After an extended break following the Lunar New Year, China finally reopened its markets on Monday the 3rd of February 2020. Monday marked to have seen the most prominent daily decline in the Chinese economy over the last five years. The Shanghai Composite index fell 8.7%, losing about 2.6 trillion yuan ($357 billion) in market value, while the Shenzhen composite fell 9.1% – both dangerously close to the daily maximum tolerable decline of 10%. Some experts believe that this is due to the latest outbreak of the deadly Coronavirus that has already taken the lives of over 360 people.
The novel Coronavirus was first identified in central China, in the city of Wuhan. Wuhan is the capital of the Hubei province and is the seventh most populous city in China. The virus is believed to be linked to the Huanan Seafood Wholesale Market in Wuhan, which has many stalls that sell wild animals like pheasants, bats, snakes, spotted dear and more. The market was regularly criticized for its unsanitary conditions and the fact that livestock is kept in close proximity to dead animals. The virus has infected almost 19,000 people in both China, countries in South East Asia as well as other locations around the world.
The World Health Organization (WHO) has declared the Coronavirus as a ‘global health emergency that will affect geopolitics, as well as global financial markets. The outbreak has put dozens of cities across the country on lockdown – currently, at least 35 million people are unable to travel and are encouraged to stay home.
People compare in epidemic to the 2002-2004 SAR break out, which killed 700+ people and hit the economy of China and Hongkong, lowering the countries GDPs by 1.1% and 2.6%, respectively. With the Coronavirus growing rapidly, we saw healthcare stock skyrocket, while consumer goods, hospitality, manufacturing, transportation, and the financial sector took the biggest hit and dropped below 10%. Chinese airlines Hainan Airlines Holding and China Eastern Airlines Corp. also fell below the limit. Many domestic airlines have been suspended, and travel bans have been imposed – this did not reflect well on the transportation and tourism industry. Other markets in Asia also saw a minor decline, and the offshore yuan weakened to 7.0141 to the US dollar.
International companies like Apple, Nike, and Starbucks rely on Chinese factories to produce their goods. In China itself, consumer goods shopping has declined, with many malls and shopping stores closing down. Car companies like General Motors and Toya have had their production hindered due to the extended holiday break implemented by the government.
To help limit the impact, China’s central bank announced that it would introduce new measures to reduce the damage, such as lowering short-term interest rates and injecting the economy with an additional 150 billion yuan ($22 billion). This would help ensure that there is enough liquidity in China’s banking system. In all, the bank plans to insert 1.2 trillion yuan into the economy. Furthermore, regulators informed brokers that they must suspend short selling, which means clients can’t bet on the market that falls by short-selling or selling borrowed stock and then purchase it back later at a lower price. The Chinese government has resorted to such measures to neutralize volatility and stabilize the market.
Financial experts encourage the public to avoid negative speculation ahead of time. China’s top economic planner suggests that the impact of the virus would not harm the economy in the long run, and there was no need to panic yet. Just like with the SARS epidemic, markets tend to depress during a period of uncertainty, but they quickly bounce back once the situation is under ‘control’. Despite that, China’s economy is unlikely to face any normalcy until mid-Spring, and the next few weeks are bound to be tough. The question is how adverse the effect of the virus will be on China’s economy – at this stage, the forecasts remain in the dark.