It was only a matter of time before the coronavirus pandemic started to show a rupture in Western relations with China. Today, the market got some of the first hints of a rising probability of “decoupling”.

Evidence came today in the form of two BBC reports, one of the U.K. government of Boris Johnson (who has COVID-19 now) saying there would be ramifications for China failing to share how they stopped the virus from spreading. One such punishment was getting rid of Huawei in their 5G program.

Over the weekend, the Daily Mail reported that the Johnson team doubted China’s SARS-CoV-2 infection count, which totals around 81,000, saying they were probably off by a factor of 40.

The wide spreading disease throughout Europe is turning people off to China in leadership positions who, only a few months ago, were fine with Beijing and thought the U.S. trade war with China was just Trump being Trump.

Three years ago, Davos Man invited Xi Jinping to the World Economic Forum, heralding him as the new leader of the free trade world.

The other signal today comes from news reports that Spain, Turkey and The Netherlands are angry with their Chinese partner over what they described as faulty medical equipment used to combat COVID-19.

COVID-19 is the disease caused by the new SARS coronavirus, first reported in Hubei province China in late December.

The Dutch health ministry announced it had recalled 600,000 Made in China face masks. The equipment was used by front-line medical teams. Dutch officials said that the masks did not fit right, and that their filters did not work as intended, the BBC reported on Monday.

“The rest of the shipment was immediately put on hold and has not been distributed,” a statement read. “Now it has been decided not to use any of this shipment.”

On Sunday, U.S. Senator Tom Cotton tweeted out a South China Morning Post story about how Chinese movie theaters are being shuttered one week after being reopened.

Cotton noted, “China just shut down movie theaters nationwide after reopening them. Sound to you like they have pandemic under control? Me neither. China is still lying.”

Cotton is a consistent China basher, but his comments come at a time when Italy and the U.S. have long passed China’s total infections. Spain passed this weekend, now with over 85,000 cases. Italy has 11,591 deaths, nearly four times that of China.

The Western world are being made to look like the Three Stooges.

People in the markets are scratching their heads, trying to figure out a timeline as to when this all ends, but unable to fully trust China.

Afterall, they ask, how did the epicenter of the outbreak manage to get away with just 81,000 cases, while Italy is still not at peak coronavirus, and some U.S. states are only just getting started?

For sure, China will recover from the coronavirus before it recovers from this face plant with its big investors in the West. The longer this disease ravages the U.S. and Europe, the more it turns into a public relations disaster for the Chinese government.

Their economies are in lockdown and in freefall.

What was once a European recovery story in 2020 is now another year of economic contraction, especially in Italy.

The U.S. economy is also seen ending the year in the red, based on economic projections by Barclays Capital. Every week, the forecasts keep getting worse.

The capitalist Democracies of Europe and the U.S. are on life support, ironically of the kind that requires big government spending to keep people employed who are otherwise at home watching Netflix. In Italy, they cannot even go out for a jog in Milan. In Brazil, Rio de Janeiro beaches are closed. In the U.S., Disney World, the symbol of American life, is closed. Central Park, the heart of the most important city in the nation, has been turned into a M.A.S.H. unit.

As people watch this unfold, Beijing’s response to the coronavirus is increasingly treated with skepticism, if not anger in government circles. They feel China got away unscathed, despite the fact that China is still very much living with this today.

Coronavirus Could Be The End Of China As A Global Manufacturing Hub

Reports of faulty test kits and medical equipment serve to amplify existing apprehensions. The China zeitgeist is a bit dismal.

In a report by Business Insider yesterday, reporter Adam Payne quotes (anonymously) a British official saying, “There has to be a reckoning when this is over. The anger goes right to the top.”

To be sure, President Xi Jinping has his plate full, says Vladimir Signorelli, head of Bretton Woods Research, a macro investing research firm out of New Jersey. “Repairing China’s global trust may come at a price,”he says. “We expect the Chinese to become more willing to concede in trade negotiations with the U.S. going forward because it’s all about volume and market share. They don’t want to lose anymore market share in the supply chain then they have to because of this disaster.”

American multinational corporations operating in China are likely to take a longer-term view on the China market, especially if China is a domestic market for them, or a launching pad into southeast Asia.

But if COVID-19 severely hurts the home market, then watch for foreign companies to become less ambitious about being in China, UBS strategists led by Wendy Liu in Hong Kong wrote in a client note dated March 27.
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