading and don’t have many other places to put their money. They are also notorious momentum traders. Mainland stocks are also essentially options on companies rather than genuine holdings, because Communist Party policy can change literally overnight without warning and shut your favorite company down. The party also has cash to spend on stimulus.

Recession is here

I was a guest on RTHK Radio 3’s drive-time business show “Money Talk” Tuesday morning, talking about the disastrous economic figures out of China on Monday. The jobless rate is at a record high, manufacturing has slowed a record amount, and retail sales cratered by a record margin.

One point I made is that, given the shutdowns already under way in Italy and Spain, we can expect similar figures out of those economies in the next month or two. And as more countries corral movement and stop public gatherings, we will see that economic pain spread.

So I chuckle a wry laugh when I hear forecasters predicting that we’re heading for recession. We are in recession, people! It’s here now.

The backward-looking economic output figures will confirm that assessment in the future. I hate the new piece of business jargon that an analyst is attempting to “nowcast” activity. But real-time assessments and common-sense assessments are what we need right now.

I’m digesting a particularly gloomy set of reports from Standard & Poor’s. The rating agency isn’t pulling any punches.

“Asia-Pacific Recession Guaranteed” is my light reading right now. It’s a quick hit. The “enormous first-quarter shock” in China means its growth will shudder to 2.9% in 2020, S&P says, a gutsy call because the Communist Party was keen on “predicting” growth of “around 6%.”

S&P is using the traditional definition of two down quarters in a row to define recession. By other measures, countries such as India and China need to achieve outsize growth just to keep the floods of people moving from the countryside to the city gainfully employed.

This new report says the “rising scale of the shock will leave permanent scars on balance sheets and in labor markets” in Asia. I concur. The rating agency believes US$400 billion in permanent income losses is going to be wiped off profit-and-loss statements.

S&P forecasts aggregate growth will fall by more than half in Asia to under 3% for all of 2020. It envisions a U-shaped recovery.

V-shaped, U-shaped, it’s all a question of how deep and how long this recession is going to last. All downturns are temporary unless you think the world economy is going to zero, which it’s not. But how bad will this get? We don’t know. The costs are continuing to add up, meaning we can’t count the final tab yet.

China Posts Worst Economic Performance on Record

Monday’s numbers for production, retail sales and the jobless rate are all the worst on record for China. Asian shares continued heavy selling despite central-bank support. [This story first appeared on TheStreet.com.]

China has posted its worst production and sales figures on record on Monday, as a series of firsts continue to be set in Asia, almost all of them on the downside.

The economic numbers released on Monday are far worse than predicted by forecasters, indicating that China’s factories essentially shut up shop in the first two months of the year. Retailers stopped buying, too, e-commerce not able to offset the empty stores nationwide.

Industrial output fell 13.5% for the January-February period, from the prior year. That’s the worst reading on record since Reuters began tracking the figure in January 1990. A poll by the news agency had anticipated a 1.5% rise.

Retail sales plummeted 20.5%, also the first decline on record, despite an increase in online purchases of goods like groceries. Shopping malls and high streets have become ghost towns, and a logistics logjam due to a lack of delivery people has delayed e-commerce orders. A survey of economists by Bloomberg had anticipated only a 4.0% fall.

China’s unemployment rate has risen to 6.2% for February, up from 5.2% in December. That, too, is a record high jobless rate since the government started publishing figures.

Investment also sank 24.5% for the January-February period, the first drop in record, and far worse than the dip of 2.0% forecast by economists. (Combining the two months negates the impact of Lunar New Year, which fell in January in 2020 but February in 2019.) Investment into property, the holding of choice for wealthy Chinese citizens, shrank by its largest amount on record, and home prices stalled for the first time in five years.

Early predictions of the impact of the coronavirus suggested there would be a rapid V-shaped recovery in China. But the location of the virus outbreak in the “Chicago of China” rapidly impacted travel and trade. The epicenter, Wuhan, is a major inland port on the Yangtze River, as well as a north-south and east-west node on railway lines. It is the center of China’s auto manufacturing.

Economic figures for March may be even worse than those recorded for the first two months of the year. Consumer confidence has been shaken to its core, and it’s unclear what will encourage it to return.

Official figures claim that China registered only 16 new cases of the coronavirus on Sunday, and 12 of those stem from “imported” cases of people arriving from abroad. But with the country opening back up to human movement, there’s potential for a second outbreak. One Hong Kong news report out of Wuhan states that doctors there are releasing patients from temporary hospitals if a lung scan shows no scarring, without testing for the virus, since test kits have run low.

During the SARS outbreak in 2003, which centered on southern Guangdong Province as well as Hong Kong, China did not enter any significant lockdown. With the Covid-19 disease, the top leadership effectively ordered half the country’s 1.4 billion people to stay home. That has complicated the return of workers from the Lunar New Year, and only around 75% of Chinese companies are back in business.

The cessation of production is far more extreme than in 2003, hence the huge and unprecedented impact on industrial production. This has broad implications in the West. Even if demand returns around the world, that is no good if there is no supply of goods.

China’s efforts to get its economy firing on all cylinders are now going to be deterred by a lack of demand, too. The travel bans put in place around the world, and a rising number of lockdowns in major economies such as Italy and Spain, will only further dampen economic activity in Asia.

China’s top leaders were due to announce their “forecast” for full-year economic performance in 2020 at a meeting on March 5. But the event has been postponed due to the virus crisis. The Communist top brass had reportedly agreed a “target” of around 6% when they gathered late last year, and are now debating whether to lower that.

Hong Kong’s economy is also suffering through what amounts to a virtual shutdown. Figures released on Monday showed that there were only 199,000 tourist arrivals in February. That is normally the same number of tourists who arrive in a single day, equating to a 96% decrease. Even at the height of SARS, which centered on the city, 427,000 visitors arrived in the month of May.

The lessons learnt during SARS have however led to far fewer cases of Covid-19 occurring (so far) here in my hometown. Although Hong Kong is next to mainland China, it has only recorded 148 cases, far fewer even than Singapore, at 226, despite Hong Kong having a population that is 32% larger. Social distancing and staying at home, as well as a rapid response to track relatives and friends of those infected, seems to be working.

Asian markets continued their panic selling on Monday, despite moves by the U.S. Federal Reserve to slash interest rates, and an emergency meeting by the central Bank of Japan. New Zealand and South Korea also cut interest rates.

Australian stocks have crashed 9.7% on Monday, their biggest fall since “Black Monday” in 1987. That comes after an extraordinary day’s trade on Friday, which saw the S&P/ASX 200 fall 8.1% at the start, only to close with their strongest one-day gain in more than a decade, of 4.4%. Financial stocks led the selling on Monday, and investors will also have been unnerved by those historically bad activity numbers out of China, the largest source of demand for Australian exports.

Japan’s Topix declined 2.0%, despite BOJ action. The Japanese central bank moved up a policy meeting by two days, and agreed to purchase bonds and other financial instruments, as well as expand corporate finance.

Chinese shares fell 4.3% on Monday after the economic-output figures, and the Hang Seng in Hong Kong dropped 4.0%. Singapore’s Straits Times index lost 5.3%. Indian shares were the biggest fallers outside Australia, the Sensex down 7.9%.

Global Markets Finally Follow Asia’s Lead on Covid-19

The coronavirus has finally infected global markets over the last two weeks. It’s taken a while to fester. But the outbreak has now spread from China’s CSI 300 to Asian, European and, finally, U.S. stocks.

I’ve been warning since Jan. 21 that a mystery SARS-like disease was hitting China, and likely to spread globally. The World Health Organization was due to meet the next day to decide if the outbreak is a “public health emergency of international concern.” I pre-empted that the answer is “Yes.”

The WHO ruled “No.” The Wuhan coronavirus is an emergency only for China, the global health body ruled on Jan. 22. How wrong they were.

Investors worldwide have had more than a month to prepare for this week’s selloff on global markets. Even while car factories in South Korea, Japan and Serbia were shuttered because they couldn’t get parts, U.S. stocks climbed toward all-time highs. Now the reality of worldwide manufacturing pain is sinking in.

Jaguar Land Rover’s CEO, Ralph Speth, expects the company to run out of some parts shortly. The British carmaker, a Tata Motors (TTM) subsidiary, says it has “flown parts in suitcases from China to the U.K.”

Isaac Larien, the CEO of Bratz dollmaker MGA Entertainment, says it has enough Chinese parts for another month. “The timing couldn’t be worse,” he told The Washington Post. “In 41 years in the toy business, this is the worst disaster I’ve seen.”

So I’ve been surprised it has taken this long for investors outside greater China to respond. Yes, China’s financial markets are ring-fenced, so there’s little direct connection from its A shares to other equities. But this infection in the “factory to the world” has had a severe effect in China, and I believe the supply-chain pain has only just begun.

Korean shares have fallen 18% since mid-February. Japanese stocks turned south earlier, but are now down 22.9% since the start of the year. Hong Kong stocks saw a short-lived rally, but are off 16.3% since virus concerns first got real in mid-January. So the radius of stock-market pain is expanding.

Nomura estimates today that 74.1% of Chinese businesses have resumed work after the Lunar New Year lockdown, and only 61.6% in the worst-affected areas. They base that off the Baidu Migration Index, which shows 49.2% of China’s population has returned to where it was pre-virus. Most migrant workers, in other words, have stayed put.

By the end of March, 91.8% of businesses outside Hubei Province should be operating, the Japanese investment bank predicts — quite optimistically, if you ask me. This crisis has already defied expectations.

Early comparisons looked at the impact of SARS in 2003. It made sense because the diseases are quite similar. SARS was short-lived, a deadlier virus that nevertheless only resulted in 813 fatalities globally. Economists and market watchers globally raced to release reports about a similar “V-shaped recovery” from Wuhan Acute Respiratory Syndrome.

Given enough time, all recoveries are V-shaped. This is a little like warning that markets will be volatile. Yes, the WARS effects will not continue forever, and China’s economy is not going to slide into permanent decline. What’s yet to be determined is how deep and wide the V is.

It’s understandable that economists have been slow. They are better at explaining what’s happened than predicting what’s to come, particularly with an unpredictable disease. Yet simple math should have suggested a sizable impact from the Covid-19 virus hitting right as much of China was on the move for the most-important holiday of the year.

China has a much greater importance to the global economy now than in 2003. The Middle Kingdom’s economy stands at $14.2 trillion for 2019. It was one-quarter the size, $3.6 trillion, when SARS hit. China only began its economic opening up in earnest in 1997. So the country has also become far better-integrated into the global supply chain.

Likewise, common sense should have told the WHO to act earlier. Many people in Hong Kong fault the organization as being beholden to Chinese funding. I’m not sure if that’s accurate, but the body has certainly bent over backward to praise China for its response, criticizing the rest of the world for lacking preparedness instead.

Not every nation can respond as China has, by locking down large proportions of its population. Nor should they.

Chinese authorities have carried out a remit to “round up everyone who should be rounded up,” a random dictum that’s sounds a lot like rounding up the usual suspects. As a result, authorities in the county of Tongbai have been training SWAT teams to noose, then hood uncooperative suspects who refuse to wear a mask. Each Chinese province is unleashing tens, even hundreds of thousands of tin-pot Communist Party local representatives or uniformed volunteers, based on a block-level grid system. Each one has their own crazy way of outcompeting the other to win what President Xi Jinping calls an all-out “people’s war” on the virus.

Consider the confusion in Wuhan. On Monday, the city government said non-residents were free to leave the city if they weren’t infected or under quarantine. By noon, that advisory was withdrawn. The city’s top brass said the announcement was “unauthorized,” and there was no change in the lockdown.

As a result, China is as much at war with its own people as the virus. Even after the immediate virus crisis passes, it may take months for those block-level dictators to relinquish their hold on the people and allow life to get back to normal. For now, you have “escapees” shinnying down drainpipes from five floors up just to get out of their apartment blocks if they don’t have the right “hall pass.”

The way the virus has popped up with pockets of infection in South Korea, Iran and Italy has been strange. But it suggests we may need to get used to the Covid-19 virus being a way of life, worse than the flu, a dangerous pneumonia, but something people learn to coexist with.

The WHO may be right that most nations are not prepared for that eventuality. The H1N1 swine flu, essentially a new and nastier but normal influenza bug, sent 60.8 million Americans to hospital and killed 12,469 of them, according to the Centers for Disease Control. Its worldwide mortality was a whopping 151,700 to 575,400 people, the vast majority young people in Southeast Asia and Africa.

Honestly, I don’t remember H1N1 all that well. It certainly doesn’t stick in the brain as something that killed half a million people. Here in Hong Kong, SARS and its 298 deaths in this city carries a lot more cultural resonance.

It appears Wuhan pneumonia is going to have far greater impact, both practically and culturally. Just as they should take reasonable precautions over their own health, investors should start assessing public companies for their exposure to the supply-chain effects of Covid-19.

What the Hitchhikers Guide to the Galaxy Has to Say About Covid-19

Global stock markets have now shed US$5 trillion in value in response to the Covid-19 coronavirus. Starting to get alarmed yet?!

Fall back to the advice “Don’t Panic.” I was eight when one of my favorite novels, The Hitchhikers Guide to the Galaxy, came out in 1979. On the cover of that guide, a kind of Lonely Planet for all the planets, are those two reassuring words. We’re told they appear in “large, friendly letters” on a “small, thin, flexible lap computer.”

The hitchhikers guide, a kind of Wikipedia that predated the Internet, has a humorous entry about the planet Golgafrincham. Bear with me, there’s a point here in the end.

[This story originally appeared in Real Money on TheStreet.com. Click here to see the original story.]

Golgafrincham’s poets were fond of making up stories about how the planet was going to end. Maybe it would be as a result of it crashing into the sun, or the moon crashing into it, or 12′ piranha bees. A tale that it was about to be eaten by a mutant star-goat got its residents to organize three arks: Ark A of leaders and scientists; Ark B of useless people like hairdressers, middlemen and telephone sanitizers; and Ark C of the little people who made stuff and got stuff done. Ark B took off first, sent toward a distant insignificant planet, which turned out to be our prehistoric Earth. The wise folk in Arks A and C stayed put after they got rid of the useless people. Tragically, those Golgafrinchans who remained all died out from an infectious disease contracted from an “unexpectedly dirty” telephone.

Is this our dirty telephone? No, we are the middle managers, lawyers, hairdressers, phone sanitizers. The useless ones. These are 12′ piranha bees. We’re saved!

Back to reality. There are so many unknowns surrounding this disease. I’ve been living with it here in Hong Kong since early this year, having survived through SARS in 2003, too. I caution investors who are worried about the health of themselves and their portfolios to keep a calm head.

Strangely, it has been the sudden emergence of clusters of the disease in South Korea, Italy and Iran that has spooked the markets. These clusters have people the world over rushing to buy industrial-strength face masks, stock up the hand sanitizer, panic-buy canned goods.

Here in Hong Kong, people have been stockpiling rice (which mainly comes here from Thailand, not China), and toilet paper, because a tabloid story said all the toilet paper factories in China would start making masks. I stood today behind an elderly lady buying a US$1 bag of bread, who compulsively reached for the huge stack of toilet paper standing by the checkout. She hesitated, didn’t buy in the end. I could a thought bubble, “If it’s run out, then why is there this huge stack?!”

What investors should be worrying about is the fact that China essentially shut down for more than a month. I’m sorry that almost 3,000 people have died. I’m sorry almost 84,000 people are infected. Here in Hong Kong we have 94 cases, which is 0.001% of the population. Last year, 34,157 Americans died of the flu.

So yes, I am avoiding taking public transportation, and I wear a mask when I’m going to very crowded places. I wash my hands, a lot. But I’m not wearing a mask non-stop. I bet a lot of those 94 infected people wore masks, but took them off at group meals, an apparent source of many infections. If I do get the Covid-19 virus, as a healthy Gen Xer, there’s every chance I’ll survive.

Global manufacturing is going to be stumbling to correct for parts failing to arrive for months to come. Eventually that is going to spill over to other sectors: it’s not much good buying Microsoft (MSFT) shares if Lenovo (LNVGY) has stopped making computers.

Markets hate uncertainty, that’s the cliché, and the situation we find ourselves in is full of them. South Korea now counts 2,337 cases, the most outside China, but at least the Korean peninsula shares an extensive border with China. How it cropped up in Iran and Italy in large numbers is a mystery, and that’s what seems to have finally punctured the protective bubble around investors.

You know the numbers. The S&P 500 has entered technical correction, a drop of 10% or more, faster than ever before. In six trading days, it has come off 12% since last Wednesday’s record high. A record high, one month after Wuhan broke out! We’ll see a few more records broken before this is all over, I’d imagine. The Dow’s 1,191-point fall on Thursday was also a new single-day high.

Asian equities are also ailing. This has been a brutal last trading day of the month, with Japan’s Topix down 3.7%, China’s CSI 300 down 3.6%, Korea’s Kospi down 3.3%, a similar fall for Australia’s ASX 200. These are large single-day falls for markets that have generally been selling off since mid-January.

Not since the Lehman Brothers crisis have we seen such selling. Of course, all asset classes are going to have to contend with virus fallout. Are equities more at risk because they had climbed so high?

Analysts at Goldman Sachs (GS) are predicting that members of the S&P 500 will post no earnings growth at all in 2020. That’s a compound effect from the severe decline in China’s economy, resultant disruption in global supply chains for U.S. companies, and eventually a slowdown in the U.S. economy itself, which is 68% driven by consumer spending.

That seems like a sensible path of calculation. The blanket panic selling, however, isn’t wise. Equally, I think it would be incredibly sad if the Tokyo Olympics this summer got called off.

Bargain-hunting investors should not step into the markets now. There is too much uncertainty, and above all too much herd panic. Day traders on the other hand may find these happy hunting times. Shareholders should be holding companies to account for their exposure to Chinese manufacturing disruption, and chaos in supply chains.

The Hitchhikers Guide has little to say about Earth as a whole. “Mostly harmless” is its entire entry. Covid-19 is a nasty pneumonia, certainly not harmless. But investors should for now fear manufacturing sickness above any infected telephone.

The View From Asia: Trump-Xi Deal Is Just a Temporary Truce

The View From Asia: Trump-Xi Deal Is Just a Temporary Truce

This story originally appeared on TheStreet.com.

It was over Argentinian steak that Chinese President Xi Jinping and his U.S. counterpart President Donald Trump hashed out a trade truce in Buenos Aires over the weekend. But it is Chinese factory owners who will be most relieved.

Xi and Trump agreed for a ceasefire in their increasingly fraught war, meaning U.S. tariffs will not raise from 10% to 25% on Jan. 1, as planned, with further talks to hash out future trade to come.

Here in Asia, we are well aware that this is only a temporary truce. Hostilities have only been suspended for 90 days. Trump continues to play both roles in the good cop/bad cop routine with Xi, sweet talking Xi in person. That kind of “face” goes down very well in China, where both the government and the people at large are desperate for recognition on the world stage.

No doubt, the agreement has eased immediate fears, which were undoubtedly unsettling investors in Asia. Emerging markets in particular have been paying a heavy price, more so as investors try to reduce risk than because of any direct effects from the trade war.

I’m writing this from Jakarta, and the Indonesian rupiah has been shaken like a palm-oil plant in a typhoon by potential disruptions to economic growth in the region, as well as U.S. interest rates rising. Earlier this year, the rupiah sank to levels last seen during the Asian financial crisis 20 years ago.

… click here to read the rest of the story.

5 Gray Swan Shocks On the Horizon In 2018

5 Gray Swan Shocks On the Horizon In 2018

The Japanese investment bank Nomura (NMR) has 10 “gray swans” to watch out for in 2018. Unlike their cousins the black swans, which simply pop out of nowhere and therefore can’t be predicted, gray swans aren’t hidden or invisible, just largely ignored. At our peril, it seems.

They are topics that aren’t widely discussed, the bank says — not the question of what to do over North Korea, or whether nationalists will triumph in the Italian elections.

I’ll tackle the first five in this story and revisit the gray-swan family by addressing the other five in a second piece.

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Trump Takes on China in Trade, but Is Wrong With His Attack

Trump Takes on China in Trade, but Is Wrong With His Attack

U.S. President Donald Trump stood side by side with Chinese President Xi Jinping on Thursday, despite the fact that Trump continues to depict — wrongly — the China-U.S. trade relationship as toe-to-toe.

That relationship is “one-sided and unfair,” Trump said in a joint address in Beijing. There’s the “shockingly high” trade deficit to consider, he explained. There’s also the $300 billion in the theft of U.S. intellectual property and forced technology transfer that the United States suffers every year, per U.S. government figures.

Trump has, to be fair, delivered on this, the most-important trip of his presidency. He has conveyed more precisely in person his message that the United States is disadvantaged by its trade with China and Japan. He’s wrong, but he’s right to express himself so clearly when he previously fudged the point when meeting the leaders of those countries on home soil.

At least he won applause from the assembled Chinese and U.S. executives in attendance to hear the two leaders speak. It was for a back-handed compliment.

“I don’t blame China,” Trump conceded, pausing when clapping began. “Who can blame a country for being able to take advantage of another country for the benefit of its citizens? I give China great credit.” Cue more applause.

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