China’s $22 Billion Injection May Help Ease Global Market Rout
Finance | 2.2.2020 | 20:35
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(Bloomberg) -- A $22 billion injection into Chinese markets won’t be enough to prevent the country’s stocks and currency falling on Monday, but it may ease a global sell-off sparked by the spread of the coronavirus.
That’s according to analysts after the People’s Bank of China and other regulators announced a slew of measures to shore up their financial markets when they re-open following the Lunar New Year holiday.
The central bank said Sunday it will use reverse repurchase agreements to supply 1.2 trillion yuan of liquidity on Monday, with the figure coming to 150 billion yuan ($21.7 billion) on a net basis, according to Bloomberg calculations.
“This is well beyond the band-aid fix,” said Stephen Innes, a Bangkok-based chief market strategist at Axicorp. “If this deluge doesn’t hold risk-off at bay, we are in for a colossal beat down. In addition, the PBOC will likely intervene in the currency market, so I would expect them to layer the soothing market balm thick and heavy.”
Since China’s onshore markets last traded on Jan. 23, the offshore yuan has weakened 1%, briefly slipping past the 7 per dollar level for the first time this year. Chinese stock futures in Singapore have plunged 7.5%, suggesting a painful opening for the mainland’s equity markets.
But traders in the global currency market appeared to take some comfort from steps that China has taken. The Australian dollar -- seen by many as a proxy for China and risk appetite -- recovered ground to trade up around 0.1% on the day in early Asia-Pacific hours Monday after briefly dipping to a fresh four-month low, while havens such as the Japanese yen and the Swiss franc edged lower.
Concern that the virus, which has killed more than 300 people, will slow the global economy sparked a deep sell-off in assets, in both developed and emerging markets. U.S. stocks wiped out their 2020 gains last week, while those in developing nations slumped the most in almost two years. Haven assets such as U.S. Treasuries and gold rose.
The measures from China’s regulators will “help cushion markets,” said Mansoor Mohi-uddin, a senior strategist at NatWest Markets in Singapore.
It will be even better for investor sentiment if the PBOC prevents the onshore yuan from weakening beyond 7, he said.
Not everyone is convinced China’s moves will be able to stem the downturn in markets, especially given the likely economic effect of the virus.
In a containment scenario -- with a severe but short-lived impact -- it could take China’s first-quarter gross domestic product growth down to 4.5% year-on-year, according to Bloomberg Economics. That would be the lowest quarterly figure since at least 1992.
“The efforts may look like trying to counter a tsunami with shovels,” said Ipek Ozkardeskaya, a senior market analyst at Swissquote Bank.
(Updates Monday trading.)
--With assistance from Benjamin Purvis and Michael G. Wilson.
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