sarschina

May 6, 2003

The alarming SARS epidemic has provoked a crisis in China, and Asia generally, that threatens to derail a decade of unparallelled growth, shaking the very foundations of power. Eric Ellis reports.

IT wasn't supposed to be like this.

All the talk, not so long ago, was big, bold and, to many in the West, confronting and even slightly sinister: the 21st century would belong to Asia, specifically China. But as global panic set in last week with the deaths of more than 300 people, and infections approaching 5000, severe acute respiratory syndrome (SARS) looked increasingly like providing China with its "Chernobyl moment".

China's cover-up of the virus, which resulted in the sacking of the health minister and Beijing's mayor, the quarantining of a hospital, the closure of cinemas, theatres, bars and a university, has seen analysts draw a parallel with the 1986 Ukraine nuclear power station accident. Chernobyl symbolised the maladministration of a sclerotic party whose inclination was to cover up and deny until the radiation that leaked over Europe was impossible to ignore. SARS, meanwhile, has leaked around the world.

China's remote government, in denial and caught openly lying about the extent of the virus, has been deeply embarrassed by SARS. Unthinkable a month ago, Chinese citizens are directly challenging the communist authorities. The government's late-in-the-day transparency was prompted by a whistleblowing doctor (this practice normally invites life-long retribution) who blurted all to the media.

Many Chinese are openly mocking the leadership, particularly via their closely monitored internet. (One image, spread around the internet with a speed that perhaps rivals SARS itself, was of "Comical Ali", Iraq's hapless Information Minister Mohammed Saeed al-Sahhaf, as "China's new spin doctor". Standing in front of Mao's portrait in Beijing's Tiananmen Square, he declares: "There are only 22 cases of SARS in Beijing.")

The confidence, even cockiness, that has come with China's increasing wealth and power, has also taken a severe jolt. Those same web chatrooms were likewise full of talk that SARS has been "planted" in China by American and Taiwanese "forces", with postings noting that both countries have been relatively SARS-free. "Some Chinese bristle at the idea that SARS originated in China," says Dali Yang, associate professor of political science at the University of Chicago. "These are conspiracy theories at best. Such theories thrive in times of great uncertainty."

In Beijing, authorities may at last be fessing up, with Mayor Meng Xuenong, just three months into the job, and Health Minister Zhang Wenkhang both fired. But more than a month into the crisis, in which 131 people have died and 2700 infected, the full extent of SARS is unclear in China's commercial capital of Shanghai, and in Guangdong, where it started and where heavily afflicted Hong Kongers own many of its factories. Technology companies, particularly Taiwanese chipmakers with foundries in neighbouring Fujian province, worry if it's safe to visit their plants – and if Taipei would then allow them back.

The World Health Organisation is warning against travel to much of China and Hong Kong. Even Toronto, the commercial centre of squeaky clean Canada, with its huge ethnic Chinese community, was declared off limits by WHO, after 20 people died and 150 were infected. Famously spick Singapore, the third most-afflicted centre after China and Hong Kong, may be next on WHO's no-go list. The SARS death rate, which had flatlined at 4% to 5%, has now alarmingly leapt to 6%. There are lay-offs across the region as economic activity winds down by up to 50% in some industries, such as tourism and transport. As mirrored in Singapore's arrival numbers, which fell 70% in April, Asia is effectively shutting down. And it doesn't look like re-opening for business for a long time.

The consequences may be considerable. Take the economic power now wielded by Beijing. The global economy is increasingly dependent on China, which is expanding at an average of 7% annually while the US sputters along at 1% to 2%. China is far and away the developing world's biggest recipient of foreign direct investment and this year, its second in the World Trade Organisation, it expected to become the world's biggest – thereby overtaking the US – with $US50bn ($81bn) incoming. China also has the world's biggest treasure chest of foreign exchange reserves, $US310bn at last count. Plus, there's $US115bn for Hong Kong, now under its sovereignty.

And, of course, China is Australia's third-largest trading partner, worth $21bn bilaterally last year, a number that grew 19% (and is expected to soar exponentially if last October's $25bn Guangdong gas deal comes onstream in 2005). All of this may be under threat.

This is a long way from the predictions by Barton Biggs, Morgan Stanley's global investment strategist, after a week schmoozing around the Middle Kingdom in the booming mid-1990s. "We were all stunned by the enormous size of China," he said. "Sometimes you have to spend time in a country to get really focused on the investment case. After eight days in China, I'm tuned in, overfed and maximum bullish."

Of course, there were others, such as the curmudgeonly Hong Kong hedge fund manager Bill Kaye, who described China as "a roach motel for capital – you can see a lot go in but not a lot coming out". But it was Biggs who declared in August 1994 that Thailand, Indonesia and Hong Kong would be "the best place in the world to be for the next five years". At a Las Vegas conference, four months before the 1997 financial crisis, Templeton Management's Mark Mobius declared that "demographic, agricultural, sociological, psychological, political and technological factors are bringing rapid change to emerging nations, and, with it, tremendous investment opportunities".

As we now know, Biggs' favourite markets were where the financial crisis began – and hit hardest. And Mobius was right about demographic and agricultural factors bringing rapid change – SARS seems to have germinated in overcrowded Guangdong's duck farms. Asia's markets are stagnating at an average of about 40% off their pre-1997 highs, while Indonesia's rupiah, trading about 70% down, is indicative of the region's tradeable currencies. And that's before they were hit by SARS.

You don't hear much of Mobius or Biggs in Asia these days. Nor does one hear much of the Asian values mantra of regional strongmen such as Singapore's Lee Kuan Yew, China's Li Peng and Malaysia's Mahathir Mohamad, the gist of which was that the West was in moral decay, democracy and a strong economy were incompatible bedfellows, and Asians were best governed by a secretive coterie of elites.

The elites are still running the region, but Biggs has been eclipsed by Morgan Stanley's mainland-born, Hong Kong-based Andy Xie. Ordinarily no bear on China, Xie cut his GDP growth forecast for China from 7% to 6.5% on April 2. China would likely give up a quarter of growth. Then China cancelled its May Day celebrations, normally a mighty day in the communist calendar. Xie said it would slice as much as another 0.4% off growth. He then warned that if the virus mutates, "it would imply a significantly lower growth rate than the one we are currently forecasting". On April 23, scientists at the Beijing Genomics Institute reported the virus was "expected to mutate very fast and very easily".

The impact of SARS in Asia is as profound politically as it is economically. Of the countries most affected, Singapore is winning plaudits for taking decisive action after a slow start, although its premature declaration last week that the worst was over alarmed many. The death toll – 21 with 192 ill – doubled in the following days. Singaporeans are unused to privations and the shutdown of the main market, which supplies 70% of the city's fresh fruit and vegetables, led to near-panic shelf-stripping across the island and in neighbouring Johor Baru, Malaysia, where Prime Minister Mahathir is trying to effectively quarantine the entire country.

Singaporean Prime Minister Goh Chok Tung wrote a stern letter – published in full on the front page of the state-controlled media – warning quarantine-breakers of dire consequences, although how dire it can get beyond heavy fines and house arrest monitored by closed-circuit television was not clear. Goh also announced a $2bn business bail-out package.

Singapore can appear relatively despotic because it's a one-party state with absolute powers. But in Hong Kong, SARS has caught the panic-stricken territory in political limbo. Deng Xiaoping's pragmatic one-country, two-systems pact – so celebrated as the solution to communist China's takeover of the British colony in 1997 – now seems its greatest weakness, leaving the territory with neither the authoritarian advantages of a dictatorship, nor a democracy's accountability.

As the toll mounts – 133 deaths, 1550 afflicted – and transforms Hong Kong into a ghost town, Chief Executive Tung Chee-Hwa is looking like an impotent buffoon, with his clueless gumboots-clad "cabinet" reduced to pathetic TV stunts, such as mopping wet markets. There's also a schadenfreude about Hong Kong's plight, particularly among western expatriates preparing to flee. "When it all boils down, the thing that made Hong Kong so compelling, that live-and-let-live mentality, is also what makes it absolutely disgusting environmentally," says one Australian banker. "To live well, you've got to have money and if there's no money around, at the end of the day, no one gives a shit."

Nor has it helped Tung that his masters in Beijing have seemed just as clueless. Like the ousted Soviets, the Chinese communist preference is for good news only – it's the lifeblood of a network of patronage that unites its 70 million members in a continuous chain of back-scratching.

Of course, Asia, and China in particular, may still become the key player of the 21st century. But first, people such as Goh will have to be convinced to stop warning that the city-state "faces its worst-ever crisis", Cathay Pacific's flight schedules will need to cease being "annihilated" as business travellers stay home, and the SARS epidemic will no longer bear "consequences too dreadful to contemplate", as China's new Premier Wen Jiabao portends.

"The smarter leaders will know China has a lot to gain by being more transparent – and staying that way," says Richard Baum, professor of political science at UCLA. "But the leadership has so many secrets and so many cover-ups. Once you let the genie out of the bottle, how can you stop it?"

As for the "tremendous investment opportunities" awaiting those in Asia ... well, the "SARS Protect" packs made by Singapore's publicly listed Raffles Hospital – antiseptic swab, info leaflet, thermometer, vitamin C tablet and mask – are flying off supermarket shelves at $16.95 apiece.