The coronavirus is slowly becoming an existential threat to the financial stability of the Chinese financial market. The Communist Party of China (CPC) is getting desperate to get the situation under control, but their actions seem to have little effect and a crash looks inevitable.
To calm jittery investors, the CPC decided to inject $174 billion into the financial markets through open market reverse repo operations. Additionally, the CPC also banned short-selling and banned major shareholders from selling stock for six months.
Despite the Orwellian measures put in place, over $420 billion of value was erased [Reuters] from the Shanghai Index, and heavily dumped the Yuan and commodities. Over 3,000 stocks dropped 10%, which is the daily limit.
This isn’t the first time China is deploying these measures to calm investors. In July 2015, the CPC banned shareholders with stakes over 5% [The Guardian] from selling shares for six months. The China Securities Regulatory Commission even said that it would deal “severely” with anyone who violated the rule.
But these tactics never work. They often have the opposite effect as investors are often unable to hedge their long positions and panic.
The ban didn’t calm investors’ nerves in 2015, and the Shanghai Index continued its downward spiral, losing over 35% of its value in the subsequent months.
The same happened in the U.S. when the government banned short-selling during the Great Recession.
The coronavirus epidemic has brought the Chinese economy to a standstill. With tens of millions of people quarantined, productivity and demand in the region have crashed. Consequently, the epidemic has caused the Chinese oil demand to plummet [Bloomberg] by three million barrels per day, which amounts to 20% of the total consumption.
The Chinese financial system was already standing on flimsy grounds, and the slowing economy was already making things worse. The CPC had been desperately trying to spur growth over the last few months and the coronavirus outbreak has poured cold water on CPC’s efforts.
China has a big ‘bad-debt’ problem and has been spending billions to bail out banks. Just two months ago, China’s sovereign-wealth fund bailed out Hengfeng Bank to the tune of $14.28 billion [Wall Street Journal]. Given the high number of nonperforming loans, many more bailouts are expected in the future.
The banks in China have been struggling as there were five cases of bank runs reported just last year. Besides, the Chinese central bank was also injecting billions of dollars into the banking system [Bloomberg] via repo operations before the coronavirus panic.
The economy was also slowing much before the coronavirus outbreak. In a bid to revive the slowing economy, China’s central bank has been on a reserve requirement ratio (RRR) cutting spree. The People’s Bank of China (PBOC) has cut RRR eight times since 2018 [Reuters].
The signs of distress in the Chinese economy were evident before, and the coronavirus outbreak will exacerbate it.
The CPC is running out of levers to pull, and the coronavirus outbreak is getting worse. The growth in the number of infections is still parabolic. Although the mortality rate is low, the rising number of cases is economically disastrous for China.
As per the official data, total confirmed cases of the infection crossed 17,200 in China. However, as I’d previously said, the data provided by the Chinese government is highly unreliable, and the number of actual cases is likely much higher.
And just yesterday, Chinese outlet Caijing claimed that the government is ‘significantly under-reporting both, the cases and deaths.
The WHO has already declared coronavirus a global pandemic, and the number of cases is expected to double every 6.4 days going forward. The Chinese economy is already struggling, and the banking sector looks fragile.
The CPC can’t solve the coronavirus problem by printing money and is rapidly running out of levers to pull. Thus, a financial crash looks inevitable.
Last modified: June 24, 2020 1:04 AM UTC