A big intervention

The last time Chinese stocks performed this poorly, the country was in the middle of a massive market meltdown. In 2015, inflated share prices eventually gave way to a big crash, while the wider Chinese economy was slowing down. In Shanghai, stocks lost a third of their value in a matter of weeks.

Those moves were widely considered China’s first steps toward creating a stock market intervention fund that it could deploy to keep markets stable when necessary. Chinese authorities were open about their plans, too, telling the public via editorials in state media not to panic and to have faith in the government.

The market recovery took several months. And even though the Shanghai market has yet to return to the levels it reached before the crash, the worst was over by February 2016.

Since then, the CSF and Central Huijin Investment have become better known as the driving force behind China’s “national teams” — a nickname given to the investment managers that can be deployed to buy up stocks when necessary to keep the markets steady.

The “national teams” could come back

Now that the coronavirus is taking a toll on markets, the “national teams” could be ready for a comeback.

The government has already made clear that state intervention is on the table. The central bank on Monday said it would inject billions of dollars into the financial system by buying short term bonds to help keep bank lending flowing.

And the China Securities Regulatory Commission, which oversees the country’s markets, said it would “keep fully alert” and “study and launch hedging tools” to stop people from panicking, as necessary.

Jeffrey Halley, senior market analyst for Asia Pacific at Oanda, said he expected China to deploy its “national teams” when necessary. But he also suggested the government will likely wait until the coronavirus scare reaches a peak before making any more big moves.

China “is probably waiting to see how things develop before shooting more bullets,” Halley said, “but I have no doubt they have plenty.”

The worst may not be over

It’s not yet clear, though, when the coronavirus outbreak will peak — and what kind of effect the continued spread of the virus could have on markets.

Monday’s losses, while huge, were China’s way of catching up to what overseas markets were already doing, according to Iris Pang, Greater China economist at ING. Chinese markets were closed for more than a week for a holiday while the number of confirmed coronavirus cases mounted, while other markets were able to price in the impact.

Pang said that while the “immediate, very short-term” selling is over, the outlook for markets is going to depend on when the outbreak reaches its peak.

That will depend on “the speed of new confirmed cases, mortality rate and community infection cases,” she added. “It is more than a [quarterly] event.”

“If the Coronavirus headcount doesn’t start to improve and the Chinese economy deteriorates more than expected, it means there will be more legs in the selloff run,” wrote Stephen Innes, chief market strategist at AxiCorp, in a recent research note.