(Bloomberg) —

One of the only shelters from the volatility convulsing global equities is looking increasingly vulnerable.

China’s stock market has largely resisted the vertiginous moves that have whipsawed shares from New York to Milan, partly due to a series of preemptive measures from the central bank that flooded the market with liquidity. The country is home to the only stock market among the world’s 20 largest that’s yet to slip into bear territory.

But on Monday, a 3.4% drop in the Shanghai Composite Index pushed a measure of 50-day swings to an almost four year high, while a widely-watched technical indicator signaled bearish momentum was taking over. FTSE China A50 Index futures were 2.7% lower in early Tuesday trading, after stocks on Wall Street had their worst day since 1987.

Investors in China have for weeks bought stocks with the belief that stimulus measures from Beijing would be enough to support the country’s markets and economy. That theory is being undermined by China’s reliance on trade with the rest of the world, as economies in Europe and the U.S. look increasingly vulnerable to the virus outbreak. The global economy could now be heading toward its first recession in just over a decade.

“If the virus sets off a chain reaction of economies around the globe entering recession, China will feel the blow from shrinking demand,” said Ge Shoujing, a senior analyst at the Reality Institute of Advanced Finance in Beijing. “A further slump in assets around the world will surely be a drag.”

Measures deployed by Chinese authorities since early February had initially helped stabilize the country’s markets. A sense of patriotism and a slowing pace of new cases in China had helped push the CSI 300 Index to a two-year high as recently as March 5. But with the coronavirus outbreak spreading across continents, China has less control should global growth be derailed.

On Monday, China’s central bank unleashed $93 billion into the financial system by offering medium-term loans to banks and cutting the amount of cash lenders must hold in reserve. Still, its decision to keep interest rates on the loans unchanged disappointed investors, as it signaled the People’s Bank of China won’t be lowering borrowing costs as aggressively as others, such as the U.S. Federal Reserve.

The loan prime rate, which underpins the majority of new household and corporate loans in China, may offer a clue on borrowing costs. The next 1-year and 5-year rates will be set on Friday, with analysts predicting costs will be lowered for both tenors.

Monday’s 4.3% loss in the CSI 300 Index means the gauge is only about 1 percentage point away from erasing the rebound since markets reopened to crisis on Feb. 3. It still fell less than other stock markets in the region, with benchmarks in Australia, Thailand and the Philippines all losing more than 6%. Taiwan’s Taiex slipped into a bear market on Monday.

But with some 160 million retail trading accounts still driving the majority of equity turnover in China, a sudden shift in sentiment could have dramatic consequences. One-way momentum trades have in the recent past created massive bubbles — like in 2015 — or triggered brutal sell-offs like the record $2.3 trillion that was wiped out in 2018.

“The outlook for China stocks rests on the decisions of other nations to control the virus,” said Tom Wang, portfolio manager at Shenzhen Qianhai You Cap Management. “It’s unlikely that A shares can get through this in one piece alone if things deteriorate overseas.”

(Updates with latest market move in third paragraph)

To contact Bloomberg News staff for this story: April Ma in Beijing at ama112@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, David Watkins

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