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Chinese Stocks Are Climbing Back after the Monday Slump
COVID-19 and China
Image credit: Cai Shihong/Unsplash

February 6 became the third day of continuous growth for most of the shares circulating in Shanghai and Shenzhen. The CSI 300 went up by 1.86%, reaching 3899.78 points by the end of the afternoon trading session. Many firms’ market caps have already snapped back after the abrupt (but quite predictable) fall on Monday.

China’s largest publicly traded entities are now regaining their value on the sly. ICBC (601398:SH), China Construction Bank (601939:SH) and Ping An Insurance (601318:SH), the mighty triad of financial conglomerates that, combined, lost over CNY 380.91 billion (USD 54.38 billion) in the morning disappointment on February 3, are now trading at CNY 5.50, CNY 6.69 and CNY 81.52 apiece respectively (3.77%, 5.69% and 6.70% higher than the closing price Monday).

At the same time, both China’s tech boards – Shenzhen’s ChiNext and Shanghai’s Star Market – are seeing a solid uptrend. ChiNext Index (399006:SZ) grew by 3.74%, hopping over the 2,000-point bar for the first time since 2016. The composite index of the Shenzhen tech board (399102:SZ) added 3.48%, with 735 out of 790 listed companies surging. The biggest player there, electric vehicle battery maker Contemporary Amperex Technology (CATL, 300750:SZ), which just made a deal with Tesla (TSLA:NASDAQ), moved up 3.72% today.

Some big names on the Sci-Tech Innovation Board lost much of their clout in the very beginning of the lunar new year (read the HYC Technology’s story, for instance). This time, the venue set a fresh record too: its total market valuation was CNY 1,216.75 billion (USD 174.59 billion) at the end of the day. Meanwhile its latest listing – Zhejiang-based in vitro diagnostic products developer Orient Gene Biotech (东方生物, 688298:SH) – blasted off Wednesday, trading at the level of over 200 times earnings.

As a result, the new Nasdaq-like platform is now ‘looking after’ 78 stocks (and there are some more coming shortly; smart manufacturing Ruisong Technology (688090:SH), for instance, reportedly finished the stock allocation on February 5). Among them, there were four that punched the ceiling (+20% price limit) and halted trading on February 6: IT service provider Eazytec (688258:SH), automation equipment maker Beiren Robot System (688218:SH), agri-biotech firm Shen Lian (688098:SH) and UCloud (688158:SH), a cloud business pioneer for which this is the third ‘daily lockdown’ this week.

Filled with a number of enormous ‘value’ stocks, the mainland’s main boards are tending to recover more slowly than their ‘growth’ counterparts after a market shock. Novel coronavirus (2019-nCoV) outbreak-caused, the recent volatility is a prime example of such a scenario: both the Shanghai (000001:SH) and Shenzhen (399106:SZ) composite indices are yet to regain what they had in January. 

While some publications are linking this three-day-long uptrend with the fact that China has decided to trim trade tariffs on some United States goods, the coronavirus narrative seems to be way stronger in affecting global investors’ decisions.

Update: by the midday break on February 7, CSI 300 is down 0.86%, Shanghai Composite is down 0.59%, ChiNext Index is down 0.82%, the Star board total market cap is up 2.27%, UCloud is up 19.16%.

How much for a black swan?

As the number of confirmed cases of infection has reached 30,000, with over 600 fatalities as of February 7, the global community is facing numerous social and ethical challenges.

Economists and investors are wrestling with questions regarding the possible effect of the epidemic on both the Chinese and the global economy. Financial services company Moody’s Analytics estimates that the virus will cut 0.8% off the country’s annual GDP in 2020. According to Dutch firm Rabobank, the impact might be even higher, with up to 2% of China’s total output getting wiped out this year.

In 2018, the central Chinese province of Hubei, the initial location of the outbreak, produced over CNY 3.9 trillion (USD 559.47 billion) of goods and services, or approximately 4.33% of China’s GDP within that period. Last year, the region’s annual output grew by 7.8% – significantly higher than that of the entire economy (6.1%). 

Wuhan is a major transport hub and an emerging technology center. The 11-million-people megapolis plays a key role in a handful of China’s national development strategies. Multiple high-tech enterprises striving to leapfrog over global industry counterparts are located there.

One example is Yangtze Memory Technologies (YMTC), a Tsinghua Unigroup and the ‘Big Fund’-backed memory chip maker, which will presumably be among the pillars of the country’s silicon future. Lavishly invested, it has already launched several projects aimed at building 3D flash memory (3D NAND) – one of the novelties in the sector.

The crisis has been posing countless challenges for the region, and the prolonged quarantine might severely damage YMTC, as well as other highly ambitious businesses in the province.

ANALYST
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