- Chinese financial markets will open on Monday with a massive capital injection.
- By spending 1.2 trillion yuan to prop up the stock market, Chinese authorities hope to prevent a massive crash when trading resumes.
- The governments efforts will fail.
Chinese stock markets are set to reopen on Monday morning after an extended Lunar holiday break. Investors expect stocks to reel as coronavirus fears intensify.
To stem the bleeding, Chinese authorities have decided to pump 1.2 trillion yuan ($173.8 billion) into the market [PBoC] but this wont be enough to stop a massive correction when trading resumes.
Chinas Economy Is Already Suffering Fallout from the Coronavirus Outbreak
The Wuhan coronavirus outbreak continues its deadly spread. The novel illness, provisionally known as 2019-nCov, has infected almost 14,500 people according to the latest data [Johns Hopkins]. There have been over 300 deaths, with cases springing up in 27 countries.
Chinese authorities have implemented wide-ranging travel restrictions to control the outbreak. But the countrys economy is already reeling from the virus.
Many international companies have shuttered operations in China, including Toyota, Starbucks, and Foxconn, the supplier of Apples iPhone. Apple itself has also scaled back Chinese operations by closing down stores and offices in the country [Reuters]. Airlines headquartered around the globe are suspending flights to the mainland.
U.S-traded equities with exposure to China are seeing significant declines in response to the outbreak. Investors can expect Chinese stocks to be even worse off.
U.S. stocks with exposure to China, including Apple (red) and Starbucks (black), have already been hit hard. | Source: Yahoo Finance
Government Intervention Wont Save Chinas Stock Market
Chinese authorities know their citizens are panicking over the coronavirus, and the last thing they need is a stock market collapse to make the situation worse. To prevent a crash, the government is intervening in the economy through capital injections and other strategies.
The Chinese government will pump 1.2 trillion yuan ($174 billion) [PBoC] into financial markets to try and control volatility in equity prices. The capital will come in the form of reverse repo operations a way of buying securities. The authorities will also employ less direct measures like subsidies and loans for business in the hard-hit Hubei region. [Chinese Ministry of Finance]
But according to Bloomberg, this will only be a net increase of 150 billion yuan ($21.7 billion) because over 1 trillion yuan in short-term funds will expire on Monday [Bloomberg].
Thats a drop in a bucket compared to the 40 trillion yuan in total market cap estimated for Chinese equities in 2018 [Statista].
Expect Panic Selling on Monday
China-based ETFs are already showing signs of stress. | Source: Yahoo Finance
The Chinese government will not be able to stop the panic selling when Chinese stock markets resume trading The Chinese economy is facing too many headwinds from coronavirus to trade disputes and an impending real-estate catastrophe [Mises].
Unlike U.S stock markets, which are kept stable by big institutions and dispassionate algorithmic traders, Chinese exchanges are dominated by retail investors to the tune of 85% [CNBC]. This means Chinese markets are emotional and hard to control.
A good example of this is the Shanghai stock market crash in 2015-16 when Chinas biggest stock exchange lost 32% of its value in 18 trading days despite authorities injecting 1.5 trillion yuan to prop it up [CNN].
The coronavirus crash may not be as bad as the situation in 2016, but things could get to that point rapidly if China doesnt get the deadly disease under control.
Disclaimer: This article represents the authors opinion and should not be considered investment or trading advice from CCN.com.
This article was edited by Josiah Wilmoth.
Last modified: February 2, 2020 5:55 PM UTC