Chinese Stocks Plunge Despite Beijing Unveiling Measures to Stem Impact of Coronavirus

Posted on 02/03/2020 5:54 AM

Have or will U.S. and China hold consultations re: Phase 1 purchase commitments?


In today's updates:


* China unveils measures to stem financial impact of coronavirus
* Death toll surpasses 360, with confirmed cases above 17,000
* Dearth of Chinese travelers to U.S. will have big impact
* China’s gov’t reacted angrily to border restrictions and airline cancellations
* Impact on China’s economic growth debated with length of crisis key unknown
China will release 10,000 tonnes of frozen pork into Wuhan when needed
* Most believe coronavirus will delay Chinese purchases via Phase 1 trade accord
* Alert on whether U.S. and China have or will soon hold consultations
* USDA Feb. 11 WASDE will present hard-to-gauge forecasts for Chinese purchases
* Democrats in Iowa gather today to vote in the state’s caucuses
* In Mexico, a boom in avocado exports has attracted the attention of criminal gangs
Farmers and ranchers in Brazil have helped cut down a lot of Amazon rainforest
* Drone delivery rules out today


Markets: Chinese markets plunged, reopening after the extended Lunar New Year break, due to anxiety over the fast-spreading coronavirus and its impact on the global economy. The benchmark Shanghai Composite Index fell 8.1% in early action, on the first trading day of the year, putting the index on pace for its steepest one-day decline since August 2015. Retail, consumer services and transportation stocks led the declines. The benchmark closed down 7.9%. The Shenzhen Composite dropped 8.6%. Other Asian equities were more stable, with Japan’s Topix falling 0.7 per cent. Equities notched moderate gains in Europe.

China Equities


Brent crude futures sank overnight after a report saying Chinese oil demand has dropped by about three million barrels a day, or 20% of total consumption, in probably the largest demand shock the oil market has suffered since the global financial crisis. Meanwhile, Saudi Arabia is considering cutting oil production by up to 1 million barrels a day in response to the coronavirus's impact on demand, OPEC officials said.

Brent futures


Prices of commodities tied to China’s economic outlook tumbled, including iron ore, which was down by 8% in Dalian, and copper, which fell 6.5% in Shanghai. Dry bulk shipping costs keep plummeting, with the Capesize index turning negative.


Friday’s U.S. equities selloff was accompanied by a surge in the VIX volatility index to 18.95, its highest in almost four months. “With the Wuhan outbreak continuing to spread at an accelerating rate, it would not be surprising to see the S&P 500 give back more of the uninterrupted gains it made between early-October and late-January. And if it does, a near term spike in the VIX north of 20, and quite possibly north of 23, will be likely. Happily, however, there are five good reasons to think any such elevated volatility will prove short-lived,” writes Tan Kai Xian in a daily note from Gavekal Research. The five reasons:
   (1) “U.S. recession risk is small, as lower borrowing costs over the past year are boosting the housing market and durable goods spending.
   (2) ”U.S. equities should be helped by earnings growth, which tends not to suffer great volatility.
   (3) “The Federal Reserve’s return to balance sheet expansion should be a stabilizing factor for U.S. markets.
   (4) “As the US heads into election season, President Donald Trump is less likely to risk trade spats of the sort seen in the last year, as they would spook investors and threaten his electoral prospects.
   (5) “Structurally, the demographic shift to a smaller youthful working age population dampens equity volatility.”



Coronavirus update:


  • Link to weekend update.
  • Beijing unveiled several measures aimed at stemming the financial impact of the spreading coronavirus. China pledged aid to companies hit by the outbreak and added a net 150 billion yuan ($21.7 billion) into money markets, while banks were told to lend more and not call in loans to companies in Hubei and other affected regions. The People’s Bank of China cut the seven- and 14-day reverse repo rates by 10 basis points to 2.4% and 2.55%, respectively. The PBOC also injected 1.2 trillion yuan ($173.0 billion) into the financial system.
  • The death toll has now surpassed 360, with confirmed cases in the country topping 17,000. China reported 17,205 confirmed cases of the coronavirus and 361 deaths as of the end of Sunday. Latest numbers from China’s National Health Commission show 57 deaths on Sunday, up from 45 a day earlier, as new cases rise to 2,829, up from 2,590. The number of infections already exceeds the total during the outbreak of severe acute respiratory syndrome, or SARS, in 2002-2003.
  • World Health Organization chief Tedros Adhanom Ghebreyesus called on countries to avoid measures that "unnecessarily interfere with international travel and trade" relative to the China coronavirus situation. "We call on all countries to implement decisions that are evidence-based and consistent," he said at a meeting of the WHO executive board.
  • Do the math on impact of a lack of Chinese travelers to the U.S. The U.S., and governments in Europe and Asia are enforcing new regulations to block visitors from China and screen returning U.S. citizens, while major airlines suspended flights to the country and companies pulled out expatriate executives. Last year just over 7 million Chinese visited the United States, representing 7% of all tourists to the U.S. Chinese travelers are especially valuable because they tend to stay longer and spend more than those from other countries — in the U.S., for example, they stayed an average of 18 days and spent $7,000 per visit last year, according to a 13D Global Strategy and Research report.
  • China’s government reacted angrily to border restrictions and airline cancellations. “This kind of overreaction could only make things even worse,” China’s Foreign Ministry on Saturday wrote on its Twitter account. “It’s not the right way to deal with the pandemic.” Chinese foreign ministry spokeswoman Hua Chunying said in a written statement that many countries appreciated China's efforts to contain the spread of the coronavirus, with the exception of the U.S. “But in the meantime, some countries, the U.S. in particular, have inappropriately overreacted, which certainly runs counter to WHO advice,” she said. “The U.S. government has not provided any substantial assistance to us, but it was the first to evacuate personnel from its consulate in Wuhan, the first to suggest partial withdrawal of its embassy staff, and the first to impose a travel ban on Chinese travelers. All it has done could only create and spread fear, which is a bad example… I also noted that the Canadian Minister of Health said Canada would not follow the U.S. and impose travel restrictions on Chinese or foreign nationals who have been to China,” Hua said. “Canada believes the entry ban has no basis, which is a sharp contrast to the U.S. behavior,” she said.
  • Ten economists surveyed on Friday by the Wall Street Journal lowered their expectations for first quarter Chinese growth by over a percentage point to a median 4.9%. Those forecast cuts were made hours before the U.S. airline announcements.
  • Forecasting impact of coronavirus difficult. Last year, the WHO said in a report that it had tracked 1,483 epidemic events in 172 countries between 2011 and 2018. The most expensive in recent history include $40 billion in lost productivity due to SARS in 2003 and up to $55 billion during a 2009 H1N1 swine flu pandemic, both of which involved China. The WHO said an outbreak of Ebola in West Africa from 2014 to 2016 cost $53 billion in economic and social impacts.

— China will release 10,000 tonnes of frozen pork into Wuhan when needed, according to an official with the National Development and Reform Commission (NDRC). Reports also indicate that China’s Unipec has stopped buying West African crude cargoes on lower refinery runs linked to the coronavirus, with Reuters indicating Unipec was offering to re-sell at least five Angolan crude cargoes.


— U.S./China trade policy update:


  • It’s just a matter of time as to when U.S. and China update the Phase 1 agreement relative to committed purchases, say China watchers contacted about that topic. Consultations will be held between the two countries, if they have not yet been via phone/video conference. Travel bans have made it difficult for people to work and to keep things running. It is possible that with enough supply chain disruption China won’t be able to meet its Phase 1 trade deal purchasing commitments .Some expect delays in purchases/shipments of one to two quarters. If any impacted timing of purchases goes beyond that timeframe, it would cut into the expected seasonality of Chinese purchases of U.S. farm products. “Obvious things like off-loading and getting imported products to their destinations require people and China is on a virtual holding pattern,” one contact said. Bottom line: It is possible that with enough supply chain disruption China won’t be able to meet the schedule for Phase 1 purchasing commitments.
  • Impacts to businesses and consumers promise to at least temporarily reduce China’s appetite for imports, despite its trade-deal pledge last month to boost by $200 billion purchases of U.S. goods and services over the next two years. Costco Wholesale Corp., which last year opened a Shanghai outlet, says it could be three weeks before it can gauge any trade delays and import appetite since ships are already in transit.
  • The unknown impacts of U.S./Chinese trade will make it more difficult for USDA analysts in their Feb. 11 WASDE report, which will be the first time the department’s ag economists projects expected import levels from China following the Phase 1 signing Jan. 15.


— Other items of note:


  • Democrats in Iowa gather today to vote in the state’s caucuses, with record high turnout expected this year. There are five candidates considered competitive in Iowa: Sen. Bernie Sanders; former Vice President Joe Biden; Mayor Pete Buttigieg; Sen. Elizabeth Warren; and Sen. Amy Klobuchar. Though the release of the final Des Moines Register/CNN opinion poll was called off, tonight’s outcome is likely to be close.

  • In Mexico, a boom in avocado exports has attracted the attention of criminal gangs. The avocado industry brings in $2 billion per year for the Mexican economy and its newfound popularity with criminals is linked to the U.S. opioid crisis. “Americans’ increased use of fentanyl, a synthetic opioid used for pain relief, pushed down the price of heroin, which in turn slashed the price of Mexican opium,” according to the Financial Times, forcing gangs to diversify. Experts warn that the avocado trade is starting to resemble that of conflict minerals in Africa. “So dangerous has the avocado business become that several municipalities have armed private security guards to protect towns,” the FT reports.

  • Farmers and ranchers in Brazil have helped cut down about a fifth of the Amazon rainforest. The government is mulling giving deeds to those producers who have expanded into rainforest lands they don’t own, hoping that newfound ownership will keep them tied to their current plots — rather than cutting further into the forest to carve out new lands. Link to Wall Street Journal article.

  • Drone delivery rules out today. An FAA proposal out today addresses permitting for drones weighing more than 55 pounds. Right now, such drones undergo the same detailed permitting process as other types of manned aircraft, such as helicopters and airplanes. The FAA is proposing a special type of permit, or type certification, for drones flying at that weight. The new permit category would mean heavier drones wouldn’t have to meet the standards used for airplanes and helicopters. Drones used to deliver packages can reach the 55-pound threshold. Link to notice.


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