Stocks basically sold off as much as the rules allowed when mainland China resumed trading on Monday for the first time after the Lunar New Year holiday. But markets here in Hong Kong showed surprising life.
The CSI 300 index of the 300 largest companies listed in Shanghai and Shenzhen fell instantly by 9.1% as trading resumed on the first day of trading since Jan. 23. Shares in mainland markets are suspended as soon as they've dropped 10%, and 2,600 stocks did just that. The trading tripwire slows the pace of declines, but it also means the selling isn't done.
Thanks to government support, Chinese stocks ended the day down 7.9%. The one-day wipeout erased US$400 billion from Shanghai and Shenzhen stocks. Roughly two-thirds of the trading on mainland markets is from retail investors, who treat stocks as much as a bet on the third race at Churchill Downs as a long-term investment. Those punters are running scared.
China's securities regulator is moving to limit short selling and is doing its part to talk markets up, quietly asking mutual funds not to sell shares. The People's Bank of China is injecting capital into the system in support, but also attempting verbal intervention, calling the selling irrational.
It's not irrational, although it's hard to get a handle on what level of damage the WARS coronavirus outbreak will do to the Chinese economy, and therefore how much of a hit to profits that stocks will take. Patient numbers and deaths in the Wuhan Acute Respiratory Syndrome outbreak continue to rise. Despite an incredible number of suppositions here in Hong Kong and on social media about the Wuhan coronavirus, we still know little about the disease.
Consequently, investors are selling shares first and asking questions later. It is only with the new year festive period coming to an end and the 400 million mainland Chinese travelers returning home from the holiday that the true extent of the outbreak will become obvious. It's not clear how easily the virus is transmitted; it's not clear if the official Chinese counts are anywhere near reality; it's not clear if the 2.2% death rate will rise; and it's not clear how widely the virus has spread during its two-week incubation period, during which some patients are asymptomatic.
The Chinese yuan also broke back above the level of 7.0 to the U.S. dollar, weakening by 1.2%. It was seen as a significant sign of China's recuperation from the bruising trade war when the yuan had strengthened late last year back past that 7.0 water mark.
Other market responses vary
Markets almost everywhere in Asia sold off, with stocks in Australia down 1.3% and in Singapore off 1.2%. Both economies have a heavy exposure to China as well as significant cultural ties.
But it wasn't all gloom and doom. Hong Kong stocks, which reopened last Wednesday and have sold off 10%, actually posted a slim 0.2% gain on Monday. South Korea rose by a similar amount.
Hong Kong's gains came largely on the back of a 2.3% advance in the Alibaba Group Holding (BABA) secondary listing here. Tencent Holdings (TCEHY) also rose, up 1.9%, as investors sought safety and potential bargains in the big-cap stocks they know best.
The WARS outbreak actually promises to boost business for e-commerce retailers, because everyone is staying home if they can. It's also good news of sorts for digital payment systems such as Alibaba's Alipay and Tencent's WeChat Pay. Investors are picking out those types of potential winners.
So far, China has resisted outright stimulus for the economy. But that's surely only a matter of time. The government is already rethinking its target for the year ahead, which it will officially set in March and was expected to be "around 6.0%."
On Monday, China's central bank guaranteed to provide 1.2 trillion yuan (US$174 billion) in liquidity to back the market via reverse repo purchase agreements. By purchasing securities in the open market, the central bank can inject short-term capital into the financial system.
There were 1.05 trillion of reverse repo agreements already due to mature on Monday, Reuters calculates, meaning only 150 billion yuan (US$21.6 billion) in net cash is being injected into the markets.
The where-to-work conundrum
Banks and brokerages are reportedly paying staff double to work this week in Shanghai. The Shanghai government has ordered other companies, including manufacturers, not to reopen for another week. But banks were told to reopen because they provide an "essential service."
I was surprised to find the highway full on Monday as I headed for a morning appointment. Many companies in Hong Kong got back to work today despite government services being closed and the administration suggesting companies allow people to work from home. Schools are closed for the month. But traditional Asian bosses love to keep tabs on their employees at their desks. My brother-in-law, for instance, must go to his property development office every day this week although he could easily do his work from home.
It will undoubtedly be an extremely choppy week or two of trading in Chinese markets. Those circuit breakers reset on Tuesday, so suspended shares can resume another 10% decline if investors are so inclined. I wouldn't be surprised to see Hong Kong stocks take a leg down on Tuesday, too. Until the virus counts stop rising, the selling pressure will remain.