The Danger
Commenting the outbreak of the new coronavirus in China, which has since spread in the rest of the world to the brink of declaring a global pandemic, in their latest forecast, the Organization for Economic Cooperation and Development (OECD) said that the "The global economy faces its biggest danger since the financial crisis. Containing the epidemic and protecting people is the priority."
As the starting point of the epidemic, Chinese markets have suffered greatly, with the biggest hit being taken by the tourism stocks, with the somewhat traditional and expected portfolio sell-off leading up to the Spring Festival extending much further and affecting major hotel operators such as the BTG Hotels Group Co and Shanghai Jin Jiang International Hotels Development Co.
According to Reuters, a recent poll of more than 40 economists, based both in and outside mainland China, forecast the country's growth to fall to a median of 3.5% in 1Q2020 from 6.0% in 4Q2019, with the predictions going down by a full percentage point since the last poll made in February. The predictions go as low as 2.4%in the worst-case scenario, with the current predictions taking place of the central scenario predictions made in February, indicating the clear dangers the Chinese economy, as the one worst affected by the virus so far, faces.
The Opportunity
However, as the western media often like to miss-quote the Chinese word for "crisis" as being composed of two Chinese characters signifying "danger" and "opportunity" respectively, there is another side to this story. The Chinese government already started its package of counter-measures - according to a recent announcement made by the Central Bank of China, an USD170bn injection is to ensure enough liquidity in the banking system and help provide a stable currency market. A large portion of the funds, 300 billion yuan out of the total 1.2 trillion yuan allocation, are to be provided to banks to lend to companies affected by the coronavirus.
The announced measures already took effect - after the initial sell-off, markets rebounded as policy-easing measures ensured ample liquidity, with interbank borrowing costs falling to lowest levels in the last decade. Analysts suggest that the prospect of massive fiscal stimulus announced by central banks around the world might fuel another upwards leg of this recovery rally. This has brought forth a momentum that saw the Chinese stock indices such as the SSE Composite Index rank among the best performing in the past week.
Chinese economy showcased its strength, which has been recognized by the foreign investors as well, eager to take the opportunity of getting onto the wagon at what they believe are discounted prices. The head of Asia strategy at SEB AB, Eugenia Victorino, said that “Chinese equities provide a hedge against the recent volatility in global risk assets. We continue to believe in the resilience in Chinese equities in the near term.”
The Outcome
At this time, its to early to make predictions as to how the epidemic situation evolves from here. Some experts have suggested that the advent of warmer weather, traditionally marking the end of flu season, might see the end of this epidemic as well, but due to the many unknowns about the new virus, they can't be sure. If this really is the case, we're just a few months away from the Chinese economy continuing its growth trajectory, bolstered by the financial measures issued in the meantime. Such a development might see the traders currently speculated in the Chinese market rewarded for their risks.
Sources:
https://finance.yahoo.com/news/chinese-shares-two-high-show-070433266.html
https://finance.yahoo.com/news/china-first-quarter-economic-hit-001251940.html