Biden Promises U.S. Military Will Defend Taiwan if Attacked

Surprising even his own staff, the U.S. president overshadowed the launch of the Indo-Pacific Economic Framework for Prosperity.

The response from U.S. President Joe Biden came firm and clear. Would the United States get involved militarily to defend Taiwan, a move it has avoided so carefully in Ukraine?

“Yes,” Biden said bluntly in Tokyo on Monday. The reporter who asked the question, not quite believing her ears, says “You are?”

“That’s the commitment we made. That’s the commitment we made,” he repeated.

With that statement, Biden ensured that today’s unveiling of the Indo-Pacific Economic Framework, his signature commercial pact in Asia, would be overshadowed by defense. A country accused of presenting “all guns and no butter” delivered a large shipment of both.

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It’s the second time recently that Biden has spoken off the cuff about a U.S. military response to an invasion of Taiwan and replied in much the same way. During a town hall event last October, he was asked if the United States would come to Taiwan’s defense if it was attacked by China. “Yes,” Biden replied. “We have a commitment to that.”

It is a change in tack. U.S. presidents always dodge the question of whether the U.S. military would defend Taiwan. They hide behind “strategic ambiguity,” fudging that they uphold the “One China policy,” which is deliberately vague.

China insists on the “One China principle,” one key word of difference, stating that the Beijing government is the only legitimate government in China, which includes Taiwan. On the U.S. side, the “One China policy” recognizes the Beijing government as the legal government of China, but only “acknowledges” China’s position that China also includes Taiwan, without agreeing that it’s true.

Confused? You should be. It allows the United States to keep Beijing sweet while maintaining unofficial relations with Taiwan. The U.S. stance was first stipulated in 1972, when then-president Richard Nixon used the “One China policy” as a way to say “You sort this one out” to the Chinese on both sides of the Taiwan Strait while doing business with both.

But Biden was very clear. The United States military would defend Taiwan if China invades it. Or in diplomat-speak, “any unilateral effort to change the status quo using force.”

It has become a more pressing issue after Russia invaded Ukraine, which Russian President Vladimir Putin says should be part of Russian soil. White House officials scurried today just as they did back in October to walk back Biden’s comments on Taiwan, asserting that there’s no change in U.S. policy. But you could say that under Biden, it is becoming more clear. A Chinese military invasion would be met with a U.S. military response.

China bristles

Not surprisingly, Beijing was furious in its response to Biden’s statement. “The Taiwan question is purely China’s affair,” a foreign affairs spokesman said. “There is no room for compromise or concession.”

China urges the United States to stand by the “One China principle,” using that word of difference again, and to “refrain from sending wrong signals to Taiwan separatist forces to avoid causing grave damage to bilateral relations.”

Biden first hinted at this change last August, when the United States withdrew from Afghanistan. He promised “we would respond” to an attack against a fellow member of NATO, adding “same with Japan, same with South Korea, same with Taiwan.” Taiwan had never before been presented with the same kind of promise of defense as those other allies.

Japanese Prime Minister Fumio Kishida, speaking alongside Biden today, was also asked how his country would respond if China invades Taiwan. He beat around the bush, like leaders always do. Japan is equally ambiguous on the status of Taiwan.

“We asserted the importance of peace and stability of the Taiwan Strait, and the peaceful resolution of the Taiwan issue,” Kishida said, adding that there is no change in the “fundamental position” of the United States and Japan.

“In Asia, we are against any unilateral effort to change the status quo using force,” Kishida added. “In Asia, peace and stability must be upheld and defended.”

That last word, “defended,” may also represent a very subtle shift by Japan, since we are parsing sentences today. Japan is increasing its “self-defense” forces, having agreed to a pacifist constitution after World War II that forbids it fighting a war. But it has 105 U.S. fighter jets on order, the F-35 Lightning, and in March launched the first of 22 new Mogami class stealth frigate ships as it beefs up its capability to respond to threats overseas.

Kishida told Biden that Tokyo is ready to take a more robust defensive stance, including the ability to retaliate. That will include a “considerable increase” in the Japanese defense budget, Kishida said.

As for the Framework…

Today was supposed to be the big unveiling of the Indo-Pacific Economic Framework for Prosperity. It’s a kind of Trans-Pacific Partnership-lite, after the U.S. withdrawal from the TPP trade deal in 2017.

The exact roster of the 13 participating nations was a secret until today. They are the United States and Japan, together with Australia, Brunei, India, Indonesia, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Thailand and Vietnam.

The IPEF is so far light on trade, and light on detail. The framework looks to build on four pillars: the Connected Economy, concentrating on digitization, including cross-border standards for data flows; the Resilient Economy, improving supply chains; the Clean Economy focusing on clean energy and decarbonization; and the Fair Economy, to enact and enforce standards on taxation and transparency and against money laundering and bribery.

We will see where it heads. National Security Advisor Jake Sullivan says not having trade in the agreement at all “is a feature of IPEF, not a bug.” It’s a deal intended to reflect a services-dominant, data-driven world.

While the United States says the IPEF is an open framework that other nations can join, it is presented as an alternative to Chinese interests in the region. It’s also an attempt at economic reintegration with Asia after a period of withdrawal.

“Especially as businesses are beginning to increasingly look for alternatives to China, the countries in the Indo-Pacific Framework will be more reliable partners for U.S. businesses,” U.S. Secretary of Commerce Gina Raimondo said in outlining the deal. She calls it a “turning point in restoring U.S. economic leadership in the region, and presenting Indo-Pacific countries an alternative to China’s approach to these critical issues.”

For now, though, negotiations are only just launching for the IPEF. There are no firm commitments or agreements, with today only the “starting gate,” in the words of Raimondo.

Taiwan, pointedly, is not part of IPEF. The United States says it will deepen bilateral trade ties with the island instead.

Next up: The Quad Squad

There will also be a meeting on Tuesday in Tokyo of the leaders of the Quad, the “Asia Pacific democracies” partnership consisting of the United States, Japan, India and Australia. Biden will also meet one-on-one with Indian Prime Minister Narendra Modi and the new Aussie leader.

New Australian Prime Minister Anthony Albanese, from the center-left Labor Party, has been swiftly sworn in so that he can fly to Japan to take part. It looks likely that Albanese will gain the 76 parliamentary seats necessary – the party is ahead in 78 races – for him to govern without forming a coalition. If not, he must make a deal with climate-minded independents and/or members of the Green Party for support.

Outgoing Liberal leader Scott Morrison had accused Albanese of being weak on China. Albanese will be accompanied in Tokyo by new Australian foreign minister Penny Wong, who is Malaysian Chinese by background. All eyes will be on how Albanese handles Australia’s current antagonistic relationship with China and what he has called a Chinese Communist Party that is more “forward-leaning” and “aggressive.”

“Butter and guns” were also both on display in Biden’s two-day trip to South Korea, where he visited both a Samsung Electronics factory and the Osan Air Base. It was at Osan, now a U.S. Air Force base, where U.S. troops were first deployed in the Korean War, with “Task Force Smith” fighting the Battle of Osan in 1950 as their first engagement with North Korean troops.

New South Korean President Yoon Suk-yeol has agreed with Biden to explore ways to expand joint military exercises that always infuriate North Korea. The two presidents appear to be taking a tougher stance on North Korea, with Biden saying at the air base that they pledged “our readiness to take on all threats together.”

Would Biden meet with the North Korean leader, Kim Jong-un? “That would depend on whether he is sincere, and whether he is serious,” Biden said. We’ll have to take the U.S. president at his word.

Biden Visits Korea and Japan With Rare Opportunity

On his first Asia spin as president, Joe Biden will find a surprisingly warm welcome, and is due to launch an economic framework for US-Asia relations.

Joe Biden is today starting his first Asia trip as U.S. president, visiting South Korea and Japan with an unusual opportunity to cement alliances with these key Asia Pacific democracies. He will be mindful all the time of the threats presented by a nuclearized North Korea and by China, with its promise to conquer Taiwan, by force if necessary.

I’m watching Biden’s first steps in Korea, where he has made a Samsung Electronics chip factory in Pyeongtaek his first stop. Samsung chief Jay Lee has been excused from attending his accounting-fraud trial to take Biden on a tour, where they’re joined by new South Korean President Yoon Suk-yeol. Samsung in November announced a US$17 billion chip factory near Austin, Texas, and is showing off its advanced 3-nanometer chips for the first time on Biden’s visit.

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During his five-day Asia stay, Biden will find fertile ground to forge friendships with new U.S.-friendly leaders in both Tokyo and Seoul, arguably the best opportunity in two decades to do so. Rivals China and North Korea, meanwhile, are both battling Covid-19 outbreaks that undermine domestic popularity for the leadership in Beijing and Pyongyang.

Still, U.S. and South Korean intelligence suggests that North Korea may well test another long-range intercontinental ballistic missile during Biden’s visit, or possibly even conduct its first nuclear-bomb test since 2017. Biden cancelled an intended trip to the demilitarized zone between the two Koreas, and there’s been no progress on denuclearization talks since he became president.

Biden arrives in Asia at a time that leaders have newly taken office who have pledged to improve relations with the United States. Japanese Prime Minister Fumio Kishida moved into the Kantei on October 4, while Yoon was inaugurated on May 10. Yoon may push for South Korea to join “the Quad,” the alliance of Pacific democracies that currently consists of the United States, Japan, Australia and India.

The U.S. president is due for a summit with Yoon on Saturday, then will fly to Tokyo on the next day, where he is set to launch the Indo-Pacific Economic Framework on Monday, May 23. The framework is a U.S.-led initiative designed to counter criticism that the United States has focused only on security issues in Asia. China champions the Regional Comprehensive Economic Partnership free-trade deal that went into effect with 14 other Asia Pacific nations on January 1. But the United States has been accused of an “all guns and no butter” approach.

The “IPEF” is very vague and in its early days. An early draft obtained by the Financial Times shows that member nations have agreed only to “launch negotiations” on trade. But even that assertion may be watered down in a planned two-page statement simply to say the countries are starting consultations that could lead to negotiations that might amount to something. Phew. The language was literally being finalized on the Air Force One flight to Seoul.

Biden is attempting to undo some of the damage done when former president Donald Trump pulled out of the Trans-Pacific Partnership, an executive order Trump literally signed on Day 1 when he took office in January 2017. Kishida in Tokyo will likely nudge Biden to consider rejoining the recast 11-nation partnership, which Japan had championed, although there’s been no indication the United States is considering that.

The IPEF will be a weak TPP substitute. It does not include any improved access to U.S. markets for Asian nations, whereas the TPP promised free-market access for many goods. But the IPEF will attempt to address infrastructure, supply-chain resilience, clean energy, and digital trade. Kishida will join Biden at the unveiling, with South Korea, Australia, New Zealand, the Philippines and Singapore likely to join Japan and the United States in the deal.

Biden will then attend a Quad summit in Tokyo on May 24. The four-way partnership has risen in profile since it was rebooted in 2017, having been on hiatus since Australia withdrew in 2008 in a bid to improve Aussie relations with China. How things have changed. Australia is once again “all-in” on the Quad, and is now instead embroiled in trade disputes with China, which it has also accused of meddling in domestic politics to the extent of attempting to get a Beijing “agent” elected to national office.

The Quad, whose leaders met in person in September at the White House, has made progress on public health with the Quad Vaccine Partnership, pledging 1.2 billion vaccine doses globally, and on infrastructure. It has also formed a coordination group to “deliver transparent, high-standards infrastructure” in the region, a response to China’s Belt and Road Initiative. It is also working on green energy, lower-emissions shipping and high-tech supply chains for goods like semiconductors.

But it has yet to make much obvious headway in handling the military threat China poses in the Pacific. Beijing has basically gotten away with its island-building program to construct missile, naval and air-force bases on islands in the South China Sea. There’s been deadly conflict on the Himalayan border between Indian and Chinese troops, where China has again built structures in contested no-man’s land.

Most recently, Australia in particular has been alarmed by a security pact China has struck with the Solomon Islands, which could see Chinese troops based in the island nation. U.S. officials have said they would need to respond to any deployment of Chinese paramilitary troops to a country that saw heavy fighting on Guadalcanal during World War II, after Japan built naval and air bases there. Aussie defense minister Peter Dutton said in response to the China-Solomon security pact agreed in April that “Australia should prepare for war,” claiming China is “on a very deliberate course at the moment.”

The leadership in Canberra is in question. Australia holds national elections on Saturday, in which it is mandatory to vote. The opposition, left-leaning Labor Party holds a very slight edge over the conservative Liberal Party, and its unpopular Prime Minister Scott Morrison, or “ScoMo.” If there’s a change in leadership, it’ll be a scurry to take part in the IPEF signing and the Quad summit, with Biden due to meet the leaders of India and Australia on the sidelines.

Unusually, a group of around 25 independent candidates known as the “teals,” almost all women with successful careers, may hold the balance of power in Australia. Inaction on climate change has fueled frustration with the “gray-haired men fighting for power,” as Damien Cave put it in The New York Times, in a country that produces the world’s highest levels of coal-generated greenhouse gas per person, and that faces devastating now-annual bushfires and floods.

One of Biden’s key differences from his predecessor on the foreign-policy front is his ability to forge multinational diplomatic alliances. He held a summit at the White House on May 12-13 for the leaders of the nine Southeast Asian nations in ASEAN, at which they agreed to strengthen economic ties, improve health security, collaborate on smart manufacturing and develop renewable energy. Most pointedly, they pledged maritime cooperation and to maintain “the South China Sea as a sea of peace, stability and prosperity,” noteworthy since China claims almost all of that sea as its own territory.

Biden noted a joint desire to see an Indo-Pacific that is “free and open, stable and prosperous, and resilient and secure.” The United States committed US$150 million in infrastructure initiatives with ASEAN op top of support of US$100 million made after Vice President Kamala Harris visited Southeast Asia in August.

Former president Donald Trump alienated just about everyone, and championed an isolationist policy of the United States going it alone. He opted to skip ASEAN meetings when he was in power. Given Trump’s antagonism toward NATO, which he repeatedly hit up for money, it is hard to imagine him having any success calling on Europe to present a united diplomatic front against Russia after its invasion of Ukraine. Then-German chancellor Angela Merkel was pretty upfront with her disdain for Trump; French President Emanuel Macron backed off their early “bromance,” saying the lack of U.S. leadership under Trump had led to NATO’s “brain death.”

Trump saved his warmest words for hardmen dictators like Russian President Vladimir Putin, describing Putin’s early moves in Ukraine as “genius.” Putin “was a friend of mine,” Trump told the golfer John Daly in March. “I got along great with him.” His attempts to curry favor with North Korean leader Kim Jong-un led to a great photo op as Trump became the first U.S. president to step across onto North Korean soil, but ultimately produced no progress on the diplomatic front.

Trump also criticized the “horrible” terms of trade with South Korea. He took Japan to task for not buying enough U.S. autos, while ignoring that many American models are way too big for Japanese streets. That informed a decision to impose higher tariffs on Japanese steel. Trump criticized Japan and South Korea, too, for failing to pay enough for the U.S. troops stationed on their soil.

The Biden administration rolled back the Trump-era tariffs on Japanese steel as of April 1. With this first Asia spin, Biden will be hoping to strengthen U.S. influence across the Pacific, both in terms of the economy and the security of the region. These first small steps may help improve the direction of U.S.-Asia policy, after many Asian nations began to sense that Washington was retreating from Asia. The United States, and its leader, are back here in Asia again.

China Sets ‘Highly Challenging Target’ for Economy

Premier Li Keqiang stresses stability and the importance of 100 million ‘market entities,’ even as Beijing keeps up its regulatory assault on the private sector.

China will target growth of 5.5% in 2022, at the high end of expectations but still far off the double-digit pace we’d grown used to, as the Middle Kingdom grew to become the world’s second-largest economy.

Premier Li Keqiang delivered a forecast of GDP growth of “around 5.5%” while giving his annual work report to the National People’s Congress, the Chinese Communist Party’s yearly agenda-setting meeting for the country’s economy.

“This is a highly challenging target,” Société Générale economists Wei Yao and Michelle Lam say in a research note. It is an acceleration from the two-year compound growth 5.1% rate established in 2021, and there are plenty of headwinds blowing against the Chinese economy.

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Top of the list: China still has a “zero-Covid” policy that requires a disruptive snap local lockdown wherever cases break out. It’s hardly a realistic approach in the face of the hyperinfectious Omicron variant. A leading Chinese virus expert has hinted at a change in approach, as I mentioned on Friday, with the potential for China to move toward “Chinese-style coexistence with the virus,” whatever that means.

It’s vague language that allows the Chinese Communist Party to carve out any old “live with Covid” strategy that it likes, explaining away any aberrations by saying they’re necessary in China. It would be a face-saving step designed to discourage too many people from asking why such harsh lockdowns were ever necessary.

But the CCP has so far struck a fine balance by avoiding an overload of the Chinese healthcare system, which is not strong outside the major cities, while permitting much of daily life to return to normal. This has been achieved by barring nearly all overseas travel. The number of Chinese passports issued in the first half of last year was just 2% of the number issued in the first half of 2019.

China set a growth target of “over 6%” for 2021, and official growth came in at 8.1%. Given the wild swings in the economy produced by the pandemic, China also cites the 5.1% average compound annual growth rate over 2020 and 2021, combined.

Li, speaking to around 3,000 delegates in the Great Hall of the People on Saturday, laid out the lowest growth target since 1991. He acknowledges that China “could face more difficulties and challenges this year,” and pledges that China will issue C¥2.5 trillion (US$396 billion) in tax refunds in 2022, in support of the private sector.

President Xi Jinping directed a series of regulatory crackdowns over the course of the last 18 months, in particular targeting Big Tech but also highlighting the “disorderly expansion of capital.” Quite what the “orderly expansion of capital” looks like is unclear; the criticism, part of the overarching “Xi Jinping Thought” that’s now codified in the Chinese Communist Party charter, gives license for the party to curb the power of the private sector, and take down a notch both Chinese “unicorn” companies and its billionaire entrepreneurs.

Meetings like the NPC owe a lot to the Marxist-Leninist roots of the Chinese Communist Party, and the “five-year plan” style of a command economy. Li praised the work of “market entities, over 100 million in number,” for having responded “with fortitude and resilience” to the shocks of the last year. “Employment is pivotal to people’s well-being,” he continued, suggesting the party is not at this time in a position to push its difficult overhaul of its inefficient, bloated state-owned enterprises. “Our efforts to keep market entities afloat are aimed at maintaining stable employment and meeting basic living needs.”

China is resisting direct stimulus from the government to support the economy as it slows, and Li said the government will target a fiscal deficit of 2.8% of GDP this year, down from 3.2% in 2021. But economists believe Beijing will continue to roll out dovish policies this year, and is even warming to the property sector, where prices have gone into reverse. It kept its inflation target at “around 3%,” and the forecast for land sales stays flat, an optimistic call given that many parcels of land are going unbought due to the financial deleveraging forced on developers.

The SocGen team calculate that the measures announced at this meeting equate to fiscal stimulus of around 3% of GDP. That’s one percentage point larger than the economists expected. Li frequently stressed “stability,” and he repeated the Communist Party’s clarion call that “housing is for living, not for speculation,” suggesting it will pull support once again if home prices start to rise.

It is not yet therefore time to consider buying the beaten-down shares of Chinese developers. Li warned that “land prices, home prices and general housing market’s expectations should be stabilized,” with affordable housing and an expansion of the rental-housing stock high on his list of priorities. Nomura says the overall impression, coupled with no mention of imposing a property tax, is that policy has turned “slightly friendly” toward the beleaguered property sector.

The NPC, coming on the heels of the closing ceremony for the Beijing Winter Olympics on February 24, marks the second major marker for the Chinese government this year. It is building toward the 20th Party Congress, likely in November, the latest installment of a key leadership overhaul that’s held once every five years. At this Party Congress, Xi will be seeking an unprecedented third term as president, having pushed through a change in the constitution that will allow him to run again. He will surely be unopposed but must still muster the support of the party. Xi wants to be able to declare victory over the coronavirus and point to solid steering of the economy.

Li did not mention the Russian invasion of Ukraine, but the geopolitical distress haunts this year’s proceedings. China is staying largely silent, not wishing to criticize its ally, Russia, but is therefore giving tacit support of the war. It is attempting to cast itself in the role of peacemaker, but it may find it hard to push Russian President Vladimir Putin to the negotiating table at a time he appears recalcitrant. Putin is insisting on the “demilitarization” of Ukraine, but China – whose officials stress over and over again the importance of national boundaries and “sovereignty” – has done nothing to criticize the clear violation of Ukraine’s borders.

Chinese shares are dropping today in synch with other Asian markets. The CSI 300 of the largest companies in Shanghai and Shenzhen ended down 3.2%. As is usual when there’s selling in this downturn, Hong Kong has fared worse than most, with the Hang Seng lurching 3.7% lower.

It’s another heavy day of selling on Asian markets on Monday, with the Topix in Japan closing down 2.8%, and all major indexes lower. The day began badly after oil shot up, with Brent crude up 8.9% at the time of writing, having risen briefly above US$130 per barrel. That hurts most Asian nations, which bar Malaysia all import large amounts of oil. The United States is leading the charge in figuring out how to restrict and sanction oil shipments out of Russia, the world’s third-largest oil exporter.

The Sensex in India is also down 2.7% at the time of writing. China and India bookend the United States as the three largest importers of oil in the world.

Indonesia is also a major oil extractor, although the former OPEC member is now a net importer of oil. Still, the production levels out of Southeast Asia are insulating those markets slightly on Monday. The Jakarta Composite Index were down 0.8%, Singapore stocks were 1.0% lower an hour before the close, and Malaysian equities were off 2.3%.

Will Asia Catch Back Up in 2022?

For Asia, 2021 was tease. It was a year that often promised something better, only to deliver everything worse. It’s hard to escape the feeling at the end of the year that we are back in much the same position as when it began.

This story originally appeared on Jan. 3, 2021 on TheStreet.com and its subscription service Real Money. Click here for the original story.

Will 2022 see the Asia Pacific region finally escape its cycle of opening up, then locking down again? There were tentative attempts to welcome foreign visitors once again in countries like Thailand, Vietnam and Indonesia. That gave way to a hellish pattern of waves of virus washing over the region, with all the travel bans, curfews and stay-at-home orders that unfold in response. Asia’s production schedules and shipments have been heavily disrupted as a result.

China persists in its zero-Covid strategy, an ultimately impractical approach that is exported to Hong Kong as East Asia’s financial hub attempts to open the mainland borders. Anyone returning from overseas must spend three weeks in an expensive hotel. China will likely maintain its position at least until the “coronation” of President Xi Jinping for a third term. That will come in the power reshuffling confirmed during the weeklong 20th National Congress, the latest in a series of once-every-five-years major meetings that is due to happen in October or November. March will see the growth target set at the annual National People’s Congress.

Before that, the Beijing winter Olympics will go ahead from February 4-20 in front of Chinese spectators, if all goes to plan. The winter events will make Beijing the first city to host both summer and winter games. But the political undercurrents are strong. The Olympics will go ahead minus diplomatic delegations from the United States, United Kingdom, Canada and Australia, in protest of the human-rights violations in China’s westernmost Xinjiang province, and the death of civic society here in Hong Kong. China says those politicians weren’t invited in the first place…

Other governments in the Asia Pacific region, led in this regard by Singapore, Australia and New Zealand, appear willing to try something other than “zero Covid.” Ratchet up the vaccine rate, do your best to protect and triple-jab the vulnerable, and learn to “live with Covid.” This seems the sensible approach.

When you look at the 26.9% gain for the S&P 500 in 2021, the 21.0% gains for the Eurozone stocks in the Euro Stoxx 50 index, and the 14.3% advance in London’s FTSE 100 index, it has been a disappointing year for Asian equities. There’s scope for them to gain ground in relative terms.

The S&P Asia Pacific Broad Market Index, which tracks developed markets in Asia, posted a loss for 2021, down 0.6%. But that was a better showing than the S&P Asia Pacific Emerging BMI, which netted a 2.3% decline for the year. China-linked plays had a torrid time.

There were solid gains for the Tokyo market, with the broad Topix index up 10.4% for the year. But it was a tougher time for export-oriented companies, as reflected in the poorer 4.9% showing for the Nikkei 225, which tracks big-caps and multinationals. Those kinds of companies should benefit in the year ahead from a weaker yen, as the Fed boosts the dollar by raising rates.

I’ve indicated before that the Japan market will be a safe haven in 2022. We can be certain that the central Bank of Japan will maintain its exceedingly easy monetary policy, with Japanese interest rates still negative at -0.10%. Inflation is not a concern, as yet, in Japan – in fact, it is desirable. The central bank and the government have struggled to achieve a 2% inflation target since setting that as a goal way back in 2013.

The Japanese economy should post strong (for it) growth of 3.2% in 2022, according to IMF estimates, up from 2.4% last year. It’s a similar pace of growth as you’d find in South Korea, Taiwan and Singapore, all typically more dynamic in recovery mode. Underpinning it all, the Japanese government under new Prime Minister Fumio Kishida passed a record US$490 billion stimulus spending package in November, bucking the trend toward tapering in other developed markets.

Value Partners, the Hong Kong-based asset manager, indicates that “investor sentiment towards Japan remains weak, and needs time to pick up,” it states in its 2022 market outlook. “Corporate earnings will likely continue to recover and we view that Japan will be one of the very few countries that will continue to have earnings upgrades.”

Australian stocks also delivered steady if not stellar performance, with the S&P/ASX 200 index up 13.0%. “With pent-up demand following Q3 lockdowns, a high vaccination rate, elevated confidence and rebounding mobility, the stage is set for a strong six months” in Australia, Nomura predicts in its global economic outlook for 2022.

Singapore’s Straits Times index didn’t quite post double-digit gains, up 9.8% in 2021. Like Australia, Singapore is now exceptionally poised having vaccinated the vast majority of its populace. The jobs market is improving, while the strength of high-end manufacturing and pharmaceuticals should stand the city-state in good stead for the year ahead. It’s a likely outperformer.

The problems with supply chains globally hurt South Korea, where the Kospi advanced only 3.6% all year. Despite the heavy influence of semiconductor producers on the Seoul market, electronics- and tech-related exporters did not experience the stellar kind of year they had in 2020, when the world couldn’t get enough gadgets to keep people company in lockdown.

Korea will have presidential elections in March, which add an element of uncertainty to the market. The central Bank of Korea also became the first in Asia to raise rates back in August, did so again in November, and will likely continue to tighten throughout 2022 to combat rising prices and home-price inflation. Rates may rise to 1.5% by the end of the year. That makes it a hard market to like for now, with South Korea’s highly indebted population sure to struggle under straightened circumstances. There’s pressure on the Seoul home market, where prices have doubled in the last five years.

The strongest showing in Asia came in India, where the Sensex posted a 21.7% gain for 2021, with the Nifty 50 up 23.8%. In fact, it’s been a very strong showing by the Mumbai market since the original depths of the first wave of Covid back in March 2020. The Indian market has more than doubled since then, with the Sensex up 111.1%.

That’s come on the back of breakneck growth, the world’s strongest major economy with a pace of 9.5% in 2021, likely to moderate to 8.5% in 2022. Reflecting that slowdown, Indian equities have flagged since mid-October, down 5.7% in the last 10 weeks of the year, so there’s no surging strength to carry them into the new year.

“While India enjoys a long-term secular bull market with expanding new-economy sectors, and is still in the upward profit cycle, we are cautious as valuations are at extreme levels versus the rest of Asia,” Value Partners notes.

Taiwan also outperformed as a market, a rare year when it did not move in lockstep with South Korea. The Taiex index added 23.7%, with electronics makers booking strong orders. Taiwanese companies also benefitted from sanctions and restrictions on some mainland Chinese manufacturers. In Taipei, retail traders became very active in the market, and have not been hampered by the higher rates seen in Korea. The Taiwanese central bank may start to raise rates next year, which could stem the tide of retail flows.

There was a narrow 0.2% loss in the Philippines, where the process of vaccinating 110 million people across 7,000 islands proving exceptionally difficult. The task is even more trying in the world’s largest archipelago, Indonesia, with the world’s fourth-largest population of 274 million people spread across 17,000 islands.

The commodities boom and increased digitalization of the Indonesian economy drove the Jakarta market up 10.1% in 2021. Vaccination rates and the success of “back to normal” business will dictate the future direction of equities in both island nations this year.

More than anything, 2021 became the year that the full vulnerability of investors in China was exposed. A series of sudden, overnight regulatory actions made it eminently clear that the Chinese Communist Party puts its own interests and its diktats over the Chinese people far above any common capitalist concerns about investor protection.

First, the for-profit tutoring industry was essentially banned. Then young people were restricted to at most three hours of videogame playing over the weekend. Next came an assault on Big Tech, with all China’s largest tech companies called in for a dressing down, and ordered to change their ways. Most recently, the country has started revising its securities laws to restrict how and where Chinese companies can go public.

Caught in the crossfire were the poor investors who bought into the “China story,” such as those who subscribed to the international offering of DiDi Global, the Chinese ride-haling market leader. Its business should be a huge growth market – scratch that, it is a huge growth market. But DiDi ran afoul of rules that didn’t exist, fulfilling the requirements of securities regulators for a foreign listing but failing to appease the newly-powerful, previously obscure cyberspace-security review office.

DiDi saw its apps stripped from Chinese app stores, and was barred from signing up new customers. That tanked its business, with the company last week posting a US$6.3 billion loss for the first nine months of the year. And it tanked its stock, an immediate descent days after its June 30 listing that leaves it down 64.8% as of the end of the year.

So it was Chinese and Hong Kong stocks that saw the most-pessimistic mood all year. The CSI 300 index of the largest stocks in Shanghai and Shenzhen fell 5.2% over the course of 2021.

Life was even worse here in Hong Kong, where the much-hated National Security Law continues to be used to pound pro-democracy activity, and anyone deemed “anti-patriotic.” The benchmark, the Hang Seng index, plunged 14.1% over the last 12 months.

Hong Kong’s mix of overseas-inclined Chinese companies, in particular those that also have U.S. listings, drew it down. The city also has a hefty influence from Chinese property developers. Many of those are in or on the brink of default, led by China Evergrande Group, which lost virtually all its value, down 88.8% over the last 12 months.

Hong Kong has been my home for the last 20 years, but it’s terrible to see it suffer so. We are walled in by excessive quarantine, treated to an East Germany-style police state, and are losing the international attractiveness that a once-free city has surrendered.

In Beijing, there is no sign that Chinese regulators will ease up their pressure on overleveraged developers. President Xi has cast scorn on investor-owners, repeating his insistence that “Houses are for living in, not for speculation.” This flies in the face of conventional wisdom, where the incredible unpredictability of the stock market leads anyone with any money to look to invest it in property, first and foremost.

Not that consolidation will be a bad thing in the long run in the property industry. There are too many Chinese developers, 103,262 of them as of 2020, the last count by Statista, a number that grew 21.1% in a decade. Fly-by-night behavior and overborrowing to fund rapid development drove land prices sky high, and homes in the biggest cities are the domain only of the wealthy.

But it is a painful correction as the model is disrupted of pre-selling flats off plan, then racing through development to the next project. Local and provincial governments have based their budgets on aggressive land sales projections, too, so there’s desperation at that level and reports of deep wage cuts among local Communist Party officials.

I don’t see any way to recommend Chinese stocks in 2022, except as a completely contrarian or bottom-feeding play. They are too unpredictable at this stage. Someone is going to make a lot of money when Alibaba Group Holding rebounds. It’s an extremely profitable company that saw its share price fall 47.8% in 2021 in a move that had nothing to do with its fundamentals. But a bet on the company is essentially a bet on what kinds of regulations the Chinese government will implement, without warning. It is not your conventional rebound story.

If you know what social changes Beijing is going to push next, and which companies it will target, perhaps you can make that kind of call. If not, there are better places to invest your money where you can be sure your ownership is valued, protected, and means something.

Hong Kong Stocks Stagger Into 2022 as World’s Worst Performer

Hong Kong was the worst performing major stock market not only in Asia but the entire world in 2021. The hamstrung Hang Seng index hobbled into year end. It’s astonishing to see a major financial hub’s market down almost 15% in what was supposed to be a year of recovery, when U.S. markets and others have been touching record highs.

This story first appeared on TheStreet.com and its subscription service, Real Money. Click here for the original story.

The Hong Kong stock market’s increasing influence from Chinese tech explains part of the underperformance. Then there’s real estate, a mainstay of the local market but beaten down by the sharp falls in mainland Chinese developers. And equally, the depressing disappearance of the city’s civic freedoms are to blame.

The Hang Seng index plunged 14.1% last year. It is far out of step with the double-digit gains in Australia (up 13.0%), Japan’s Topix index (up 10.4%), Indonesia (up 10.1%), and the majorly outperforming markets in Taiwan (up 23.7%) and India (up 21.7%).

There are smaller gains, true, in Singapore (up 9.8%), South Korea (up 3.6%), with the Philippines essentially flat (0.2% lower for 2021), and losses in New Zealand (down 0.4%) and Malaysia (down 3.7%).

Chinese markets also ended in the red. It is internationally focused Chinese companies that are experiencing the rot. The Hang Seng China Enterprises Index is made up exclusively of Chinese companies that are listed in Hong Kong but that do not trade inside mainland China. It was down a startling 23.8% in 2021, a sharp contrast with home-listed Chinese companies.

It’s a reflection of the rising pressure from Beijing for Chinese companies to “return back home” in terms of their listing. Didi Global (DIDI) is the unwitting poster child for that category of company. The ride-hailing market leader in China was pressured into delisting from the New York Stock Exchange under duress from Beijing. It was barred from signing new customers after its June 30 IPO, leaving its shares now 66.2% below the listing price. It said at the start of this month that it will abandon the NYSE and attempt to list in Hong Kong, as I explained at the time.

Most of the tech companies listed in Hong Kong have U.S. listings that are sure to be equally unpopular with the Chinese Communist Party. Until they abandon them, there’s the suspicion their shares can be hurt by drastic action. U.S. authorities are also acting to bar foreign companies if they don’t file accounts that can be inspected by U.S. regulators – a move that Chinese law suggests would be illegal. It’ll take a regulatory huddle across the Pacific to sort that one out.

Meanwhile, Hong Kong’s market remains in limbo. It should rebound once any penalties that Beijing is levying on Big Tech are laid down, and if the U.S. listing issue can be resolved. If and when that happens, there could be a swing in the order of 20% to 30% – the Hong Kong market’s underperformance this year – but this is a regulatory issue, not one driven by fundamentals. A policy change could be announced overnight in Beijing, or Washington. Or not.

Then there are the ongoing social problems in Hong Kong. Britain says 88,000 Hong Kongers have taken up its offer of a residence visa through September, after the program began in January. A record number of Hong Kongers have emigrated, to the United States, Australia, Canada, Singapore and New Zealand and other popular destinations.

British Foreign Secretary Liz Truss just delivered the six-month report that Britain compiles twice a year to cover the state of play in Hong Kong. It is damning in its condemnation of the oppression of citizens by the Hong Kong puppet government and the Chinese Communist Party above it.

In particular, a much-hated National Security Law went into effect on June 30, 2020, imposed directly from Beijing rather than having any input from Hong Kong’s people or their representatives. But the local authorities – the police, the courts, the administration of Chief Executive Carrie Lam, and the shadowy National Security Office – have abused it to persecute any and all of Beijing’s perceived enemies.

The media is under attack, sometimes literally. Unions, civic groups and student unions have been forced to disband. There’s an informant’s hotline, East Germany-style, for you to rat on your neighbors if you think they’re not patriotic enough. You can feed through information, photos, audio clips and video files if you want to report a violation of the National Security Law, which is so vague that popular protest slogans can land you in jail.

Britain notes that any contact by its politicians with anyone in Hong Kong is often construed by Beijing and the Hong Kong government as “foreign collusion.” This can involve the simplest diplomatic contact, and in fact Beijing’s critics are dubbed to be “colluding” with, well, anyone that they contact overseas. The Hong Kong government and China frequently refer to shady “foreign forces,” which sounds like an army, or the CIA, but can equally mean the World Association of Girl Guides and Girl Scouts. They never identify who these “foreign forces” are.

Hong Kong is preparing to hold joke elections on December 19. They’re a sham designed to pretend there’s any semblance of democracy in the city. But no pro-democracy candidates are running – they’re not allowed to, since only pre-screened “patriots” who support the mainland government and the Chinese Communist Party can take part.

The vast majority of opposition politicians have either gone into exile, or are in jail. The city’s most-popular newspaper, the pro-democracy tabloid Apple Daily, was forced to shut down when its accounts were frozen and its top executives arrested. On Monday, the newspaper’s founder, Jimmy Lai, was sentenced to 13 months in prison for attending a vigil honoring those who died in the 1989 Tiananmen Square massacre. Hong Kong used to mark the June 4 anniversary with a memorial service attended by thousands of people. It has been banned the last two years, under the pretense that it would violate Covid-19 protocols.

Lai, who was sentenced alongside seven other pro-democracy leaders, is already in prison. He was convicted of inciting people to participate in a rally for a cause that is, at least on paper, legal to celebrate. But the police didn’t approve the vigil – for political reasons they pretend are all about public health. A hand-picked judge doing Beijing’s bidding, Amanda Woodcock, insists there’s a need for “deterrent” sentences due to the disruption to public order and the way those attending “belittled” a public-health threat. She insists those convicted thought the Tiananmen Square massacre commemoration was “more important than protecting the community.”

They thought nothing of the sort. Lai wrote a mitigation letter that you can find here. Any punishment will see him share the “burden and the glory” of those who shed their blood to proclaim truth, justice and goodness. “May the power of love of the meek prevail over the power of destruction of the strong,” he says.

These social issues bubble away, a poisonous undercurrent beneath society. It is the issues over U.S. listings that have depressed the city’s stock market this year, not to mention the forced deleveraging of the Chinese property industry. Hong Kongers will remain depressed as long as they’re oppressed by the dictatorship sitting atop them.

Have I Been Given a Dodgy Pfizer Shot in Hong Kong?

Lies, damn lies, and statistics in the vaccine age, as Hong Kong and Macau stop administering the Pfizer/BioNTech drug.

This story first appeared on TheStreet.com on Wednesday, March 24, 2021.

I’ve been given a dodgy vaccine dose.

Hong Kong and Macau have today suspended delivery of the Pfizer/BioNTech/Fosun shots. The Chinese local distributor, Fosun, requested the halt of the first batch of the vaccine to reach these shores. Batch 210102 consists of 585,000 doses. Eight days ago, I got one.

The markets moved on the suspension. The Hang Seng Index opened slightly lower after yesterday’s 0.8% drop in the S&P 500. But as morning word broke of the vaccine halt, the Hang Seng faltered, ending Wednesday down 2.0% at its lowest level in more than 10 weeks. The Hong Kong benchmark is now in a technical correction. It has fallen 10% since a February 17 peak.

Now, I’m not too worried. About the vaccine, at least. I’m worried the negative news will delay shots getting into arms, and ultimately the economic opening up of Hong Kong and Asia in general.

There have been reports of “more than 50” instances of defective packaging for the Pfizer drug made by front-line nursing staff. Those reported defects include cracks in the tops of the glass vials, leaks, or stains on the outside. There’s no apparent safety threat.

The defective doses have been thrown out. Fosun, which received the packaging complaints, wrote to the governments in Hong Kong and Macau, telling them to suspend use of the drug as a precaution. It’s undecided how long the suspension will last. Fosun distributes the drug in China, while Pfizer sends it around the rest of the world.

The sudden halting of the BioNTech vaccine will raise further doubts in the minds of a Hong Kong public that is already highly skeptical about getting inoculated, as I explained before I got my shot. The Pfizer/BioNTech drug is one of only two available so far in Hong Kong. The administration of the Chinese-made Sinovac vaccine can continue.

We need to be very careful about how we respond to such reports. The tendency, as I exaggerated at the start of this article, is to think “Oooh, vaccine, dodgy.” AstraZeneca (AZN) is contending with far worse such misperceptions. The authorities should investigate if the Pfizer doses already administered have had the right strength.

I was, by chance, asked to provide some media training today for a major fund manager. The media coaching is something that I do very occasionally, when my corporate news sources request it. Here I was, giving the reporter’s eye view to companies administering their PR.

My early comments focused on three biases that are prevalent in today’s media: negative news bias (we remember bad news better), availability bias (we ascribe greater importance to news we’ve recently read) and confirmation bias (we seek out, by choice of news source or through algorithmic suggestions, news stories and data that support what we already believe).

The halting of the vaccines has Availability Bias written all over it. So, too, do the issues over the AstraZeneca jab concerning both blood clots in Europe and the veracity of its 79% efficacy rate.

An easy way of thinking about the combination of these biases: You never read about a plane that doesn’t crash.

It’s an exaggeration, we have all probably read a story about a pimped-out Gulfstream or a stealth bomber or two. We just remember the plane crashes.

Nevertheless, there have been an average of 14 fatal accidents for commercial and cargo planes globally per year over the last five years, according to the Aviation Safety Network, resulting in 345 deaths per year. In 2020, there were five commercial passenger-plane accidents, killing 299 people.

There were 42,060 people who died in vehicle crashes in the United States alone in 2020. The pandemic and empty roads seem to have encouraged reckless driving: the figure was up 8% over 2019, and the highest since 2007, even though people drove 13% less. What’s more, the fatality rate per 100 million miles driven spiked 24%, the largest annual jump ever, since the National Safety Council started collecting data in 1923. Speed, drugs and perhaps empty roads coupled with a deadly pandemic that encourage reckless behavior are factors.

Hardly anyone is afraid of hopping in a car. Plenty of people are terrified to fly. Yet even when you break it down into accidents per mile travelled, driving is far more dangerous.

It is far more dangerous to get Covid than to get a Covid vaccine. Covid is killing more than 20,000 people per week in Europe. Controversially, it might have been advisable for Europe to continue to give people the AstraZeneca vaccine even if they knew it was causing dangerous blood clots… but on further investigation, and to the best of our knowledge, it is not, anyway.

I need to write “to the best of our knowledge,” because we’re handling a health emergency in real time. The newly developed drugs involve vaccines developed in a year, when the process normally takes a decade. We have learnt a lot about Covid over the course of the pandemic, and will continue to learn about both it and the drugs designed to contain it.

Many European nations screeched to a halt with their AstraZeneca programs when the red flag was raised over concerns about suspiciously timed blood clots. At that time, there were 18 cases of cerebral sinus vein thrombosis, of which one was fatal, out of 20 million people vaccinated in Europe. That’s 0.00009% blood clots, and 0.000005% that were fatal.

Random chance determines that some people are going to get blood clots, and that seems to be what has been going on, although the clotting issue is still being investigated. In fact, the number of blood clots was lower than average in the general population, AstraZeneca says. But blood clots have become the plane crashes of the vaccine age.

Here in Hong Kong, I can tell you every single case of hospitalization after someone got a vaccine. On Monday, the latest info available, there were 20 people taken to hospital after receiving a dose, as this daily report outlines. “A female aged 58 suffered from dizziness,” one report starts. “A male aged 46 suffered from palpitation and increase in blood pressure,” another begins. “A female aged 20 suffered from loss of consciousness and abdominal pain,” and so on.

While this public record may be necessary, it also isn’t all that useful. What we want to know is, did the vaccine cause those effects? Did the person faint or get high blood pressure because they were stressed out? As a direct result of the drug? Because they don’t like needles? Or because they watched a scary movie on their phone while they waited?

Our Negative News Bias tells us it’s directly because of the vaccine drug. Our Availability Bias tells us everyone feels faint, when in fact 20 Hong Kongers had typically very minor reactions out of 23,400 people who got a dose that day: 0.085%. And we don’t even know why those 0.085% of people had that response. Confirmation bias tells anti-vaccers they were right all along.

The Hong Kong government reports that around 403,000 people have so far been vaccinated against Covid-19. Of those, 150,200 received the BioNTech vaccine, and 252,800 got the Sinovac jab. So about one-quarter of the original BioNTech Batch 210102 has been administered. The second Batch 210104 of 758,000 doses is all in storage.

The Sinovac numbers are higher because it was available first, and was for a while the only anti-Covid dose you could get. Mainland China is encouraging people to get a Chinese-made vaccine if they want streamlined entry to China, even though a Chinese vaccine is not available in many places, including the United States.

The BioNTech vaccine has been proving far more popular with the folks I know. Yesterday, about twice as many people signed up for the BioNTech/Pfizer shot as the Sinovac option. Its 95% efficacy figures are far higher than for Sinovac, which has variously been cited as 50.4% effective in Brazil, 65.3% in Indonesia and 91.3% in Turkey. The World Health Organization suggests a minimum efficacy of 50% – meaning 50 out of 100 people have total immunity – for a vaccine to be approved.

I’ve already indicated that I do not think the Sinovac drug should have been cleared in Hong Kong. The company has not released its clinical trials data to the public. It has not been properly peer reviewed. Hong Kong has broken its own public health rules to approve the drug, desperate to get a Chinese alternative into arms first before any “foreign” drug.

The 95% efficacy rate of the Pfizer/BioNTech drug has yet to be challenged. Should these defect reports dent its reputation in the public eye? According to the Hong Kong director of health, there have been eight incidents of cracked BioNTech vials, 22 air-pressure issues leading to leaks, 16 reports of vial seals being loose, and 11 cases of stains or marks on the outside.

That’s 57 incidents out of a batch of 585,500 doses. That’s a rate of 0.0097%. I like those odds. I’ve got an appointment to get my second dose three weeks after the first – assuming that this temporary halt in the vaccine program lifts.

It’s an appointment I intend to keep.

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.