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China crisis

The damage so far has unsurprisingly been hardest felt in China, where more than 75,000 cases have now been confirmed and 2,000 people have died. Containment efforts have shut down large swathes of its economy, not least its many factories, the effects of which are now being felt by western companies that use them, including the subject of this week’s cover feature, Tesla. But the most high-profile casualty so far has been Apple, whose shares fell 2 per cent on Tuesday after it said that Chinese supply issues would see it miss sales targets. As we write on page 12, it’s unlikely to prove too much of an impediment to the company’s long-term success. Nevertheless, investors should be watchful of other companies with big Chinese exposure that may not have the same financial strength as these US tech giants to withstand such disruption.

However, there is some cause for optimism that a potential black swan might turn out to have been more of an ugly duckling. The rate at which new cases are being diagnosed is slowing, and cases outside of China remain low. And while Chinese markets initially took a significant hit, an injection of liquidity has seen a 10 per cent monthly fall pared back to a mere 3 per cent. Even if its government’s largesse cannot cure Covid-19, it will certainly soothe market nerves – temporarily at least. 

Certainly, the extreme measures taken by China to shore up its faltering economy are hardly reassuring in and of themselves, and will not cure another epidemic that the country is struggling to contain: debt. Take so-called ‘virus bonds’ for example, which Chinese regulators have encouraged companies to issue to invest in initiatives to combat the epidemic – as our sister publication The Nikkei Asian Review notes, the cheap loans are in fact mostly being used to roll over existing borrowing, discouraging the deleveraging most observers say is desperately needed. 

Regardless of your direct exposure to China, that matters, especially if you are an investor in the commodity-heavy FTSE 100, which has performed worse over the past month than the Chinese benchmark. China has been able to outrun its debt so far, but slowing growth makes that more difficult – what happens if it catches up is anyone’s guess, but it is unlikely to be pretty. Once again, the case for diversification rears its head, either internationally, or into non-correlated commodities such as gold, which broke above $1,600 an ounce this week for the first time since March 2013. We’ve produced a handy guide for doing so on page 48.