by Bryan Perry

February 25, 2020

I’ll have no specific investment advice for you this week, but the best investment hope I can offer you in this column is that freedom coming to China would open the world to a great new age of potential profits.

While it was widely accepted just a week ago that there was evidence of improving containment of the coronavirus, the situation has taken a turn for the worse in recent days after Chinese scientists offered new evidence that the virus can be spread asymptomatically – meaning that a carrier of the disease shows no noticeable signs of infection until it becomes advanced. This is bad news – there’s no way to sugar coat it.

How long have the Chinese known this condition? That is anyone’s guess, but considering the recent death of the whistleblower doctor in Wuhan and how he was muzzled by Chinese authorities when he tried to sound the alarm, there is no telling how bad the situation really is, and this lack of transparency has pinched a raw nerve with the market, leading to sharp declines in the latter half of last week.

Dr. Li Wenliang, an ophthalmologist working in Wuhan, the Chinese city where the epidemic originated, died on February 7 of the virus. Using the popular Chinese social media platform WeChat, Li wrote that he had become aware of several cases similar to Severe Acute Respiratory Syndrome (SARS), another coronavirus that killed nearly 800 people in a 2002-2003 outbreak that Beijing initially tried to cover up.

Within days, local police paid Li a visit and reprimanded him for these posts. It was reported that he was arrested, jailed, and made to recant. He signed a statement on January 3, a copy of which was circulated online in China, in which he acknowledged making “false statements.” Five weeks later he was dead, leaving behind a young child and pregnant wife. As a result, Li has become the face of Beijing’s blunders.

While the new coronavirus, which can cause a form of pneumonia, has a relatively low mortality rate compared to SARS or even the seasonal flu, scientists are concerned that since it presents only mild symptoms in many people that it might spread more easily and then mutate into a more lethal strain.

It is this unknown factor that has triggered a new level of market nervousness.

Yanzhong Huang, a global health expert specializing in China for the Council on Foreign Relations, said, “There is a strong parallel between the response and cover-up to SARS and this current outbreak.”  Although the first case was apparently detected on December 12, local officials hid the statistics for weeks, fearful of offending Communist Party higher-ups by reporting anything undermining “stability.”

China’s President Xi Jinping’s authoritarian rule does well at issuing top-down physical commands. For instance, he built new hospitals in Wuhan within 10 days and quarantined the entire city, but the crackdown on non-governmental organizations (NGOs) in the health field and muzzling of independent media also cut the central government off from vitally needed information.

“We have declared a people’s war against the epidemic,” Xi told President Donald Trump by phone. But the phrase “people’s war,” of course, means top-down control, over-riding any dissent from the populace.

Under Xi Jinping, top-down controls have become even tighter. Sophie Richardson, the China director of Human Rights Watch, said, “One clear target of Xi’s groups to silence are domestic non-government organizations in the health field that provide services and information to the public or help respond to medical crises.” So, the question at hand is whether the Beijing government will learn anything from the current crisis about the need for bottom-up information from civil society. So far it looks unlikely.

It is reported that some doctors, journalists, and critics of China’s handling of the coronavirus have been censored, arrested, or simply disappeared. China’s Internet watchdog, The Cyberspace Administration of China (CAC), has levied a widespread crackdown on social media platforms, requiring operators of such outlets to “create a good cyberspace environment to win the battle against the coronavirus epidemic.”

Can This Epidemic Have a Positive Outcome – Regime Change?

I could go on and on about how deplorably China’s government is handling this crisis, but at the same time, is it possible that this government clampdown will unleash another long overdue Democracy Movement, like the one in 1989 that spread to 400 cities before the massacre at Tiananmen Square that resulted in the death of several thousand student protestors and a memory that is widely associated with questioning the legitimacy of Communist Party rule that remains one of the most sensitive and censored topics in China?

Either way, something’s got to give if the world wishes to seek global progress while China’s abuse of power is allowed to flourish without retaliation. The U.S. is the only country with the direct economic and political power to ultimately break that system and open the door to democracy. It will take cooperation from most other developed democratic nations to apply the same kind of economic pressure that leads to a civil uprising by the 1.43 billion Chinese people (20% of global citizens) trapped inside China.

It happened in the Soviet Union in 1991 and maybe it can happen in China now. Yes, Russia still has some of its nukes and an iron-fisted ex-KGB “ruler for life” in Vladimir Putin. But what’s left after the disintegration of the Soviet bloc is a much smaller and weaker Russia with a paltry GDP of $1.6 trillion, which accounts for only 1.8% of world GDP. Russia doesn’t even rank in the top 10 global economies, and it is about to be overtaken in rank by the likes of Mexico, South Korea, Spain, and Australia.

The problem with China is that there is no transitional leader such as Mikhail Gorbachev, who facilitated the long-overdue transformation. Gorbachev’s decision to allow elections with a multi-party system began a slow process of democratization that eventually contributed to the collapse of the Soviet Union.

That, and the Reagan administration’s arms race spending, had the Soviets call off the Cold War at a time when an unsustainable 50% of Soviet industrial output was going to the military. When the justification of an external threat was removed, there was no reason for the Russian public to tolerate totalitarian rule.

Chinese Total Debt-to-GDP Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In my view, China has to be crushed economically – even pushed into a recession, sparking massive and widespread civil upheaval. China is leveraged to the eyeballs, with debt currently approaching 320% of GDP. If current conditions persist, a tipping point of economic collapse is within the realm of possibility, and a nationwide uprising sparked by economic decline is probably the only way to defeat the Communist Party and trigger a wellspring of democratic sentiment. Is it possible in our lifetime? Yes, I believe so.

Beijing is threatening America’s economic livelihood through its mercantilist policies while operating a diabolical cyber infrastructure. The latest round of charges against Huawei on February 13 of racketeering and theft of trade secrets shows that the spirit of the Phase 1 deal is just more posturing, hoping to keep tariffs to a minimum while waiting for a softer-on-China administration to occupy the White House.

Is China the modern day “evil empire” that was coined by Ronald Reagan? I’d say so. But what President Xi didn’t count on was the challenge of trying to suppress the spreading of a more lethal coronavirus and the impact it would have on an already highly leveraged economy and that of global public opinion of their handling of it. If there were ever a time to sow the seeds of crucial and historical change for a free society in China, it is now. The best time to hit ‘em is when they are down, because the devil does not play fair.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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