Chinese stocks suffer their worst day in almost five years

Despite attempts by the Chinese authorities to prop up prices, the market saw its worst day since August 2015, closing almost 8% down.

The Chinese stockmarket has suffered its worst day in almost five years, with the Shanghai index closing down 7.9% on Monday (3 February).

Monday saw China’s stockmarket open for the first time since closing for Chinese New Year on 23 January. The market had been due to open earlier, but authorities extended the holiday period in an attempt to stem the spread of coronavirus.

Despite attempts by the Chinese authorities to prop up prices, the market saw its worst day since August 2015, closing almost 8% down. At one point, the market was down by 9%.

During the period of the market being closed, the potential seriousness of the virus became more apparent, with China placing several cities under quarantine and restricting transport.

This, investors fear, will take a toll on Chinese economic growth - concerns that were expressed through the sharp decline in Chinese equity prices once the market re-opened.

According to Fahad Kamal, chief market strategist at Kleinwort Hambros: “China is the world’s second largest global economy based on market prices, and the biggest in purchasing power parity terms.

“Anecdotally, we know this outbreak has caused 70,000 cinemas across the country to be shut; the international coffee chain Starbucks has closed 2,000 of its Chinese branches; Toyota has temporarily halted car production. There is no denying there will be a negative economic impact.”

Similarly, Emma Wall, head of investment analysis at Hargreaves Lansdown, notes: “For the local market, today it was a sea of red, with almost every constituent of the Shanghai Composite posting losses – with the exception of medical equipment and pharmaceutical stocks. The biggest fallers were industrial stocks, energy firms, consumer goods companies, manufacturing and materials.”

Fears of the coronavirus hurting Chinese economic growth have extended to global stocks too. As Wall points out, European luxury goods company LVMH, beauty brand Estée Lauder and UK fashion retailer Burberry have all seen their share prices decline. These companies, which each see roughly 30% of their revenues come from Asia, will see lower sales as China’s population stays home, either voluntarily or due to quarantines.

More general fears over weaker growth in China having a knock-on effect on global economic growth have taken a toll on the S&P 500 and other major world markets over the past week.

Matthew Cady, investment strategist at Brooks Macdonald, is confident that the Chinese government will be able to support continued economic growth, however.

He notes: “We continue to see Chinese policymakers able and willing to respond to support their domestic economy. In the past 12 months, we have seen tax cuts, interest rate and interbank repo rate cuts, as well as cuts to banks reserve requirement ratios. As PBOC Governor Yi Gang has previously remarked, Chinese policymakers have ‘tremendous room’ to act to support the economy.”

Markets, Cady says, should eventually rebound. He says: “Providing the authorities are able to control the outbreak, financial markets will look for a rebound in economic activity in subsequent quarters. If this is the case, while there will naturally be some volatility around growth rates between calendar quarters, the full year impact is likely to be more muted.”

Kamal also warns against overreaction. He points out that the Chinese economy has been decelerating for over a decade and while this year may have worse economic growth than expected due to the virus, “it does not signal a dramatic new paradigm”.


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