Look out – Chinese stock market crash is a warning

Chinese stocks had their worst day in four years today with the benchmark CSI 300 Index, which tracks the top 300 stocks traded on the Shanghai and Shenzhen stock exchanges, closing down 7.9%. The losses wiped out $445 billion in market value.

Some of this is due to Chinese markets, which have been closed since 23 January for Lunar New Year celebrations, catching up with global markets which have fallen in this period. However, the vital factor is, of course, coronavirus which so far has killed 361 people and infected over 17,000 victims.

In an effort to stop its spread the Chinese government has quarantined entire cities in the province of Hubei where the virus originated, isolating tens of millions of citizens. Public spaces across the country have also been shutdown in an attempt to contain the virus’ spread. Now the economic cost is beginning to show.

The blow is particularly cruel, and pronounced, as the Lunar New Year usually heralds a splurge in consumer spending – with over 1 trillion yuan ($143 billion) spent over the course of it last year. Now hotels, cinemas, bars, and restaurants – which usually count on the holiday as a boom period – are suffering as customers stay home, wary of crowds. Big multinationals are also taking precautions. Starbucks has temporarily closed over half of its outlets. Apple has closed all its stores. Google has closed all its offices. Foxconn, Volkswagen, and Toyota have all closed factories.

The crash comes with the Chinese central bank government unexpectedly lowering short-term interest rates, and announcing measures to inject 1.2 trillion yuan ($173 billion) into the financial system to cushion the expected blow. This has the air of emergency medicine with analysts saying a great deal of the cash injection was intended to simply ensure companies could meet payment obligations due today. Rumours are also swirling that large state-run institutional investors have been buying up stocks to try and prop up the market.

Despite this over 80% of listed companies were down 10%, the maximum depreciation regulations allowed in one day before trading is suspended. The only reliably rising stocks were those in medical companies, many of which hit their appreciation limit, going up 10%. While these limits on falls might help forestall some panic selling it seems likely stocks will continue to slide as the coronavirus crisis continues to grow in scale. Indeed, the SARs epidemic – whose Chinese death toll coronavirus has already exceeded – caused months of market turbulence in China.

A prolonged crisis will only reinforce growing fears about China’s economic state. Official figures put China’s 2019 GDP growth rate at 6.1%, the slowest in three decades, dragged down by factors including the trade war with the US and the mass culling of Chinese pigs due to African swine fever (nearly one quarter of the world’s pigs died). Now growth for the first quarter of 2020 is forecast to reach only 4.8%, and Goldman Sachs has predicted China will only grow by 5.5% in 2020.

The timing of this slowdown could not be worse for Xi Jinping. Having moved to consolidate more power and status into his hands than any leader since Mao the buck very definitely stops with him, and challenges have proliferated. In addition to slowing growth Xi has had to face political challenges including growing international suspicion of China, Taiwan’s elections delivering a landslide victory to the China-sceptic Tsai Ing-wen, and months of protests in Hong Kong.

For critics of China the current crisis showcases the limits of its authoritarian system in which bad news is often buried until crisis forces a drastic response. Even more worryingly for Xi, domestic anger over how the coronavirus crisis has been handled will become only more febrile if it drags out and is accompanied by a deeper economic slowdown.

The slowdown should also be worrying the governments across the world. China is now the world’s manufacturing hub and increasingly important as a consumer hub as well. The SARs crisis caused global turmoil when China accounted for only 4% of the global economy , and now its makes up 16%.

Asian stocks have been hit hardest, but the US has also felt the bite. The Dow Jones dropped 2.1% on Friday, though it rallied somewhat today. Commodity prices have also slid. Brent Crude which stood at at $65 per barrel before the New Year break now is now below $56. Metals, bar gold, have also taken a beating with copper is down 11% since mid-January.

For the moment there is no need to be alarmist, but there is no denying coronavirus will takes its toll not just on China but the world economy, regardless of how effectively it is contained.

Goldman Sachs has estimated that coronavirus will knock off 0.1-0.2% points off global GDP growth this year, potentially rising to 0.3% points in a more severe scenario. Others are even more bearish, with fears of global recession making a comeback, especially as worries about the US economy- which is seeing low profit margins, record debt, negative yields, and liquidity issues – persist. While trying to predict recessions is a fool’s game what is clear is that uncertainty in the markets will persist as long as coronavirus does.