The Year of the Rat has delivered a black swan to President Xi Jinping’s doorstep. China’s benchmark CSI300 share index opened down a whopping 9 per cent today, after traders returning from the extended Lunar New Year holiday week dumped stocks on fears over the impact of the coronavirus which has now killed over 360 people. The plunge, reminiscent of 2015’s brutal crash which wiped around $5 trillion off Chinese bourses, could prove hard to brake.
The sharp reaction was aggravated by the fact investors have been unable to trade since January 23, but the $14 trillion mainland economic engine is at risk of stalling. Quarantines and fear are docking consumption of nearly everything — excepting counter — cyclicals like medicine and meal delivery — with no clear end in sight. Morgan Stanley estimated only 12 per cent of revenue of companies listed in China is earned from exports. An extended collapse could feed into bond and loan defaults, hurting balance sheets at rickety banks and indebted local governments.
Beijing injected around $174 billion into banking system on Monday, and central bank chief Guo Shuqing, who has been judiciously easing interest rates, has room to cut them further. But monetary measures are spears thrown at waves when sentiment darkens so dramatically. In 2015, an attempt to rally a “national team” of state-owned enterprises to buy stocks failed to revive indexes, as did central bank easing moves. Shutting down derivatives didn’t help, while official tolerance of widespread, indefinite trading halts infuriated influential index compilers like MSCI.
China has tried to inoculate markets against nasty surprises since the last crash. A centralised apparatus, overseeing stock, banking and insurance watchdogs, has reduced the bureaucratic turf muddle that aggravated the prior crash. Guo’s relentless crackdown on shadow credit has drained speculative capital pools that once overheated shares; Refinitiv data shows the amount of margin loans outstanding has halved since 2015, for example.
Yet none of that will stop ordinary people being pessimistic about what this public health crisis will do to economic performance and company prospects, and deciding to reduce their exposure to stocks. If watchdogs, trying to please Xi, try to prop up the market in defiance of genuinely bearish fundamentals, they could lose what credibility they have earned since the last bust.