Sick China Markets
Analysts warned against the fall of smaller Asia economies that are dependent on Communist China.
The Shanghai Composite ended the Monday morning session 8.1 per cent lower at 2,734, its steepest one-day decline since August 2015. The loss occurred despite China’s central bank injection of 1.2 trillion yuan ($173.8 billion) of liquidity into the markets via reverse repo operations on Monday.
Before the opening of the markets Chinese Communist Party introduced a ban on the net sell, that is short-selling and selling of the stocks. This decision enabled the Chinese to control stock prices. The ban on sale will expire on Feb 7, 2020, unless it is renewed.
The special measures did not help because the investors made their negative decisions that affected the Chinese markets.
The Shenzhen Composite Index dived 8.3 per cent and the small-cap Chinext Index dropped 6.6 per cent. More than 3,000 stocks traded down by their maximum permitted daily move of 10 per cent.
In the currency markets, both offshore RMB and onshore yuan weakened below 7 against the US dollar, after the PBOC cut the yuan's fixing to 6.9249 versus the US dollar, the weakest level since January 13 and the biggest cut since August 2019.
Commodities were also affected trading down the crude oil, iron ore, and steel rebar futures at the levels of early 2000s when SARS virus caused similar damage.
In HongKong the Hang Seng Index see-sawed between gains and losses before closing the morning session at 26,336, for a gain of 0.1 per cent. Alibaba climbed 2 per cent and Tencent added 1.7 per cent. The Hang Seng China Enterprises Index of Chinese companies listed in the city rose 0.5% to 10,289.
"The worst case scenario is that this Wuhan coronavirus rages on unchecked like the Ebola crisis in West Africa several years ago", stated Mr Francis Lun, a stock analyst in Hong Kong.
It could take two or three years for China to recover, he speculated. Mr. Lun called China the big elephant in the room, which can bring down smaller economies like South Korea, Hong Kong, Taiwan or even Japan.
Reuters calculated that the investors erased $420 billion from Chinese stocks, with the Shanghai Composite index shedding 8% to hit a one-year low.
Japan's Nikkei 225 index lost 1.0 per cent to 22,971.94, while the S&P ASX/200 declined 1.3 per cent to 6,923.30. In South Korea Kospi was flat, at 2,118.88.
Australian shares tumbled to the lowest levels in 2020. The S&P/ASX 200 Index fell 96 points, or 1.4 per cent, to 6994.5 points, making it the biggest one-day fall for the new year. Western Australia, that is nearly completely dependent on the China, was concerned particularly about 13 per cent decline in the iron ore price.
Communist China's Optimism Propaganda
The China Securities Regulatory Commission told the state-owned People's Daily on Sunday, however, that it believed the outbreak's impact on markets would be short lived. To support firms, it said it would call on corporate bond investors to extend the debt maturity dates, and consider launching hedging tools for the A-share market to ease market panic.
The experienced analysts expressed dissenting opinion.
"This is well beyond the band-aid fix, and if this deluge does not hold risk-off at bay, we are in for a colossal beat down", Mr Stephen Innes of AxiCorp. said in a client note.
He expected the shocks at the opening but warned against "the aftershocks" that would drive the sentiment of the investors.
As of Monday morning, at least 24 provinces, municipalities and other regions in have told businesses not to resume work before Feb. 10 at the earliest. That's according to publicly available statements from the governments. Nearly 90m Chinese people remained isolated from the rest of the country.
Last year, those parts of China accounted for more than 80% of national GDP, and 90% of exports, according to CNBC calculations.