Could debt burden from coronavirus be China’s black swan?

Global financial markets, beset by concerns around the wider economic impact of the coronavirus, rose on Tuesday 11 February as analysts expected further economic stimulus from China’s central bank. 

Similarly, South Africa’s JSE was this morning (Tuesday 11 February) expecting to take its lead from firmer Asian markets and a solid performance from Wall Street overnight. Tencent, in which SA-based Naspers has a 31.2% stake, rose in Hong Kong trading.

Economic stimulus is seen as a way to shore up confidence in the Chinese economy, which is stalling as a result of the virus’ impact on local manufacturing and general economic activity, including restricting travel and the movement of goods.

China’s central bank expected to inject further market stimulus

The Chinese central bank has already injected billions of US dollars into the economy in recent weeks. Bloomberg is now reporting that economists from Goldman Sachs, UBS Group AG and BNP Paribas SA foresee more easing steps ahead, including further cuts to central bank funding rates and more tax relief to hard-hit sectors of the Chinese economy.

But the challenge for the Chinese government is not to go too far in its efforts to ease the economic impact of the coronavirus. Warned Fortune magazine: “[The] coronavirus risks sending China debt to the moon”.

The magazine quotes Brian McCarthy, head strategist for Marcolens, an investment research firm with a focus on China, as saying that no one knows what China’s debt capacity is.

“Is it 250% of GDP? Is it 350%? We will know it when they hit it,” said McCarthy.

What if China hits the limit of its debt-carrying capacity?

And if China does hit the limit of its debt-carrying capacity and the coronavirus is still spreading and still impacting China’s economy, which accounts for almosty a third of global growth, according to Standard & Poor’s. What then?

Several market-watchers are now warning that this could become a so-called black swan event – something nobody saw coming and has profound consequences.

Then afterwards everyone says, “Well, we should have foreseen that happening”. 9/11 is an example. So too is the Wall Street Crash of 1929 which led to the Great Depression of the 1930s.

Cautious economists are starting to warn of a black swan event 

“So could coronavirus prove to be the equivalent of the collapse of the US sub-prime mortgage market: A black swan?” asks Larry Elliot, economic editor for the London-based Guardian.

“Those of a cautious bent, like El-Erian [Mohamed El-Erian, the chief economic adviser to the insurance company Allianz], think it could.”

Elliot notes that a black swan event has a number of characteristics.

“It has to come as a complete surprise. It has to have profound consequences. And, once the dust has settled, people who never saw the crisis coming say that it was glaringly obvious that there was trouble ahead. The coronavirus outbreak would seem to tick all three boxes.”