Markets take a tumble due to coronavirus

China stocks took a nosedive on the first trading day after the extended Lunar New Year holiday amid coronavirus fears.

The benchmark Shanghai Composite Index tumbled 7.72 percent to close at 2,746.61 points, while the smaller Shenzhen Component Index was down 8.45 percent to 9,779.67 points. The ChiNext Composite Index, meanwhile, shed 6.85 percent to 1,795.77 points, and the blue chip CSI300 Index closed 7.88 percent lower at 3,688.36 points.

Over 3,000 stocks slumped by the daily limit of 10 percent, while around 80 posted gains hitting the maximum 10 percent.

Turnover on the two major bourses added up to 519.48 billion yuan (US$74.06 billion), compared with 809.04 billion yuan in the last session before the holiday.

Sub-indexes for all the industry sectors declined, according to the Wind Information, while some medical equipment firms, pharmaceutical shares as well as stocks related to pneumonia and flu posted gains.

Overseas capital, however, seized the chance to invest in mainland markets. The net influx into the mainland via Stock Connect schemes linking Shanghai and Shenzhen with Hong Kong reached 18.19 billion yuan on Monday, breaking the record of 17.39 billion yuan on November 2 in 2018.

To bolster the financial market, China’s central bank injected 1.2 trillion yuan into the financial system via reverse repo operations on Monday.

The move aims "to offset the impact of the maturing of reverse repos and the concentrated maturing of financial market products, and to maintain reasonable and adequate liquidity in the banking system during the period of epidemic prevention and control," according to a People's Bank of China statement.

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

This also indicated an unexpected interest rate cut on reverse repurchase agreements by 10 basis points in response to the economic shock from the coronavirus outbreak.

Meanwhile, 1.05 trillion yuan of reverse repos matured on Monday, resulting in a net injection of 150 billion yuan. Thus the liquidity in the whole banking system is 900 billion yuan more than that of the same period of last year, the bank said.

"The People’s Bank of China will continue to pay close attention to market liquidity during the period of epidemic prevention and control to ensure adequate liquidity supply,” it said.

Despite the plunging stocks in the session, E Fund Management Co believed A shares have long-term investment value, and the retreat due to the short-term shock of the epidemic can bring a good opportunity for investing in the A-share markets in the medium and long term.

CCB Principle Asset Management Co, taking the experiences of the SARS period in 2003 as an example, said that although the domestic economy suffered a negative drag at the quarterly level, it was back on track after May of that year.

"We believe the authority will soon disclose more measures to support growth," said Xing Zhaopeng, China markets economist of the Australia and New Zealand Banking Group.

Xing expects the central bank will inject longer term funding by conducting Medium Lending Facility on February 10 or 17, and will closely monitor the liquidity condition.

"If the money market is tight, it can frontload another RRR cut of 50 basic points within the next few weeks," Xing said. "However, it is likely that they prefer a targeted RRR to encourage funding supports to the affected segments, such as Hubei Province or SMEs."

The ANZ Group also expected to see financial institutions issue more debt/equity instruments for capital supplement in the first half year against potential financial risks as the authority has encouraged financial institutions to lower loan rates or extend matured debts for affected enterprises.