China’s stocks plunge in worst pre-new year loss on record

Panic coursed through the world’s second-largest stock market before the start of a week-long trading break as investors sold stocks on concern a deadly virus will worsen over the Lunar New Year holiday.

The Shanghai Composite Index sank as much as 3.3%, set for the worst pre-new year drop in its three-decade history. More than 90% of the mainland’s 4 000 stocks fell on volumes that were 15% above the average for this time of day. The yuan weakened 0.3% and government bond futures rose to the highest since 2016.

Pressure is building on Beijing to contain a new Sars-like virus that’s killed at least 17 people and infected hundreds. The coronavirus first appeared last month in the city of Wuhan in central China, a city with 11 million residents — more than in London or New York — that’s now in lockdown after officials halted travel.

“Fear and panic are rampant,” said Wang Daixin, a fund manager at Bristlecon Pine Asset Management. “It’s hard to tell how bad things will get before a turn for the better. I didn’t get out when I had the chance to, so now I might as well sit it out rather than lose money. Others are offloading at whatever cost.”

The virus and its potential impact on the economy and financial system pose a growing challenge for President Xi Jinping. It comes at a time when the Communist Party is seeking to maintain stability in the face of a trade war with the US, the spread of swine fever, a debt mountain, rising corporate defaults and protests in Hong Kong.

China was criticised during the Sars epidemic 17 years ago for initially providing limited information and denying the scope of the problem.

A gauge of consumer-staples stocks — some of last year’s top performers — fell for a sixth day. The Lunar New Year is a typically strong season for traveling and spending as families gather for the celebrations. Macau casino stocks also tumbled as the city reported its second case of the novel coronavirus and announced it would cancel all Lunar New Year festivities.

Read: Commodity investors recall Sars as they tally toll of new virus

In Hong Kong, where two cases have also been confirmed, the Hang Seng China Enterprises Index dropped 2.5%. China Life Insurance slumped to its lowest level in a month.

The final day before the Lunar New Year break is historically a good one for stock investors: since its launch in 1991, the Shanghai Composite Index has ended the session lower on only six occasions.

Shutting down Chinese markets has trained attention on the offshore yuan, as well as markets in Hong Kong and exchange-traded funds tracking Chinese stocks in New York or Europe. It will add an element of speculation to their prices when mainland bourses are closed. Hong Kong traders will return to their desks on Wednesday, while exchanges in Shanghai and Shenzhen will reopen January 31.

In the US, owners of the more than $19 billion that tracks Chinese stock ETFs will have less information in deciding how much the securities are worth. The reaction from foreign investors can often be more severe: the Xtrackers Harvest CSI 300 China A-Shares fund, which holds mainland listed-shares only, fell twice as much as the underlying gauge earlier this week.

Without being able to trade for a week, investors are heading into the holiday blind.

Bullishness fades

“A key indicator for me will be the number of the new cases,” said Li Shiyu, managing director at Guangdong Xiaoyu Investment Management. “The epidemic may reach a peak in two weeks and hopefully start to slow. I may cut my positions given the market will be under pressure. If there is a trend for new cases to decline, I would consider buying shares again.”

The virus has dented what had been growing enthusiasm toward equities. Confidence was riding high as Beijing signed a phase one trade deal with the US and data signalled China’s economy was stabilising. Margin debt had topped 1 trillion yuan as investors took on leverage to chase the rally, while privately-offered funds boosted their stock positions to the highest since early 2015.

“Markets were too heated up and there is room for profit taking,” said Nader Naeimi, head of dynamic markets at AMP Capital Investors. “We have sold Hong Kong shares, China A futures against the long broad EM basket this week. We’re just waiting for some heat and froth to come out before closing the shorts.”

© 2020 Bloomberg L.P.