Chinese stocks plummeted more than 8% as traders returned from an extended lunar new year holiday amid an ongoing coronavirus outbreak.
The Shanghai Composite index closed nearly 8% lower, its biggest daily drop for more than four years.Manufacturing, materials, and consumer goods companies were among the hardest hit, while healthcare shares soared.
More than 2,500 stocks fell by the daily limit of 10%. The yuan opened at its weakest level in 2020 and slid almost 1.2%, past the symbolic 7-per-dollar level, as the falls soured the mood in markets throughout Asia.
This will last for some time"
The outbreak of a novel coronavirus, which has killed at least 304 people and infected more than 14,380 in mainland China, has ground economic activity to a near standstill in China, as authorities take aggressive measures to contain the flu-like disease, curbing public transport, shuttering entertainment venues and shortening business hours.
The People's Bank of China announced Sunday that it will inject 1.2 trillion yuan ($173bn) worth of liquidity into the markets via open market reverse repo operations. The Chinese central bank said the overall liquidity in the system would be 900 billion yuan ($130bn) more as compared to the same period last year.
"Whilst this fall in domestic listed Chinese shares is significant, it was not unexpected. The Chinese markets had been on an extended holiday since 23 January for the Chinese lunar new year, as the authorities have sought to contain the fall-out from the Coronavirus outbreak. But whilst the Chinese domestic markets were closed, international markets had already been keeping pace with the outbreak's development. As such, just to catch up with international markets. Chinese domestic listed equities were already expected to fall by around 8-9% just to catch up to where international markets were," Matthew Cady, investment strategist at Brooks Macdonald said.
"While this will be the largest single-day addition since 2004, it implies a mere net injection of RMB150bn as commercial banks are scheduled to repay RMB1.05tn of funds on Monday," strategists at Singapore's DBS Group Research wrote in a note. "The authority may need to inject more cash in the rest of the week via reverse repo and/or medium-term lending facility to soothe market nerves."
Investors were bracing for volatility when onshore trade in Chinese stocks, bonds, yuan and commodities resumed, following a steep global selldown on fears about the impact of the virus on the world's second-biggest economy. "This will last for some time," said Iris Pang, Greater China economist at ING.
Adrian Lowcock, head of personal investing at Willis Owen, an investment platform in the UK said: "Just as investors returned from celebrating the Chinese New Year, the Chinese market tumbled as Hong Kong closed its borders to contain the Coronavirus. Whilst significant, much of the fall was linked to Chinese markets catching up with global market sell off following the outbreak of the virus. Whilst the virus is going to have an impact on the Chinese economy, the Chinese government are not going to sit idly by and have already began pumping money into the financial system.
"It is hard for investors to sit and watch markets tumble as the virus continues to spread, but selling up and moving into cash is not without its risks. Whilst in the short term selling could protect from further potential losses, this could be easily offset if the money is not reinvested at the right time. Instead many wait for markets to recover before returning, which could prove detrimental."
The People's Bank of China also plans to lower lending rates to support companies, while financial regulators have delayed the introduction of new rules in order to avoid further tightening market liquidity.
Some economists in China have predicted that the outbreak could shave more than a percentage point off economic growth in the first quarter, pushing gross domestic product growth below 5%.