‘The worst is yet to come’ for stocks in China

Stocks in China are primed for a steep fall on Monday when markets in Shanghai and Shenzhen reopen.

Stocks in China are primed for a steep fall on Monday when markets in Shanghai and Shenzhen reopen after a week-long closure, even as Chinese authorities try to calm frayed nerves over the fast-spreading Wuhan coronavirus.

The last time mainland-listed Chinese stocks traded was January 23, two days before the start of the Lunar New Year, and the benchmark Shanghai Composite had fallen 4.5 per cent since mid-January at that point.

The markets were originally scheduled to reopen on Friday, but that was pushed to Monday when China extended its national holiday in an attempt to slow the spread of the new coronavirus that was first identified in the central city of Wuhan in December.

Instead, the number of confirmed infections across China has jumped sharply — from 830 cases on January 23to more than 14,380 as of Sunday — while the death toll has climbed to 304 from 25 over that period. The World Health Organisation on Thursday declared coronavirus’s worsening spread a public-health emergency of international concern, after earlier opting not to escalate its status.

While China’s markets were closed, Hong Kong’s stockmarket fell 5.9 per cent, and the Hang Seng China Enterprises Index — which tracks large Chinese companies listed in Hong Kong — fell a steeper 6.7 per cent. Both suffered their worst weekly drops in two years.

Some exchange-traded funds that hold mainland-listed stocks fell 8 per cent in the week that ended Friday, foreshadowing declines in Shanghai and Shenzhen in the coming week.

Wei Yingfei, a partner at Shanghai-based private-fund manager DayWin Asset Management, says he is prepared to sell at least a fifth of the stocks his firm holds when China’s stockmarket reopens on Monday, because it might be more prudent to sit on more cash.

“No one can tell how long the contagion will last,” said Mr Wei, who oversees about 5 billion yuan ($1.1bn) in assets. He said he expected the Chinese economy to “suffer a big blow” as the virus keeps spreading, and thinks China may call upon its “national team” — a group of state-backed funds — to buy domestic stocks next week to cushion any major market declines.

The main concern among global investors is that the virus could turn into a pandemic that cripples transportation and tourism, crimping global growth. The pneumonia-causing virus could further weigh on China’s slowing economy.

This past week, some economists cut their forecasts for first-quarter Chinese growth by several percentage points. “The situation has escalated rapidly,” Ting Lu, chief China economist at Nomura said in a note. “In our view, the worst is yet to come.”

Chinese authorities have been trying to convey messages to market participants, advising them not to panic. The country’s top securities regulator earlier this week released a statement urging investors to look at the coronavirus “rationally and objectively”. It also said market participants should “adhere to the concept of long-term investment and value investment”.

China’s central bank separately said it planned to add liquidity to the financial system next week to help support markets.

The market was being forced to “price in fear of the unknown”, said Weiqi Zhu, a managing director at Gao Zheng Asset Management, which has cut its holdings of tourism, property, consumer and Macau gaming stocks. The firm has $US120m ($180m) under management.

Back in 2003, the Shanghai Composite Index fell as much as 9 per cent between mid-April and mid-May, when the SARS outbreak was most severe.

The Wall Street Journal