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Shanghai Composite Index sinks on re-opening. Is the worst yet to come?

Analysts fear the central bank's liquidity measures are insufficient in combating coronavirus fears, as Chinese stocks plunged nearly 9% on market re-opening day.

The China Securities 300 Index (CSI 300 Index) re-opened as much as 9.1% lower on Monday 03 February, its first day of trading since closing for Lunar New Year nearly two weeks ago.

This is the Chinese stock market’s biggest fall since 2015, according to Bloomberg.

The CSI 300 Index is a weighted index that tracks the top 300 performing stocks on two of the country’s main bourses – the Shanghai and Shenzhen stock exchanges.

The Shanghai Composite Index fell 8.7% within the first few minutes, while the Shenzhen Component Index plunged 9.03% in early trade.

On IG, the FTSE China A50 Index and China H-Shares also dropped 1.71% and 0.61% respectively to begin the week.

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China index decline in line with estimates

The steep decline is in line with the estimates of Asia market watchers, who had predicted a drop of between 5% and 9%, in view of ongoing uncertainty surrounding the Wuhan coronavirus.

The People’s Bank of China (PBOC) had also earlier pumped in an estimated 1.2 trillion yuan (US$173.8 billion) worth of funds into the local economy via reverse repo operations, so as to cushion any panic selling in the financial markets as trading resumed.

Analysts believe that a large proportion of this financial package would be for the relief of any outstanding debt repayment failures.

Another liquidity measure (a total of 30 measures were introduced over the weekend) in the form of credit support for enterprises most impacted by the Wuhan coronavirus was also announced by China's central bank. The China Securities Regulatory Commission (CSRC) additionally issued a verbal directive to brokerages to bar short selling for Monday’s markets re-opening.

The Chinese markets were supposed to resume trading on 31 January, but authorities had postponed proceedings in a bid to delay and soften any negative impact arising from the 2019-nCoV.

Net injection 'isn't huge'

Regarding the capital injection, Tommy Xie, an economist at Oversea-Chinese Banking Corp said that the amount 'isn't huge'.

'The PBOC may want to retain some flexibility, which means it can add more liquidity in the rest of the week if the sentiment is too bad,' he said.

IG Asia market strategist Pan Jingyi similarly noted that ‘expectations remain that more could be done in the coming sessions, should the (liquidity) support fail to arrest the volatility’.

Meanwhile, economists over at Citigroup said that while ‘these initial interventions aim to boost confidence’, ‘they are unlikely to be sufficient to curtail a sharp downturn in Q1’.

They further noted that because most employees won’t return to work until 10 February – the first working day after an imposed cessation on operations across major China cities planned to end on 09 February, ‘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’.

As of 11.30am, the Shanghai Composite Index has pared some of the early losses by 0.67%.

The Wuhan coronavirus continues to impair financial markets globally, with both the Dow and S&P 500 index posting their biggest single day drops since August 2019 on 31 January.

As of Monday morning,the number of infected persons across China rose to 16,582 with death toll at 360. The Philippines reported the first death outside of China on 02 February, and announced a temporary travel ban on visitors from China, including Hong Kong and Macau. Singapore on Friday also announced a ban of all new visitors arriving from mainland China.

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This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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