China’s central bank has pledged to pump 1.2tn yuan (£130bn) into its financial system in an attempt to protect its economy from the coronavirus epidemic.
The People’s Bank of China (PBoC) announced it would launch the operation on Monday, to ensure a stable currency and “reasonable and abundant liquidity” in the banking system.
Under this “reverse repo” scheme, PBoC will purchase a range of securities from investors seeking ready cash, to avoid a wave of forced selling as investors return to work from the lunar new year break, which was extended after the coronavirus outbreak.
According to Reuters’ data, just over 1tn yuan of existing reverse repo contracts expire on Monday – the PBoC’s move will allow these to be rolled over, plus an extra 150bn yuan (£16bn) of fresh support.
Over the weekend, the PBoC also announced more monetary and credit support for hospitals and medical institutions at the frontline of the battle against the Wuhan coronavirus. It urged financial institutions to provide “sufficient credit resources” to hospitals and medical research units.
Economists believe the virus will hurt the global economy in 2020. Goldman Sachs predicts it could knock Chinese growth down to 5.5% for the year, from 6.1% in 2019.
Turbulence is expected on the Shanghai and Shenzhen stock exchanges when they reopen on Monday. They have been shut for the holidays since 23 January, when the coronavirus crisis was intensifying.
Other markets have already suffered heavy losses, with Hong Kong’s Hang Seng index losing 6% last week when it reopened after the new year break. Britain’s FTSE 100 dropped by 4% during the week, hitting a seven-week low.
Stephen Innes, chief market strategist at AxiCorp, said the PBoC’s liquidity injection went “well beyond a Band-Aid fix”. But Chinese investors could still “hit the panic button out of the gates”, he feared, given the scale of the crisis – and China’s major role in the global economy.
“The markets continue to view the Wuhan virus through the lens of the Sars epidemic of 2002-03. Still, given the importance of China in the global supply chain in 2020 versus 2003, the risk might be that the market is not alarmist enough,” Innes added.
According to trading firm IG, Hong Kong is on track to fall a further 1% on Monday, while the FTSE 100 was down 0.5% in futures trading.
On Friday, the US announced an entry ban on foreign nationals who have visited China in the past two weeks, as countries around the globe evacuate their citizens from Wuhan, where the epidemic began.
The death toll from the coronavirus passed 300 people on Sunday, with the first fatality outside China recorded in the Philippines.