64 Finance & economics The EconomistAugust 31st 2019
H
alf a decadeago, if you had asked
economists which number—five or
seven—described China’s gdp and which
its currency, most would have answered
this way: growth will remain strong at
around 7% annually, and the currency will
strengthen until it takes just five yuan and
change to buy a dollar. One measure of the
impact of Donald Trump’s trade war on
China is the inversion of these digits. As
American tariffs bite, economic forecast-
ers think that Chinese growth next year
will slow to five-point-something percent.
The yuan, for its part, has slumped to more
than seven per dollar.
Mr Trump has crowed about the success
of his tactics. “China has taken a very hard
hit,” he said on August 26th at a news con-
ference after the g7 summit in France.
“They want to make a deal very badly.” But a
more accurate reading of China’s policy
stance is one of surprising calm in the face
of the economic slowdown and, by exten-
sion, of stiffer resolve in the trade dispute.
The toll of tariffs on China’s economy is
becoming more visible. Although exports
to America account for just a small share of
overall gdp, the uncertainty has bruised
corporate confidence. Investment spend-
ing is on track to increase this year at its
weakest pace in at least two decades. Fac-
tory prices have veered into deflation, a bad
sign for industrial profits. Economists at
Morgan Stanley, a bank, now forecast that
Chinese growth will fall to 5.8% next year;
previously they had expected 6.3%.
In the past, whenever growth looked set
to slow sharply, Chinese companies could
count on a stimulus package to revive it.
But this time officials have been much
more restrained in their response, partly
because of concern about adding to China’s
hefty debt burden. On August 26th the cen-
tral bank had a chance to lower funding
costs for banks, but it refrained, bucking
the global trend towards lower rates. On
August 27th the State Council, or cabinet,
issued an underwhelming 20-point plan to
promote consumption. Some analysts had
been hoping for targeted tax cuts or subsi-
dies; instead, it made small-bore promises,
such as more 24-hour convenience stores.
The Chinese government’s lack of panic
about the economic outlook should give
Mr Trump pause. “Its leadership now looks
committed to a strategy of toughing out
trade tensions,” says Andrew Batson of Ga-
vekal, a research firm. It helps that Chinahas procured insurance in letting its ex-
change rate decline to 7.1 yuan per dollar,
the weakest since 2008, offsetting some of
the drag from tariffs.
But some think the calm is verging on
complacency. Not only has China’s govern-
ment refrained from stimulus, but it has
become more hawkish about the property
sector, the engine of its economy. In line
with President Xi Jinping’s oft-repeated
warning that investors should not specu-
late on housing, regulators have curtailed
lending to developers and sworn off cut-
ting mortgage rates. “We would view stabi-
lising growth by choking credit to the prop-
erty sector as analogous to performing
cardiac surgery without blood pumps, oxy-
gen and anaesthesia,” says Lu Ting, an
economist with Nomura, a bank. In other
words, things could get ugly. 7SHANGHAI
Officials are calm as growth slows. Are
they complacent?China’s economyThe other
inversion
T
he ebolaoutbreak in west Africa in
2014-16 was the worst in history, with
nearly 30,000 cases and a death toll of more
than 11,000. It exposed a flaw in funding
mechanisms to tackle such health emer-
gencies: by the time money arrives the dis-
ease has already spread. So to speed things
up the World Bank created “pandemicbonds”, a type of insurance scheme. In 2017
they were sold to private investors, who
would lose their money if any of six deadly
pandemics hit. In the event of Ebola, up to
$150m would be released to affected coun-
tries’ governments, and agencies such as
the World Health Organisation, to be used
to fight the outbreak.
Last year Ebola struck the Democratic
Republic of Congo. It has already killed
nearly 2,000 people. But the scheme has
not paid out. The 386-page bond prospec-
tus contains a clause making payout condi-
tional on the disease spreading to a second
country, with at least 20 people dying
there. Ebola has indeed spread, to neigh-
bouring Uganda. But it has killed just three
people there, with no new cases since June.
Investors, including pension funds and
asset managers, had bought $320m of the
bonds in a deal that was heavily oversub-
scribed. The notes covering Ebola give
them an annual coupon of 11.5 percentage
points above libor, a benchmark interest
rate. The World Bank, with contributions
from Japan and Germany, has already spent
$87m on coupon payments, swap premi-
ums and fees. Unless the outbreak wors-
ens, investors will get their money back
when the bonds mature next year.
If the insurance had been designed to
cover all severe outbreaks it would have
been “prohibitively expensive”, says Mu-
kesh Chawla, who co-ordinates the World
Bank’s pandemic emergency-financing fa-
cility. As well as the bond proceeds, the in-
stitution holds a smaller pot of money,
which can be disbursed at the discretion of
experts. It has already allocated $50m from
this to tackling the Ebola outbreak, along-
side $350m from other sources.
It is inevitably hard to design insurance
for rare events. Indeed, says Andrew Far-
low of Oxford University, it may be impos-
sible to set triggers so that the bonds deliv-
er when needed, at the same time as
providing the returns that investors de-
mand. Before the World Bank issued its
bonds, consultants ran a computer simula-
tion of half a million outbreaks of filo-
viruses (a group of viruses that includes
Ebola). But pandemics are even harder to
model than natural disasters such as hurri-
canes, for which a market in “catastrophe
bonds” is well established.
In all insurance contracts the cost of
cover exceeds the expected payout (other-
wise insurers would go bust). For pandem-
ic bonds and related swaps this risk pre-
mium is about $17m a year. That money
would be better spent on public-health sys-
tems and surveillance to try to catch out-
breaks earlier, says Olga Jonas, a fellow at
the Harvard Global Health Institute who
has previously worked on risk-financing at
the World Bank. In Uganda, vigilance
stopped Ebola from spreading. That saved
lives, as well as investors’ millions. 7KAMPALA
The World Bank’s pandemic bonds are
not helping the fight against EbolaEbola in CongoSick notes
No clean bill of health