The coronavirus and trade war punish China, damaging its status as a source of growth

Think about how quickly the world is adapting to China becoming less important politically and economically than it was before the double whammy of the trade war and coronavirus outbreak.

The trajectory of China, the world’s most populous nation and second-largest economy, has changed, and it will remain that way for at least the next few years.

Perhaps the single biggest consequence of this novel coronavirus is China’s communist government losing leverage in dealings with the U.S. and other developed countries.

China will be desperate to keep U.S. companies from moving their supply chains and building new factories in other countries.

For companies, the need to be in China for growth in demand is going to be questioned. Vietnam, India and Malaysia already have recorded big increases in exports to the U.S. as new supply chains are built. Vietnam’s trade surplus with the U.S. jumped about 29% last year.

China’s gross domestic product (GDP) is now projected to slow to 4.9% this year from 6.1% in 2019, according to the Organisation for Economic Co-operation and Development (OECD), whose March update said growth would be 0.8% slower this year than it had projected in November. That’s the biggest cut in any of the major countries outlined in the OECD’s “Coronavirus: The world economy at risk,” published March 2.

Will China’s communist government stay in power? Will it have to strike out at Taiwan or Hong Kong, or do something else drastic to rally citizens on the mainland? Will the consequences of COVID-19 change the country’s political status, government, markets and economy? In either case, what are the chances that China may boom in the mid-term (over the next three to five)?

Potential benefits to the U.S.

The virus, unlike other macroeconomic issues I’ve studied over the past 10 years during which I’ve been bullish on stocks, has the potential to get even worse. It’s not something we can just guess is going to go away without the world suffering from economic and market damage.

On the other hand, it could spur near-term economic activity outside of China and, specifically, in the U.S. Global companies based in the U.S. are going to invest in new factories, supply-chain redundancies, and so on.

Regardless, with the rest of the world hurting from negative interest rates and weak economic growth, there are trillions of dollars that keep pouring into the U.S., driving down our interest rates and inflating our stocks and other U.S.-based assets.

That’s likely to continue, right? Well, nothing’s for sure, but it does make sense that the U.S. economy and markets could actually benefit from the coronavirus crisis. That may be cold comfort, but one thing is for certain: The tide is changing.

Cody Willard writes the Revolution Investing newsletter.

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