A Trader Without Information Is a Dangerous Thing
(Bloomberg Opinion) -- When Sleeping Beauty pricked her finger on a spinning wheel, the rest of the kingdom went to sleep along with her.
Not so in China. As an epidemic rages, many provinces have extended their Lunar New Year holiday by weeks, but financial markets – from commodities and stock exchanges to bond clearing houses – will resume operating Monday. The Hong Kong Stock Exchange has been in business since Wednesday.
This creates a problem for investors: With China’s real economy practically shut down, they don’t know how to trade or position themselves. That could make things more volatile.
Consider how this is playing out in the hardware supply chain. Until recently, this sector was a shining star, as investors bet that consumers would rush to buy 5G phones later this year. The coronavirus outbreak has completely changed the calculus. In the smartphone-manufacturing provinces of Zhejiang and Guangdong, the government has forced employees to stay home until Feb. 10. More delays could be coming; these two areas are the hardest-hit after Hubei, the epicenter of the virus. How can smartphone makers and their suppliers fill demand – if there is any – when factories are closed?
And then there’s the trouble of earnings reports. While the U.S. market is getting propped up by solid corporate profits from the likes of Amazon.com Inc., we may not see anything out of China for weeks, if not months. Because of strict travel restrictions, auditors may not be able to visit company sites and do their work. The Hong Kong bourse, which hosts more than 1,000 mainland companies, may have to extend the March 31 deadline for 2019 reports.
That leaves investors only with broad-brush data on the outbreak. Depending on their mood, those reports can be read as glass half-full or half-empty. For example, the number of new patients in Hubei has been roughly steady for three consecutive days. Optimists could see that as evidence of China’s bureaucratic machine effectively controlling the disease, while pessimists might say this is proof of underreporting. Diagnosis tool kits are in short supply, so conceivably, thousands of infected people are just waiting to be tested positive.
You might ask why China is willing to open its financial markets so soon, with businesses closed and factories quiet. To its credit, Beijing has learned a thing or two after the stock rout of 2015, when it put indefinite trading halts on as many as half of mainland-listed firms. In a stroke, public markets were practically transformed into a private one. Not only did that sour investor appetite, it also delayed MSCI Inc.’s decision to include A-shares in its well-tracked indexes. So we’re unlikely to see a repeat performance, even if bureaucrats do conduct window guidance now and then to stem a selloff.
Compared with the SARS epidemic, whose spread was dangerously underreported, China has vastly improved its communication strategy. It now releases updates of confirmed cases twice daily.
Beijing is left with few good options, with a viable vaccine possibly months or even years away. Still, the government can do more to improve transparency. It could, for instance, open up its medical-supply database so the public can assess the severity of test-kit shortages for itself. China also needs to prove its bureaucratic apparatus works – and a lot more urgently than in 2003, when the economy was operating at full steam. Until then, we’re left with wild guessing games.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
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