On the First Day of China Stock Market Opening, Over 8% Plunge... Response Measures Ineffective Amid 'Corona Shock'

[Image source=Reuters Yonhap News]

[Asia Economy Beijing=Special Correspondent Park Sun-mi] The Chinese stock market, which had been closed since the 24th of last month due to the Spring Festival (Chinese New Year) holiday, opened on the 3rd with a plunge of over 8%, directly reflecting the shock of the spread of the novel coronavirus infection (Wuhan pneumonia). This also indicates that the government's emergency liquidity injection and short-selling ban measures have not been effective at all in the face of the fear of the epidemic's spread. Reflecting the situation in China, stock markets in neighboring countries including Japan also plunged one after another, turning on a 'red light' for global stock markets.

On this day, the Shanghai Composite Index started trading at 2716.7, down 8.73% from the previous trading day. The Shenzhen Composite Index also recorded 1598.80, down 9% in early trading. The plunge in the Chinese stock market is affecting stock markets in nearby Asian regions as well. On this day, the Japanese stock market opened with both the Nikkei 225 and TOPIX indices down 1.4%, and the KOSPI opened at 2086.61, down 32.40 points (1.53%) from the previous session. The Hong Kong Hang Seng Index is also declining.

On this day, the value of the Chinese yuan was also depreciated against the dollar, reflecting market anxiety. The official exchange rate was set at 6.9249 yuan, up 0.54% from the previous trading day. The plunge in the Chinese stock market and the depreciation of the yuan indicate a capital outflow atmosphere due to the spread of the novel coronavirus in China, suggesting that the vicious cycle may continue for some time.

The sharp market shock stems from concerns about the Chinese economy caused by the spread of the novel coronavirus. Economists diagnose that due to the spread of the novel coronavirus, China's growth rate, which was 6% in the fourth quarter of last year, will fall to the 4% range in the first quarter of this year, and if the virus spread does not subside, the growth rate slowdown may continue into the second quarter.

To minimize the financial market shock, the People's Bank of China has released liquidity and banned short selling in the securities market, but these measures are insufficient to defend against the selling pressure caused by weakened investor sentiment.

The People's Bank of China injected 1.2 trillion yuan (about 205 trillion won) of liquidity into the market through open market operations on this day. The People's Bank explained late the previous night that the liquidity injection policy is a measure to provide reasonable and sufficient liquidity during the special period requiring prevention and control of the novel coronavirus and to ensure the stable operation of the financial market. The People's Bank added, "With this liquidity injection, the total liquidity in the banking system will be 900 billion yuan more than the same period last year."

However, Bloomberg diagnosed that considering the Chinese financial market situation where over 1 trillion yuan of short-term funds are maturing for repayment on this day, the liquidity increase effect from the People's Bank's measure is limited to about 150 billion yuan.

The Chinese securities authorities have entered an emergency system.

Since the Chinese stock market, which had entered the Spring Festival holiday from the 24th of last month, reopened on this day, the possibility of reflecting the market shock during the closure period more significantly as time passes has increased. The China Securities Regulatory Commission (CSRC) stated through the Communist Party's official newspaper, People's Daily, that "the impact of this virus on the stock market is short-term," but also said, "We will strengthen vigilance against abnormal signals," indicating the background of entering a state of readiness.

To minimize market shock, a short-selling ban was imposed on the securities market. According to sources, the CSRC verbally instructed major securities firms and investment banks, including Zhongxin Securities and China International Capital Corporation (CICC), to ban short selling starting from this day.

The CSRC is also considering disclosing risk hedging measures that can offset the current market panic situation. The evening trading session of the futures market, scheduled to start from this day, is planned to be suspended for the time being.

In the securities industry, the measures taken by the securities authorities ahead of the market opening are perceived as mandatory obligations. According to the Hong Kong South China Morning Post (SCMP) on this day, Zhongxin Securities expressed in a message sent to employees at its branches that the measures such as the short-selling ban following the authorities' instructions are politically significant tasks to stabilize the market plunge on the first day of trading.

Some opinions suggest that the Chinese government's countermeasures to prevent the stock market plunge may be insufficient to be effective. During the Shanghai stock market crash in 2015-2016, the Chinese government injected 1.5 trillion yuan of stock market support funds into the financial market, but the market capitalization fell by 32% in just 18 trading days.

This content was produced with the assistance of AI translation services.