Chinese shares drop nearly 9% amid fears of coronavirus impact

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Stock markets in China have seen the biggest daily fall for five years as traders rushed to sell amid continued fears about the impact on the global economy of the coronavirus epidemic.

The benchmark Shanghai composite index fell 8.7% on Monday on a wave of negative sentiment that has built up for 10 days during the long market shutdown for the lunar new year.

The Shenzhen composite was off 9.1% and dangerously close to the daily maximum permitted fall of 10% after which trading is suspended. The yuan fell through the seven-to-the-US-dollar mark for the first time since December.

The losses were the worst on the Chinese markets since 2015 although they pared back slightly later in the day to 8%. It comes as the death toll from the outbreak rose to 361 and more than 17,000 people infected.

The contagion has spread to more than 20 countries around the world and led to travel bans on Chinese citizens to the US, Australia, New Zealand and several other nations.

The Chinese authorities have reeled off a series of measures to tackle the market panic. On Sunday they announced they flood the financial system with 1.2 trillion yuan (US$170bn) in extra liquidity, a measure designed to buy up securities from investors seeking to sell.

On Monday the People’s Bank of China – the country’s central bank – lowered the interest rate it charges banks for short-term funding upon which many banks rely to remain trading.

Capital Economics said that while the move might take some pressure off the banks the rate cut was not enough to offset the drag on economic activity from the coronavirus outbreak and that more rate cuts were therefore on the way.

Mathan Somasundaram, Blue Ocean Equities market portfolio strategist in Sydney, said all other geopolitical concerns were out to one side while China was struggling to cope with the virus.

“No one cares about the Middle East, no one cares about Brexit if China is wobbly,” Somasundaram said.“There’s no way China is going to be consuming anything if they’re shut down.”

The growing fears about the Chinese economy also prompted the finance ministry to subsidies on interest payments for some companies hit by the coronavirus outbreak, state-run newspaper Guangming Daily said on Monday, Reuters reported.

There was also heavy selling across the rest of Asia Pacific, with the Australian benchmark S&P/ASX200 index closing down 1.34%. The Nikkei in Tokyo finished down 1% although the Hong Kong market was up 0.26%.

Hardest hit in Australia was the energy sector, with the index down 3.77% after 15 minutes of trade as the oil price continued to suffer from the prospect of a prolonged slowdown in the world’s second biggest economy. Brent crude slumped 51c to $56.11.

With Australia’s close economic ties to China through its huge exports of iron ore and metallurgical coal, the Aussie dollar slipped to US66.87c, down from 67.19c on Friday. Safe havens of gold and government bonds continued to benefit as investors shied away from risk.

After just minutes of trading on Monday morning, a range of China-traded commodities fell by the maxiumum allowed in one day, including iron ore, nickel, crude oil, palm oil and eggs. Thermal coal rose on concerns about lack of supply.

The Australian tourist and education industry is also heavily dependent on China. The travel ban on foreigners entering from China could knock 0.2% off economic growth this quarter according to AMP economist Shane Oliver.

Economists at UBS in Sydney said on Monday morning that they expected the reserve Bank of Australia would downgrade its growth forecasts at its monthly meeting on Tuesday.

They expect the RBA will hold off cutting rates on Tuesday from the already historic ow of 0.75% but will be forced to cut in March and possibly again in June as weak wages and consumer spending drags on the economy.

Most global attention was focused on trading in Shanghai and Shenzen and what it reveals about the state of the country’s economy.

Many economists are predicting that the coronavirus will have a significant impact on the Chinese economy. Many businesses have been shut as part of the lockdown to contain the virus while most overseas airlines have suspended flights to the country and Chinese people are now banned from travelling overseas.

Goldman Sachs has forecast that the virus could knock Chinese growth down to 5.5% for the year, from 6.1% in 2019, with knockon effects for the rest of the world economy.

Economists at Citigroup said the steps taken by Chinese authorities were “unlikely” to be enough to prevent a sharp downturn in the first quarter.

“As most employees won’t return to work until 9 February,” they said, “the output losses are likely to be larger than expected, and incoming economic activity data will continue to prompt the authorities to take more actions in order to reduce the adverse impact of the Wuhan coronavirus on the economy.”

Chris Weston, a market strategist at broker Pepperstone, said “the big unknown” was how China’s financial markets responded on Monday to the show of force from the country’s central bank.

“The fact the China [regulator] has detailed they see the impact of the coronavirus as ‘short-lived’ is designed to instil confidence,” Weston said. “Whether the market feeds off this optimism is another thing given the spread of the virus is still in its exponential stage.”


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