The recent coronavirus (2019-nCoV) outbreak in China has increased investors’ trepidation and financial market uncertainty. Domestic Chinese economic activity has been disrupted and the impact on China’s Q1-20 GDP is likely to be substantial, with ripple effects across the Asian region.
Initially, the more proactive and open policies of the Chinese government in managing the outbreak combined with lower fatality rates relative to the SARS epidemic in 2003 implied that 2019-nCoV was less serious. However, asymptomatic transmission have raised concerns about how long it will take to contain the outbreak.
After an extended Chinese New Year holiday, Chinese financial markets re-opened last Monday (3 February). Fortunately, despite investor concerns, bond and money markets were able to operate as normal – albeit with reduced volumes and fewer counterparties. Many other industries remain closed and will be subjected to phased opening over the coming weeks.
The financial authorities, led by the People’s Bank of China (PBoC), implemented several proactive actions to ensure sufficient liquidity and prevent volatility. These included two large liquidity injections by the central bank (a net CNY 150bn reverse repo injection on 3 February, and a net CNY 400 bn on 4 February) and a 10bps cut to the 7-day and 14-day reverse repo rates to 2.40% and 2.55% respectively.
Other regulators, including the Ministry of Finance, China Securities Regulatory Commission, and China Banking and Insurance Regulatory Commission announced several additional measures to help stabilize markets. These included support for companies impacted by the coronavirus outbreak and delays in implementing new regulatory rules for firms that may have difficulty implementing them.
The more accommodative monetary and regulatory announcements helped support financial markets and minimized volatility – as did the phased opening of different industries and businesses. In previous years, the PBoC has actually withdrawn liquidity following Chinese New Year holidays. In contrast, the combination of large liquidity injections, combined with recent cuts to the Reserve Requirement Ratio (RRR), Medium-Term Lending Facility (MLF), and Loan Prime Rate (LPR), all suggested a more dovish policy tilt by the central bank.
Until evidence emerges that the authorities’ aggressive containment and quarantine measures are working, a high level of uncertainty will remain. Regardless, the economic impact of the coronavirus outbreak on first quarter growth will likely be impactful.
We expected the authorities to announce further support measures to counter the negative economic impact – which will likely include further tax cuts, easier borrowing conditions for companies, additional infrastructure investment and measures to stimulate consumption.
In addition, the PBoC will retain its easing bias – potentially implementing additional rate cuts in MLF, LPR and RRR. Although the pace and size of future rate cuts is unlikely to be aggressive, market driven interest rates will likely decline further.