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There’s One Metric That Can Stabilize China's Markets

There’s One Metric That Can Stabilize China's Markets

(Bloomberg Opinion) -- Just a few weeks ago, optimism was palpable in the heart of Shanghai’s financial district. UBS Group AG’s annual China conference enjoyed a record turnout and investors from abroad were enthusiastically buying mainland shares — so much so that some hit foreign-ownership limits. 

Now all anyone can think about is the number of coronavirus cases. The Shanghai Composite Index slid 8.7% lower Monday, its first trading day since the extended Lunar New Year holiday. That’s the steepest drop since China’s market meltdown of 2015. Within minutes, the People’s Bank of China injected a net 150 billion yuan ($21 billion) of liquidity — its largest single-day operation since 2004 — and lowered the money-market policy rate by 10 basis points. The securities regulator told brokers not to issue margin calls or sell stocks at their proprietary-trading desks.

At first glance, these are encouraging signs, particularly from a central bank that’s been reluctant to cut rates even as a damaging trade war with the U.S. drags on. Perhaps this is a signal that the PBOC will be open to the idea of helicopter money again. China poured 4 trillion yuan into the economy after the collapse of Lehman Brothers Holdings Inc. in 2008. But any boost in sentiment from Monday’s rate cut waned in less than 15 minutes. No matter what China’s market regulators do, it won’t be enough.

That’s because for financial markets to stabilize, investors need to see that factories and businesses can reopen in the foreseeable future. Consider this rout against the backdrop of the trade war, which sank the nation’s stock market deep into bear territory in 2018. Whereas a spat with the U.S. hampers China Inc.’s ability to sell its goods, this epidemic is preventing any production at all. As of now, two-thirds of the economy remains shut

So far, China’s vast bureaucratic machine doesn’t seem to have a grip on the virus. Take a look at the number of new cases in Hubei, the epicenter of the outbreak. If any cautious optimism lingered last week, the latest data crush that sentiment. 

There’s One Metric That Can Stabilize China's Markets

As long as China struggles to contain the outbreak in Hubei, other province won’t dare open for business. No local government official is willing to take the blame for spreading the virus further. 

Nor are private enterprises willing to risk it. China Evergrande Group, one of the country’s largest developers, said that its 1,200-plus real-estate projects and 1,000-plus sales offices will remain closed until Feb. 20. As to when its sprawling business will resume operation, that all depends on how the virus goes, the company says.

An optimist might say that Beijing still has the policy dry powder to stabilize its markets. No doubt, the state remains powerful in China. But increasingly, the economy is becoming a partnership between the public and the private sectors. Even though local governments issued municipal bonds at record pace last year, infrastructure spending remains anemic. Lowering the money-market rate can only temporarily halt a slide in stocks and commodities futures; it does nothing to the real economy if businesses aren’t open. More than ever, markets are testing the effectiveness of the Chinese bureaucracy. 

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

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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