It’s what they’re not telling you that matters the most…
By Kim Iskyan
On August 14, 1998, the president of a powerful, formerly communist nation told one of the biggest lies ever…
At the time, I was living in Russia, so it occupies a hall-of-fame spot in my personal panoply of politician lies. On that day, then-Russian president Boris Yeltsin declared that Russia’s currency would not be devalued. He slurred:
There will be no devaluation – that’s firm and definite… I’m not simply fantasizing. Everything has been calculated. Every day, work is done to control the situation in this area.
Three days later, the ruble devalued sharply, with deep and dire economic consequences for the Russian economy and for tens of millions of Russians (and me) who found themselves holding a currency worth a fraction of what it had been worth just a few days before.
It’s a stark lesson for anyone who believes politicians when they talk about bad things not happening.
And right now, politicians in another, still-communist country – are likely telling lies that are far bigger and more damaging. These are life-and-death falsehoods about the SARS-like coronavirus making its way through China, east Asia, and now the rest of the world…
The latest from the Financial Times…
Beijing has warned that the spread of the deadly coronavirus is expected to accelerate, heightening concerns about an outbreak that has killed at least 80 people in China and reached a dozen other countries… China confirmed on Monday that 80 people had died from the respiratory disease, up from 56 a day earlier, while 2,744 people were infected.
But there’s a big problem with this information – especially the China-sourced parts of it. Is it true? And how much worse could it be – really?
It’s easy to trust what the government tells us. For many of us who predate the era of “fake news,” our natural default is to trust others, particularly those in a position of authority. And it’s especially easy to fall into the default of trust when you want to trust… because the truth might be far worse than anything you can imagine.
Right now, a lot of people are assuming that China is telling the truth about just how bad the 2019-nCoV virus is, how far it has spread, and how many people have died.
For example… last month, CNBC reported: “China’s response and candor [relating to the virus] – in contrast to how it handled the 2002-03 Severe Acute Respiratory Syndrome (SARS) epidemic – helped reassure investors concerned about the possible global fallout.”
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Recently, U.S. President Donald Trump tweeted that “the United States greatly appreciates [China’s] efforts and transparency” to contain the virus.
It’s ironic when a government is applauded for telling people that a potentially fatal virus is being passed around. Shouldn’t this kind of disclosure be the default? It’s not.
To its credit, China is certainly treating the outbreak seriously, by locking down around 60 million people, imposing draconian travel restrictions, extending the Lunar New Year holiday, and implementing a wide range of other measures to try to restrict the transmission of the virus. Chinese president Xi Jinping acknowledged that the country is facing a “grave situation.”
But there are (at least) two problems here…
First, this is China we’re talking about. It values control above all else… And let’s not forget that authoritarian socialist systems aren’t typically transparent.
Second, remember the joke about how you can tell when a politician is lying – by watching for when his lips move? That’s true in China, too.
China doesn’t have a great track record with being straightforward about epidemics. As political-risk analysis company GZERO Media explained…
In 2003… China hid the true scale of the SARS threat. State officials have admitted that mistakes were made during the SARS outbreak and pledged to be much more transparent in the future. But even if they keep that promise, will China’s people and foreign governments believe them?
What’s more, China is a world leader in information control and containment. Remember, there’s no Google, Twitter, or Facebook in China – because the authorities can’t control them. That’s why China has its own Internet ecosystem. The Chinese authorities have access to every bit of information or data about anyone or anything in China – thanks to Tencent and every other social media, data, and computer company in China.
If it wanted to, there’s little question that China could ensure that nothing other than the party line escapes to the international airwaves about the coronavirus.
And what if the Chinese government itself has no clue about the actual severity of the outbreak – because of an inherent weakness in its political structure?
As GZERO Media explained:
In an authoritarian system like China’s, local authorities know that access to state resources and personal promotion depend on both loyalty to their bosses and the quality of their performance. They have an incentive to promote good news and hide bad news, and there is no free press to hold them accountable.
In March, a study by U.S. think tank Brookings Institute found that the Chinese government has been systematically fudging its economic data. “China has overestimated its nominal and real growth rates by about two full percentage points on average between 2008 to 2016,” reported the South China Morning Post.
When reported economic growth is between 6% and 8%, two percentage points of wiggle room is a lot.
And the people in charge of collecting data at the local level know which side their bread is buttered on… The SCMP explains, “It has long been believed that local Chinese officials inflate figures reflecting their economic performance, which is closely tied to their opportunity for promotion.”
If local Chinese officials are willing and incentivized to falsify economic data to make sure they get promoted, do you think they’d hesitate for a moment to fake data about precisely how many people in their neighborhood have contracted the Wuhan virus?
It’s easy to forget that while China’s economy is unapologetically capitalist, its government is – as unapologetically – communist.
In practice, this can often mean that government officials have a near-feudal relationship with their superiors. And no matter what the big boss says (in part for the consumption of nervous foreigners), no mid-level boss – or anyone down the chain – wants the scrutiny that might come with fessing up to more cases of the virus. Better to obscure and hope it blows over, or that someone else takes the blame.
Some senior officials in China are – publicly, at least – trying to undercut this dynamic. As the BBC reported last month,
China’s top leaders have warned lower-level officials not to cover up the spread of [the virus]. Anyone who concealed new cases would “be nailed on the pillar of shame for eternity,” the political body responsible for law and order said.
As we mentioned earlier, China has put nearly 60 million people on lockdown. There’s no question that officials are taking the virus seriously. And that raises the stakes for the junior bureaucrat who’s tallying up the number of people who have contracted the disease at the hospital down the street. How eager is he going to be to post a big number – the real figure – that will attract attention?
So even if the Chinese government was to make known all information and insight it has about the spread of 2019-nCoV (unlikely), its own understanding is severely limited by what lower levels of government report. And these are motivated to cover their own behinds – and less concerned with some notional shame pillar.
Remember: All governments and politicians lie. All the time.
I’m not only talking about China or Russia… After all, American history is replete with examples of the government being less than truthful.
In April 2019, the Pew Research Center reported that just 17% of polled Americans trusted the federal government to do the right thing most of the time or almost always. That’s near a historic low since polls first started querying the public on the issue in 1958.
Regardless of what you think of his politics, Donald Trump isn’t helping things in this regard… especially when he sometimes contradicts himself within the space of a single speech.
So why should Americans trust the Chinese government to do the right thing when they don’t even trust their own government?
All of this couldn’t be happening at a worse time…
Here in Asia, we’re in the midst of the Lunar New Year Spring Festival holiday period. In a normal (non-virus) year, people in China will make a combined 3 billion trips to see friends and family in the weeks before and after the New Year. (By comparison, Americans took around 55 million trips over Thanksgiving, the heaviest travel period of the U.S. calendar.) Even if some of those Chinese trips are just over the hill and through the woods, that’s an awful lot of train, plane, and bicycle journeys… with lots of opportunities to mingle, share germs, and transmit 2019-nCoV.
This means that a lot of the government officials who might otherwise have at least half an eye on what’s happening under their purview will be busy greeting the Year of the Rat. Efforts toward preventing the spread of the virus will be less pronounced than if the outbreak was happening at any other time of year.
The latest news on the virus might not be true, but many folks will likely believe it anyway.
Kim Iskyan is an editor at large for Stansberry Research, and has written about investing in a wide range of frontier and emerging markets. Until recently, he was the publisher of Stansberry Research’s Asian affiliate, and he lives in Singapore.