By Reshma Kapadia
March 20, 2020 6:15 am ET

As the U.S rushes to slow the spread of the deadly novel coronavirus, it has unleashed a kitchen-sink array of measures to stave off severe economic damage from the pandemic. Investors grasping for a road map—and perhaps a bit of optimism—as to what comes next have settled on China, whose economy is restarting while the rest of the world is shutting down. But economists and fund managers warn the U.S. could be in for an even longer and bumpier path to recovery.

First, the good news: The number of new confirmed cases of the coronavirus in China has slowed considerably, and that suggests the risk from the virus isn’t indefinite. “It’s the uncertainty for what the virus is engendering that’s creating market chaos, but the important thing is that it’s a fading virus,” Alan Greenspan, former Federal Reserve Chairman and advisory board member at RockCreek, a $14 billion investment firm, said in a video to the company’s clients. “The book will close on this, but not right away.”

Skepticism about the number of confirmed cases in China persists, exacerbated by the initial cover-up of the virus by officials. But economists say the trend is corroborated by Beijing’s containment approach. “As these measures continue on a general easing trend, it indicates Beijing believes that the virus is under control,” says TS Lombard economist Rory Green.

Now, the question is if the health crisis, the market volatility, and the economic hit in the U.S. will follow a path similar to China, despite numerous differences in political and economic systems. “It will be a longer, more drawn-out process, because China was able to limit the bulk of the cases to a single large province, whereas in the U.S. and Europe there are multiple sources of transmission,” says Brad Setser, Council on Foreign Relations.

A timeline offers some context: China state media reported the first known death related to the virus on Jan. 11 and the first confirmed cases outside of China popped up Jan. 20. China locked down Wuhan, the New York City-sized center of the outbreak, on Jan. 23—about three days after the outbreak was officially recognized. China hit a peak in the number of new cases (excluding a one-day surge due to a change in classification of the cases) 15 days later. By the end of the month, there were few new confirmed cases in China outside of the hard-hit Hubei province. President Xi Jinping visited Wuhan on March 10, saying China would lift restrictions.

Life isn’t back to normal, but there are signs of progress. An estimated 60% to 70% of migrant workers have returned, helping companies restart. Electric power generation is 15% below normal, an improvement from roughly six weeks ago when it was 45% below normal, says Peterson Institute for International Economics’ Nicholas Lardy. Still unclear, of course, is what happens to reinfection rates as people get back into routines.

Containment Measures

China took Draconian measures, limiting the movements of 700 million people, putting industrial hub Wuhan on lockdown, enforcing quarantines, tracking contacts of those with the virus to identify others with the virus and isolating them, and vigilantly monitoring and documenting the movements of delivery people.

The U.S. won’t be able to take the same measures an authoritarian nation can, but moves by cities and states across the country in the last couple days—such as telling New Yorkers and those in the Bay Area to shelter in place, canceling schools for millions of kids, and closing bars, restaurants, and stores—are much more drastic than many envisioned just a week ago. “The real severe lockdown in Wuhan was only replicated in a handful of cities. The rest of the country was doing what the Bay area is doing now,” says Andy Rothman, investment strategist at Matthews Asia. “If you look at the success in keeping the disease from getting out of control in Shanghai or Beijing, their measures never got to the point in Wuhan.”

The U.S. has other complicating factors. Testing has proven to be crucial in limiting the spread of the virus in countries like Singapore. The U.S. has been slower on that front. There are 28 million uninsured people in the U.S., which could prevent them from seeking care. The U.S. also has fewer hospital beds per capita than China, which does most of its health care through hospitals. China also is better equipped with gowns, respirators, and ventilators, while the U.S. has been dependent on imports—and also further hampered by tariffs on those items, Lardy says.

A flattening in the pace of new cases helped markets stabilize in China. Before the latest global rout started two weeks ago, the Shanghai Composite index had recouped its earlier losses from when China halted its economy to contain the virus the outbreak. Now, it’s down 11.4% since the beginning of the year—less than half as much as the S&P 500. “People saw the measures were working; the number of new cases were going down after two weeks, and they felt like whatever happens the government will have our back,” Rothman says. “I’m not sure we are there in the U.S.”

More testing, while likely to create a sharp increase in confirmed cases, could steady markets even as absolute numbers rise, with Eric Stein, who oversees $17 billion as co-director of fixed income at Eaton Vance. He likens it to the bank stress tests during the 2008 financial crisis: Getting a grasp on how bad the situation is could actually start to calm the market. “We are in the first inning from a social and economic perspective, but from a market perspective we are more in the fifth to seventh inning,” Stein says.

Fiscal and Monetary Measures

Policymakers are unveiling a raft of measures to try to avert economic catastrophe. The People’s Bank of China has higher rates, and therefore more ammunition, than other central banks, but it hasn’t cut interest rates all that much. The Federal Reserve, however, made two emergency cuts that brought interest rates down to 0% to 0.25%.

Most of China’s stimulus has been aimed at making it easier for businesses to keep operating. The Chinese government told banks to offer forbearance on the repayment of corporate loans, for instance, and halted taxes and companies’ payments to unemployment insurance and social security, so they can keep workers on their payroll, pay rent, and buy inventory for when demand returns. Roughly 85% of employment in urban China is with smaller private companies, and anecdotal data and surveys show that a reasonable share of those people are still getting some or all of their pay, according to Matthews Asia’s Rothman.

The U.S. response is still evolving. It has passed a $8 billion spending package and is discussing a more than $1 trillion spending package. Economists who have been watching this unfold in China stress the importance of getting cash into the hands of people most affected. Big employers like airlines and casino operators are getting a lot of attention—but 98% of U.S. firms employ fewer than 100 people and three-quarters have no payroll. “The average American worker works for a company that is very small and gets lost between the cracks,” Rothman says. “I’m not saying forget about the airlines. But don’t lose track of mom-and-pop shops. These are the firms most at risk because they don’t have deep pockets and may not have access to bank credit—so cutting interest rates doesn’t help them. Steps to keep them alive until business gets back to normal are critical. The Chinese are starting to move in the right direction to protect and give them a safety net. The question is if we can do the same thing.”

Economic Fallout

The first Chinese economic data released since the outbreak began was atrocious, and offers a glimpse of the pandemic’s damage. Industrial production fell 13.5% in the first two months of the year from the prior year—worse than during the financial crisis—and urban unemployment hit a record 6.2%. Retail sales tumbled nearly 21%. But TS Lombard economist Rory Green says China’s economy has hit bottom—even if the speed and scope of the recovery from here is uncertain.

With U.S. and Europe headed toward recession, China’s recovery is going to be stalled, but Green still says China’s economy has seen its worst point. China’s dependence on exports has fallen in half since the global financial crisis. Beijing will also respond to a decline in global demand by increasing and adjusting domestic stimulus to limit job losses and credit risk—though that will not be enough to help the rest of the world avert recession, Green says.

The structural challenges to China’s economy over the medium-term are significant. Supply-chain shifts are likely, as the coronavirus has further disrupted companies that were already grappling with the trade war. And U.S.-China tensions keep getting re-inflamed, most recently when Beijing kicked out more U.S. journalists.

For those looking to China as a gauge of how bad the economic damage can get in the U.S., there are differences to note. More than two-thirds of the U.S. economy comes from services, which has suffered the brunt of the fallout so far; services account for just 55% of China’s GDP.

Economists are reassessing forecasts daily as they grapple with credit markets seizing up and financial distress through the system. Quarterly declines in U.S. and European economic growth could exceed anything on record going back to at least World War II, according to Deutsche Bank Chief Economist Torsten Slok, who expects a severe recession in the near-term.

Global policymakers are vowing to do “whatever it takes.” But staving off more of a hit to the economy in the near-term, along with smoothing the longer-term ramifications of any measures, won’t be easy. Corporate and consumer behavior is changing, and that will lead to structural differences in how economies and markets behave for a long time.