A Chinese man getting off a train as he and others return from the Spring Festival holiday on January 31 2020 in Beijing, China. Picture: GETTY IMAGES/KEVIN FRAYER
A Chinese man getting off a train as he and others return from the Spring Festival holiday on January 31 2020 in Beijing, China. Picture: GETTY IMAGES/KEVIN FRAYER

It seems inconceivable that the coronavirus outbreak, which has killed more than 600 people and shut down two-thirds of China’s economy, could be bullish for stocks. Yet Shenzhen’s private sector-heavy ChiNext index not only brushed away a selloff earlier this week, but also hit a three-year high on Thursday.

The most obvious explanation? This epidemic is giving policymakers the opportunity to correct past mistakes without looking silly. Recall 2018, when China staged one of the world’s worst routs. The selloff began well before the trade war as investors braced for record corporate defaults, even in the new-economy, electronics-manufacturing and technology sectors.

Later in the year, stocks slid further as companies struggled to meet their margin calls. More than 20% of listed companies had pledged roughly a third or more of their shares to meet financing needs.

This all happened because in late 2017, China declared war on shadow banking, the main channel of credit for private businesses. The following April, Beijing unveiled far-reaching rules for its banks, requiring them to stick to traditional loan books and ditch creative wealth-management products that had aided the cash-starved private sector in the past.

Last year, murmurs were growing louder that Beijing’s war on shadow banking can’t last. After all, China Inc was suffering from two years of record defaults, pinched both by an unanticipated trade war and new, draconian credit policies. But thus far, Beijing’s top policymakers have resisted bankers’ intensive lobbying efforts.

Losing face

Lenders already have a grace period until the end of this year to comply fully; another extension would be a tacit admission that the new rules were ill-designed in the first place and the experiment is a failure. The one thing China’s bureaucrats dislike most is losing face.

The coronavirus has changed the narrative. Last weekend, regulators said that they would agree to another extension for banks struggling to meet the new rules. Caixin, a Chinese media outlet, recently reported that the grace period could be pushed back by one more year to 2021.

Over the past week, various arms of China’s sprawling bureaucracy have come out to stabilise its financial markets, with the People’s Bank of China (PBOC) on Monday making the biggest single-day cash injection since 2004. Of all the new policies that sprang up, however, a complete halt to the war on shadow banking would be the most helpful.

Private businesses never had much access to traditional bank loans anyhow, so the PBOC cutting the loan prime rate — interest rates that banks offer to their best corporate clients — won’t do the trick. Meanwhile, in the past two years, plenty of good companies have gone bad because they couldn’t refinance their working capital needs. This also explains why, this week, Shenzhen’s ChiNext index has outperformed the blue-chip Shanghai composite index, which is filled with state-owned enterprises.

By nature, we Chinese are an optimistic and forgiving bunch. Rather than lamenting how an initial health cover-up in the incompetent Wuhan government caused a nationwide crisis, investors are looking at the glass as half-full. At long last, Beijing can toss away its misguided war on shadow banking and design a smarter one that gives the private sector some room to breathe.

• Ren is a Bloomberg Opinion columnist covering Asian markets.


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