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Chinese stocks tumble nearly 8% as coronavirus spreads

All sectors close lower, as central bank injects $174bn of liquidity into market

A man stands in front of a screen showing the Shanghai Composite Index outside a brokerage in Tokyo on Feb. 3. The benchmark index tumbled 7.7%.   © Reuters

HONG KONG -- Investors fled Chinese equities on Monday as financial markets reopened after the extended Lunar New Year break, with stocks logging their biggest single day fall since 2015. The yuan and commodities also tumbled, as investors counted the economic impact from the spreading coronavirus outbreak.

The Shanghai Composite Index sank 7.7%, logging its worst debut to a Lunar New Year in at least two decades. It opened on Monday 8.8% lower than its Jan. 23 close, the last day of trading before the long holiday break.

All sectors closed in the red, with only 60 predominantly health care stocks of the more than 1,500 constituents closing higher. Declines were led by telecommunications, technology and commodity producers, and analysts expect the bearish sentiment to persist.

The CSI 300 Index, which tracks the 300 most-traded stocks in Shanghai and Shenzhen, ended down 7.9%. More than 3,000 stocks immediately fell by the 10% daily limit, but Chinese stock indexes do not have a circuit breaker.

The benchmark iron ore contract in Dalian fell by its daily limit of 8%. Copper, crude and palm oil also slumped by the maximum limits. The yuan fell 1% to briefly weaken past the symbolic level of 7 against the U.S. dollar.

The slump comes despite Beijing authorities unveiling a slew of measures to support the financial system, with the central bank announcing that it would pump 1.2 trillion yuan ($174 billion) of liquidity into the market on Monday in the largest one-day open-market operation since 2004.

They also allowed insurers with ample solvency to "appropriately raise their investment" in equities from the current limit of 30% of assets. Two traders said there were indications that Chinese state funds were buying to cushion the fall and reduce the impact on investors.

Provinces and cities including Shanghai have further extended the holiday break to Feb. 9, which limited volumes and exacerbated declines, market strategists said. While workers have been encouraged to telecommute, traders must be physically present in the workplace and use secure proprietary systems to ensure compliance.

Monday's slump is the worst since the July 2015 stock bubble burst. It also topped the 5%-plus declines for the country's main benchmark stock indexes -- the Shanghai Composite Index, the CSI 300 Index and the Shenzhen Stock Exchange Component Index -- on May 6, when markets returned from a holiday break and a pair of tweets from U.S. President Donald Trump threatened trade talks. The economic impact is expected to be larger this time around.

"The reality is that the virus outbreak is still at an early stage, with numbers expected to rise in the coming weeks, and that will put pressure on market sentiment," J.P. Morgan Asset Management Asia Chief Market Strategist Tai Hui said.

"The market will monitor how that pans out as well as travel restrictions. Then there is also the impact on factory floors if companies are lengthening their holidays," he said.

J.P. Morgan Asset Management is advising clients to diversify their positions geographically and also increase developed bond market holdings to reduce volatility and negate the impact from market forces.

The sharp fall in mainland Chinese shares will further drag emerging-markets indexes lower. China accounted for more than a third of the MSCI Emerging Markets Index at the end of 2019, which has dropped 10% from the Jan. 17 high.

Hong Kong's benchmark stock index on Monday arrested two days of declines and closed up 0.3%, while Tokyo's Nikkei 225 fell 1%. The Nikkei Asia300 index of companies outside Japan also fell 1%.

China's National Health Commission said that the death toll in China from the coronavirus had reached 361 as of the end of Sunday, up by 57 from the previous day. There were 2,829 new confirmed infections, bringing the cumulative total to 17,205. The World Health Organization declared a global public health emergency last week.

Countries have imposed travel restrictions on China, and factories and retailers including Apple and Starbucks have closed locations in the mainland, raising questions over the economic impact.

UBS said in a note on Monday that it expects first-quarter Chinese growth to slip to 3.8% with the economy seen rebounding from the June quarter. It also cut its 2020 forecast to 5.4% growth from 6% previously.

Additional reporting Yusho Cho in Shanghai.

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