- China’s authorities is taking determined measures to calm the monetary markets, however they’re unlikely to work.
- The Chinese language monetary system is already standing on flimsy grounds, and financial situation is worsening.
- Coronavirus outbreak is getting worse, and the Chinese language authorities gained’t have the ability to sort out this downside by injecting liquidity into the markets.
The coronavirus is slowly changing into an existential menace to the monetary stability of the Chinese language monetary market. The Communist Celebration of China (CPC) is getting determined to get the scenario beneath management, however their actions appear to have little impact and a crash appears inevitable.
To calm jittery buyers, the CPC determined to inject $174 billion into the monetary markets via open market reverse repo operations. Moreover, the CPC additionally banned short-selling and banned main shareholders from promoting inventory for six months.
Regardless of the Orwellian measures put in place, over $420 billion of worth was erased [Reuters] from the Shanghai Index, and closely dumped the Yuan and commodities. Over three,000 shares dropped 10%, which is the each day restrict.
The Orwellian Measures Don’t Work
This isn’t the primary time China is deploying these measures to calm buyers. In July 2015, the CPC banned shareholders with stakes over 5% [The Guardian] from promoting shares for six months. The China Securities Regulatory Fee even stated that it will deal “severely” with anybody who violated the rule.
However these ways by no means work. They typically have the other impact as buyers are sometimes unable to hedge their lengthy positions and panic.
The ban didn’t calm buyers’ nerves in 2015, and the Shanghai Index continued its downward spiral, dropping over 35% of its worth within the subsequent months.
The identical occurred within the U.S. when the government banned short-selling during the Great Recession.
Coronavirus is a Big Blow to a Fragile Financial System
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.
Coronavirus Getting Worse
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.
This article was edited by Samburaj Das.