Investors closely monitor epidemic impact

China's stock market investors have veered between anxiety over the spread of the novel coronavirus pneumonia and optimism that the government’s vigorous campaign to contain it will succeed and the crisis will pass relatively quickly.

Shares took a nosedive after equity, currency and bond markets reopened on February 3 after an extended Chinese New Year break. Then, they rebounded.

The benchmark Shanghai Composite Index and the smaller Shenzhen Composite Index both plummeted on Monday, registering slumps of 7.7 percent and 8.5 percent, respectively.

Then, as worries eased, the markets reversed. In the last four days of trading, the Shanghai index advanced between 0.3 percent and 1.7 percent. Shenzhen rallied between 0.1 percent and 3.2 percent.

Trading volume during the week on the two major bourses totaled 5.07 trillion yuan (US$724.3 billion), nearly double the value of the last week before the holiday.

Some sectors have weathered the crisis better than others. Gainers were led by medical and pharmaceutical stocks, particularly those related to face mask manufacturing and antibiotic and vaccine research and development. The industry performed strongly on Tuesday through Thursday, before retreating on Friday, but the sector maintained its position as the biggest weekly gainer among all industry sectors, according to market tracker Wind Information.

Stocks related to online working were also among the big gainers as many companies asked employees to work from home until the epidemic abates. Online education shares surged as well after city authorities said schools won’t reopen before the end of February.

Among sectors hardest hit by the virus outbreak are real estate, coal and iron and steel. Wind’s sub-indices show all three sectors declining by more than 7 percent in the five trading days.

Commodity markets stabilized somewhat in the last two days of trading, after suffering heavy losses caused by fears that the outbreak would damp demand for raw materials used in manufacturing. Crude oil prices declined for most for the week, and gold prices also dipped. Copper and nickel recovered.

Like the Chinese markets, foreign bourses also have seesawed as investors try to gauge how much the coronavirus outbreak will affect global trade, tourism and economic growth.

Over the week, foreign investors went bargain-hunting for Chinese shares, amid relatively lower prices. The mainland saw a net influx of over 30 billion yuan via the “stock connect” channels linking the Shanghai and Shenzhen markets with the Hong Kong market.

Market analysts have remained relatively upbeat about the ability of the Chinese economy to weather this storm. The lingering question is how long it will take to control the virus outbreak.

Fitch Ratings said it is too early to make definitive adjustments to GDP forecasts, with uncertainties remaining over the economic impact of factories closing and people confined to their homes.

"In a scenario where the virus peaks soon and starts to be contained within the next couple of weeks — causing official restrictions to be dismantled swiftly — there could be a smaller impact on growth," said Brian Coulton, chief economist at Fitch Ratings.

However, he added, "If the epidemic is not contained until the second quarter, growth could fall more steeply. This adverse scenario would, however, be likely to prompt more assertive policy-easing that would boost growth in the second half."

Coulton was referring to actions taken by Chinese authorities to control the virus and shore up markets and businesses.

Liquidity expansion

The People’s Bank of China, the nation’s central bank, injected 1.2 trillion yuan into the financial system via reverse repo operations on Monday to expand liquidity.

The move aims "to maintain reasonable and adequate liquidity in the banking system during the period of epidemic prevention and control," according to the bank’s statement. “We firmly believe that the impact of the epidemic on China’s economy should be temporary, and the fundamentals for sound and high-quality economic growth over the long term remain unchanged. The People’s Bank of China will continue to pay close attention to market liquidity to ensure adequate liquidity."

Specifically, the bank injected 300 billion yuan into the market through seven-day reverse repos at an interest rate of 2.4 percent, and 900 billion yuan through 14-day reverse repos at an interest rate of 2.55 percent.

That indicated an unexpected interest rate cut on reverse repurchase agreements by 10 basis points.

A reverse purchase agreement, or repo, is a tool for increasing or decreasing liquidity in the interbank market. In simple terms, it is a form of short-term borrowing. Sellers, such as banks, offer bonds or other securities as collateral for a “loan” from the central bank. The securities are typically repurchased the next day or in coming weeks, at a higher price. If repurchase rates are lower, sellers are encouraged to borrow more, giving themselves extra cash.

With the maturation of 1.05 trillion yuan of reverse repos on Monday, liquidity in the whole banking system is 900 billion yuan greater than the same period last year, the central bank said.

Meanwhile, other financial authorities in China have adopted policies to bolster the economy and businesses.

The Ministry of Finance, for instance, has opened "green channels" and simplified approval procedures for the procurement of medical supplies, and exempted imported materials donated for epidemic prevention and control from duties, value-added tax and consumption tax.

"We expect China to introduce more measures to support the firms and households severely hit by this epidemic," said Lu Ting, chief economist of Nomura.

He said he believes authorities will inject additional liquidity, provide additional credit support, extend loan terms, cut or postpone taxes and other fee payments, and encourage landlords to lower rents.

"We do not think Beijing will overly stimulate the economy during the recovery stage to compensate for lost GDP because conventional stimulus simply does not work under such conditions," Lu said. "In our good scenario, China can still achieve its goal of doubling real GDP in the decade of 2011-20."

Australia & New Zealand Banking Group also predicts the central bank will continue to provide liquidity as needed.

"We also will see financial institutions issue more debt-equity instruments for capital supplement in the first half of 2020," said Xing Zhaopeng, China markets economist of the ANZ Group.

Cheng Shi, chief economist at Industrial and Commercial Bank of China (ICBC), said the epidemic will put greater pressure on the domestic economy in the short term, mainly in the first quarter, but won’t reverse China's long-term economic growth.