Chinese stocks recoup coronavirus losses, but gains may not last

Chinese stocks have reclaimed the coronavirus-induced losses suffered following the Lunar New Year holiday, a sign that investors are trying to look past the damage done to the world’s second-largest economy.

The Shanghai Composite and CSI 300 indexes both rallied 2.3 percent Monday after the People’s Bank of China cut rates for the second time in two weeks, joining the Shenzhen Composite in trading above their closing levels on Jan. 23, the last trading session before the holiday. China’s major stock averages slumped nearly 8 percent when traders returned to work on Feb 3.

“Improvement in global, marketwide risk appetite seems to have come to a standstill, weighed down by a slowdown in Chinese equity sentiment,” wrote Nomura strategist Masanari Takada in a note sent to clients on Monday, adding that it makes sense for the “Chinese equity market to keep pointing downward.”

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The coronavirus outbreak, which originated in Wuhan, China, has led to the lockdown of more than 60 million people and has caused scores of businesses to temporarily close or reduce their operations. At least 71,000 people have been sickened by virus and another 1,770 have been killed.

The People’s Bank of China on Sunday announced a 10 basis point cut to its medium-term lending facility, lowering the rate on 200 billion yuan worth of one-year loans to financial institutions to 3.15 percent from 3.25 percent. Earlier this month, the PBOC cut short-term rates and injected 1.2 trillion yuan ($236 billion) into money markets.

Nomura’s Global Markets Research team expects more easing in the coming months, through a combination of reserve requirement ratio cuts and lending facilities. However, the analysts don’t expect Beijing to introduce a massive stimulus program.

The fallout from the virus caused economists at Nomura, on Monday, to slash their first-quarter gross domestic product forecast for China, warning growth will likely see its sharpest quarterly slowdown since the Tiananmen Square incident in 1989.

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For their base-case scenario, they see Chinese GDP growth slowing three percentage points to 3 percent before making a V-shaped recovery in the second quarter due to pent-up demand and production.

“Barring a flurry of aggressive interventions by Chinese policy authorities in support of the market, we have a hard time imagining that supply-demand for Chinese equities will improve anytime soon.”