• Investors are pricing a slowdown in first quarter earnings amid disruption to manufacturing and supply chains
  • All eyes on the Politburo after it advocated widening fiscal deficit and selling special sovereign bonds to fund stimulus
Pedestrians wearing protective masks ride an escalator near an overpass with an electronic board showing stock information at Lujiazui financial district in Shanghai. Photo: Reuters

Chinese stocks fell as investors turned skittish on the economic outlook and a slump in corporate earnings, even as Beijing unveiled a slew of measures to blunt the fallout from the coronavirus pandemic.

The Shanghai Composite Index declined 0.9 per cent at the close of trading on Monday, the most in a week, after earlier sliding as much as 1.8 per cent. The ChiNext gauge of smaller companies slumped 2.3 per cent.

The loss reflects the jitters among stock traders even as top policymakers said China will widen its fiscal deficit and sell special bonds to help fund its stimulus programmes and the People's Bank of China cut a gauge of borrowing costs in the money market.

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The stimulus may do little to revive growth, according to Chen Hao, a strategist at KGI Securities in Shanghai. While China has signalled the health crisis is abating by allowing more manufacturers to resume production, it is too deeply linked to a breakdown in the global manufacturing chain.

"That is not helpful to mend the damaged global supply chain and restore foreign trade" as other countries are still facing an elevated crisis, Chen added. "There's also a lack of figures in the plans, without which it would be hard to quantify its impact."

Investors are now starting to price in the slowdown in corporate earnings and the impact of the disruption to global supply chains on listed companies' production and overseas orders, said Wang Chen, a Shanghai-based partner at Xufunds Investment Management.

"How bad the first-quarter earnings will be remains a hangover that is haunting investors," Wang said. "Therefore, the earnings estimates have to be revised down. The damage to the global supply chain is huge and we'll inevitably see lots of Chinese companies being affected. They will suffer from either short supply of imported raw materials or a sharp decrease in overseas orders."

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So far, China's response to the historic economic slump has not been as drastic as the steps by the US Federal Reserve, for example, which cut its key rates to near zero and unveiled unlimited bond purchases.

"The market is disappointed and think of these policies as not being enough," said Chen Li, chief economist at Soochow Securities in Shanghai. "There is confusion among investors of what the policy target is for the year."

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The People's Bank of China cut the interest rate on the reverse purchase agreements by 20 basis points on Monday to inject more liquidity in the system, which Chen said was smaller than 30 expected by the market.

All eyes are on the Politburo, after the Communist Party's highest decision-making body said on Friday that China will increase its budget deficit and sell special government bonds for a third time in history, without giving specific numbers.

Citic Securities said China's deficit would probably rise to 3.5 per cent of the size of the economy. Haitong Securities predicts the actual budget deficit will widen by 3 trillion yuan (US$423.1 billion)this year.

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