Does the ‘devil virus’ mean financial disaster?

China officially went back to work on Monday, after an extended two-week Lunar New Year holiday, while the authorities struggled to get the spread of the new coronavirus under control. But many are not back at work yet, and the spread of the “devil virus” (as President Xi Jinping called it) is manifestly not under control.

This virus has already killed more than 1000 people — more deaths in two months than the Sars (severe acute respiratory syndrome) outbreak of 2002-03 caused in seven months — and it’s accelerating. More than 80 have died a day in the past few days, and the death rate in the city of Wuhan in Hubei province, the point of origin of the disease and still its epicentre, is now 4 per cent of those infected.

The death rate is still only 2 per cent nationally, but infections elsewhere are generally more recent than those in Hubei province and may not reflect the final death rate. And it’s spreading fast within China: four large cities in coastal Zhejiang province are now locked down.

Significantly, Xi is no longer claiming he is “personally commanding” the antivirus fight. If this is going to be a complete disaster, somebody else should take the blame, and the woman in charge of the national campaign against the virus is Vice-Premier Sun Chunlan.

Well aware she is now the designated fall guy, Sun immediately visited Wuhan and declared the city and country now face “wartime conditions”. Waxing full-on, she warned: “There must be no deserters, or they will be nailed to the pillar of historical shame forever.”

But mere rhetoric won’t save her if the epidemic goes nationwide.

And it probably will go nationwide: the two or three weeks wasted after the virus was first detected cannot be recovered. But the enforced holidays, travel curbs and lockdowns, albeit belated, may limit the spread of the virus beyond China.

Or maybe not, but even if the virus is largely contained within China the risk of financial infection is high. High enough to qualify as a potential “black swan”.

A “black swan” is an unforeseen event that has a huge impact on the normal course of events. The Sars epidemic in 2002-03 was a black swan: it knocked about two percentage points off China’s economic growth that year. However, that epidemic did not cause a global recession because, back in those days, China was only a small part of the global economy.

Now the Chinese economy is the world’s second-biggest. It takes up four times the space in the global economy that it occupied in 2002, so a 2 per cent fall in its growth translates into at least half a per cent hit to the entire global economy. Which would not be a big deal if the global economy was in good shape, but it isn’t.

Indeed, 12 years after the 2008 subprime financial crisis, the global economy is in the intensive care ward. There has been no return to the pre-crisis highgrowth rates, and interest rates, except in the United States, are still at rock-bottom. That means the banks have no room to cut the cost of borrowing and stimulate demand if the economy is starting to tank.

This applies in particular to China itself, where the banks have been forced by the Government to finance huge amounts of unproductive investment as the regime continuously “primed the pump” in order to ward off a recession.

It worked, in the sense that the loans financed a further orgy of construction that has now equipped the country with 100,000km of under-used expressways and four half-empty 60-storey apartment towers at all four corners of every major intersection in each of the country’s hundred biggest cities. China was the only major country to avoid a recession after 2008 — but it left the banks staggering under a mountain of bad debts.

By now, China has a Potemkin economy where the official economic growth rate is 6 per cent a year but the true number, as measured by electricity use or megatons of freight carried by the railways, is between 2 per cent and 3 per cent. Knock 2 percentage points off that and you have no growth at all — and a crisis of survival for the regime.

That would be the biggest black swan you ever saw, but remember that the lies and official incompetence that surrounded the Chernobyl disaster played a big part in making the Soviet public ripe for regime change a few years later. Could the coronavirus have a similar effect? It’s not likely, but it is conceivable.

The immediate and short-term deaths from the Chernobyl melt-down amounted to 60 people. The Wuhan coronavirus has killed 16 times as many already.