China unveils emergency market support in response to deadly coronavirus
Liquidity boost planned as markets reopen on Monday
Beijing has readied an emergency package to support the Chinese financial system, including a Rmb1.2tn ($173bn) boost of liquidity, as markets brace for a sharp sell-off on Monday in response to the deadly coronavirus outbreak.
China’s central bank said on Sunday that it would provide the lending facilities to money markets as the country’s bourses were set to reopen following an extended closure.
Over 14,000 people have been infected with the coronavirus in China and more than 300 people have died, according to China’s health authorities. The number of infections is already greater than the total during the outbreak of severe acute respiratory syndrome, or Sars, in 2002-2003, which caused several months of market turbulence in China.
The Philippines reported the first death outside China on Sunday, as a number of countries imposed restrictions or outright bans on people traveling from China.
The crisis has led to the quarantine of about 40m people in China’s Hubei province, where the disease first appeared in December, and forced some of the country’s largest cities and manufacturing centres to extend the Lunar New Year holiday.
Some economists in China have predicted that the outbreak could shave more than a percentage point off economic growth in the first quarter, pushing gross domestic product growth below 5 per cent.
The new liquidity injection will be China’s largest single-day open market operation since 2004, according to Bloomberg, although the net addition of liquidity will be lower because more than Rmb1tn of short-term funds will mature on Monday.
The People’s Bank of China also plans to lower lending rates to support companies.
China’s markets shut for the Lunar New Year on January 24. The holiday period was extended three days until February 3 as a result of the coronavirus outbreak.
Hong Kong’s Hang Seng index closed down 2.8 per cent when the market resumed trading on Wednesday, after the Lunar New Year break, with travel and tourism-related companies hit by fears that the outbreak would disrupt travel.
Analysts said the virus — and efforts to contain it — were likely to hurt company performance and hit stock prices when they resume trading on Monday.
“In contrast to 2003 with Sars, we’re now a decade into a bull market and valuations of some financial assets are stretched,” said Simon MacAdam, global economist at Capital Economics, in a note to investors. “The new virus is a plausible catalyst for a market correction.”
The PBoC is partnering with several other Chinese financial regulators, such as the foreign exchange and banking watchdogs, to manage the impact of the virus on an economy that was already growing at its slowest pace in 29 years.
China’s banking and insurance regulator said on Saturday that it would extend a deadline beyond the end of 2020 for companies to meet new asset management rules. The regulations were part of a multiyear crackdown on shadow banking that led to a tightening on liquidity — and the announcement gives leeway on this.
The regulator also said that some insurers would be allowed to surpass the 30 per cent cap on investments in equity markets, in a move intended to support stock prices.
While Chinese officials have said coronavirus infections could peak within a week, other experts outside China say that point could come as late as April or May.
During Sars, China experienced a two-month sell-off that caused the market to drop about 10 per cent, according to research from Maybank. Singapore and Hong Kong markets suffered similarly.
“Markets, in particular Hong Kong and China equity markets, could be very volatile in the near term as markets anticipate a broader community outbreak to occur in coming months,” said BNP Paribas Wealth Management’s Asia chief investment officer Prashant Bhayani in a note. “Beijing is very likely to step up in policy easing when there are signs that the outbreak becomes a headwind to economic growth.”