More than 3,000 Chinese stocks fell by their daily limit the moment the Chinese stock market opened this morning. What is happening? A new, mutated, and lethal virus called a coronavirus has killed more than two hundred people, infected more than ten thousand and led to a virtual shutdown of large segments of the Chinese economy. This is a huge social and humanitarian disaster in the making as the virus has spread across the world to dozens of countries and air travel to and from China has been restricted. From an investor’s point of view, how badly will the Wuhan coronavirus hurt investments in China?
How Are Investors Responding to the Coronavirus Threat?
The Chinese stock markets were shut down for a week for the New Year holiday so the precipitous fall of Chinese stocks was the first response as coronavirus fears grow according to The New York Times.
The sell-off continued despite government efforts to bolster the economy. China’s central bank on Monday injected $173 billion into its financial system in an emergency move it said was “in order to maintain reasonable and abundant liquidity in the banking system and stable operation of the currency market.” It has also pledged to lower the lending rates for companies.
Other markets in the region, which have already digested much of the impact, were also trading in the red. Shares in Tokyo finished the day down nearly 1 percent, while in Australia they closed down 1.3 percent.
Although the stock markets are open again, much of the rest of the country is shut down. Travel is restricted in and out of the 11 million person city of Wuhan as well as other metropolitan areas in the East and Central regions of China. The Chinese economy was already slowing down and Chinese debt has risen greatly. Thus the world’s second largest economy already had weaknesses and needed to maintain its forward momentum in order to avoid further economic and social-political problems. Investors see this and are heading for the exits. How long the stock plunge lasts and how bad it gets will depend on a large degree on how well China is able to manage this crisis and get people back to work.
Will Investors Be Able to Sell Their Chinese Stocks?
The Chinese stock market, like many others, has limits to keep a stock rout from devastating the market in a single day. Unfortunately, this means that many investors could not get their sell orders executed in time before trading closed on their individual stocks. Thus, we can expect to see this rout go on for several days as both traders and long term investors seek to pare their losses.
A big problem is that in China it is perfectly legal and quite common to borrow money to invest in stocks. In a market that has more often gone up than down over the last few years, this could be very tempting. The problem now is that those who owe money cannot sell their stocks and may end up being “upside down” on their investment portfolios. This may be where the Wuhan coronavirus wrecks the most damage on Chinese stocks and the overall economy.