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Epidemic won’t spark financial crisis in China

(Global Times)    11:31, March 02, 2020

Analysts expect further liquidity injections, market improvements

China is not facing a financial system crisis, despite mounting pressure from the coronavirus epidemic on the economy and global stock market routs, but further macro stabilizing measures, including more liquidity injections, might be necessary, analysts said on Sunday.

Ominous signals have begun to suggest that the epidemic might have hit the Chinese economy harder than some had expected, which in turn has fueled speculation that China might face a financial crisis.

On Saturday, official data showed that China's manufacturing sector may have experienced a sharp downturn in February worse than during the global financial crisis in 2008.

The official manufacturing purchasing managers' index (PMI) dropped to 35.7 in February, the lowest level on record, according to the National Bureau of Statistics (NBS). The non-manufacturing PMI plunged to 29.6, deep in contraction territory.

The downbeat data followed hefty losses in the Chinese A-share market on Friday amid a worldwide stock market rout due to concerns over the coronavirus epidemic. The benchmark Shanghai Composite Index plummeted 3.71 percent on Friday to drop below the psychologically important level of 3,000. The index lost 4.87 percent for the week.

Although the Chinese stock market fared better than the Wall Street, where the Dow Jones Industrial Average lost 12 percent last week, concerns over a potential downtrend in the A-share market or even a broader financial crisis grew.

"Suggestions that China is facing risk of a financial crisis are just absurd," Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology, told the Global Times on Sunday.

"If anything, China's A-share market is facing an upward trajectory given the fact that it has been at its historic lows and that the economic fundamentals have not changed."

Although the epidemic in China and strict measures to contain it have brought much of the world's second-largest economy to a near standstill, Chinese officials and analysts have maintained that the economic impact will be short-lived. Some have expected China's GDP growth could slow to 3 percent in the first quarter.

As the epidemic has been reined in significantly in places outside of the epicenter Hubei, Chinese officials have rolled out measures, including financial support, to help companies, particularly small businesses, to get back on their feet. And officials have been hinting that relief measures on the way.

"While broad-based interest rate cuts are unlikely, there will be more targeted rate reductions for certain areas. The [People's Bank of China] will likely focus on cuts to the [Reserve requirement ratio (RRR)]," Dong said, adding that further cuts to the RRR, or the cash banks are required to save at the central bank as reserves, are "almost a certainty."

In light of moves by China' s central bank to inject liquidity and local governments to support businesses, some argue the potential risks of a spike in non-performing loans among local governments could cause a financial crisis. But Dong said that China's government debt level remains significantly lower than those of developed countries and banks are among the world's biggest and most regulated. "Everything is very much under control," he said.

China's A-share market might be at the start of a bull run, according to Yang Delong, chief economist at Shenzhen-based First Seafront Fund. "US stocks have reached its top, whereas the A-share market is bottoming out. Therefore I think the A-share market will increase by 20 percent this year," he wrote in a note sent to the Global Times on Sunday.

Apart from solid fundamentals and favorable policies, Yang also said that China's new securities law, which is set to clean up illegal activities and lower the threshold for companies to list, will ensure a steady rise in the A-share market. 

(For the latest China news, Please follow People's Daily on Twitter and Facebook)(Web editor: Liang Jun, Bianji)

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