Mainland stocks in for a wild ride

Editorial | Mary Ma 3 Feb 2020

The market consensus is that mainland stocks will be greeted with massive sell-offs when trading reopens in Shanghai and Shenzhen after a longer-than-usual Lunar New Year break.

Trading in A-shares had been due to resume last week but was postponed until today due to the SARS-like Wuhan virus that is still raging.

Yesterday, the death toll exceeded 300 and more than 14,000 people were infected.

Also, the Huoshenshan Hospital was completed and handed over to special medical teams after construction work began just over a week ago. This is the first of similar facilities being purpose-built for patients with the new disease.

As the epidemic continues to spread, it becomes a wild guessing game as to by how much mainland stocks will slump today.

While some stocks will undoubtedly plummet deep enough to touch the red line to result in suspension, will the indices in Shanghai and Shenzhen fall deep enough on a single day to automatically deactivate the market as a whole?

I wonder, as it would have to be an extreme disaster for that to happen.

Before Shanghai and Shenzhen closed for the holiday, they had corrected by about 3 percent. Since ours in Hong Kong resumed trading after the holiday, the Hang Seng Index has fallen by roughly 6 percent and appears to be on course to crash below the 26,000 level.

Beijing policy makers were faced with only two alternatives: continue to suspend the exchanges or open them.

Some industry observers have said that Beijing should continue to close the markets to avoid the possible quake.

I find it an absolutely crazy thought as this would not solve the problem. Rather, it would shake the markets even more violently after they reopened - unless the markets do not open again for a long while.

Hong Kong made a similar decision in 1987 - and it proved to be a serious mistake which forced Ronald Li Fook-shiu to step down as chairman of the stock exchange.

It's impossible for the mainland to stop trading for a longer period.

First, it would create liquidity difficulties for investors, some of whom may have been forced to stampede on Hong Kong listings of mainland-concept stocks for liquidity.

The initials of mainland heavyweights Alibaba, Tencent and Meituan-Dianping form "ATM" - and the SAR is now being used like an ATM machine by investors whose access to the mainland was blocked during this period. Hong Kong stocks are de-facto proxies of their mainland siblings.

Second, further closure of the A-share markets would set back Beijing's efforts to internationalize its financial markets.

On Wall Street, the coronavirus outbreak has provided investors with a convenient excuse to sell their pricey stocks. Indeed, the correction was long overdue.

In the past, Beijing policy makers would roll out advance measures every time a major crash was anticipated in order to preempt it.

That strategy has proved to be less than successful so far.

Perhaps they have learnt from the past and will now hold fire until the situation becomes clearer after the markets open.

Will Beijing lower interest rates and reserve requirement ratios after Shanghai and Shenzhen resume trading?

These are the things to watch out for.

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