China's Government Fails to Stop Coronavirus from Infecting Stock Markets, Crypto Coins News

China's Government Fails to Stop Coronavirus from Infecting Stock Markets, Crypto Coins News
  • China’s government is taking desperate measures to calm the financial markets, but they are unlikely to work.
  • The Chinese financial system is already standing on flimsy grounds, and economic condition is worsening.
  • Coronavirus outbreak is getting worse, and the Chinese government won’t be able to tackle this problem by injecting liquidity into the markets.

The coronavirus is slowly becoming an existential threat to the financial stability of the Chinese financial market. The Communist Party of China (CPC) is getting desperate to get the situation under control, but their actions seem to have little effect and a crash looks inevitable.

To calm jittery investors, the CPC decided to inject $ billion into the financial markets through open market reverse repo operations. Additionally, the CPC also banned short-selling and banned major shareholders from selling stock for six months.

Despite the Orwellian measures put in place, over $ billion of value was erased

[Reuters] from the Shanghai Index, and heavily dumped the Yuan and commodities. Over 3, stocks dropped , which is the daily limit.

The Orwellian Measures Don’t Work

This isn’t the first time China is deploying these measures to calm investors. In July , the CPC

banned shareholders with stakes over 5 % [The Guardian] from selling shares for six months. The China Securities Regulatory Commission even said that it would deal “severely” with anyone who violated the rule.

But these tactics never work. They often have the opposite effect as investors are often unable to hedge their long positions and panic.

The ban did not calm investors’ nerves in , and the Shanghai Index continued its downward spiral, losing over (% of its value in the subsequent months.) Shanghai Index continued plummeting in despite government intervention. | Source: Trading View

The same happened in the US when the government banned short-selling

during the Great Recession.

Coronavirus is a Big Blow to a Fragile Financial System

The coronavirus epidemic has brought the Chinese economy to a standstill. With tens of millions of people quarantined, productivity and demand in the region have crashed. Consequently, the epidemic has caused the Chinese oil demand to plummet [Bloomberg] by three million barrels per day, which amounts to 48% of the total consumption.

The Chinese financial system was already standing on flimsy grounds, and the slowing economy was already making things worse. The CPC had been desperately trying to spur growth over the last few months and the coronavirus outbreak has poured cold water on CPC’s efforts.

China has a big ‘bad-debt’ problem and has been spending billions to bail out banks. Just two months ago, China’s sovereign-wealth fund bailed out Hengfeng Bank to the tune of $ . billion . Given the high number of nonperforming loans, many more bailouts are expected in the future.

Chinese banks have a ‘bad-loan’ problem. | Source: Wall Street Journal

The banks in China have been struggling as there were Five cases of bank runs reported

just last year. Besides, the Chinese central bank was also injecting billions of dollars into the banking system [Bloomberg] via repo operations before the coronavirus panic.

The economy was also slowing much before the coronavirus outbreak. In a bid to revive the slowing economy, China’s central bank has been on a reserve requirement ratio (RRR) cutting spree. The People’s Bank of China (PBOC) has cut RRR eight times since

The signs of distress in the Chinese economy were evident before, and the coronavirus outbreak will exacerbate it.

Coronavirus Getting Worse

The CPC is running out of levers to pull, and the coronavirus outbreak is getting worse. The growth in the number of infections is still parabolic. Although the mortality rate is low, the rising number of cases is economically disastrous for China.

Coronavirus cases are still going rapidly. | Source: Johns Hopkins CSSE

As per the official data, total confirmed cases of the infection crossed , in China. However, as was previously said

, the data provided by the Chinese government is highly unreliable, and the number of actual cases is likely much higher.

And just yesterday, Chinese outlet Caijing claimed that the government is ‘significantly under-reporting both, the cases and deaths.

The WHO has already declared coronavirus a global pandemic, and the number of cases is expected to double every 6.4 days going forward. The Chinese economy is already struggling, and the banking sector looks fragile.

The CPC can’t solve the coronavirus problem by printing money and is rapidly running out of levers to pull. Thus, a financial crash looks inevitable.

This article was edited by Samburaj Das .

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