(Yicai Global) Feb. 4 -- Chinese stock markets plummeted across the board on the first trading day after the Spring Festival holiday, but this correction will help release pent-up risks, and the market is set to bounce back after the novel coronavirus-caused pneumonia outbreak relents, economists say.

Yesterday's plunge was actually normal, Wang Han, chief economist with China Industrial Securities International Group, told Yicai Global, saying the drop is not that alarming since the central bank has acted to ensure sufficient market liquidity and the risks of pledging of stock rights and securities margin trading are under control.

The central bank has sufficient tools to stabilize the market, such as lowering the interest rate for reverse repurchases, boosting the supply of funds on the currency market and increasing market liquidity, Lu Zhengwei, chief economist at Industrial Bank, said to Yicai Global, adding the People's Bank of China is also likely to cut the reserve requirement ratio and interest rates in future, if necessary.

"The spread of this pestilence is still fraught with uncertainty, but historical global experience tells us financial markets have largely been able to recover from a drop and even rise after epidemics end," Wang stated.

PBOC conducted CNY1.2 trillion (USD173.4 billion) in reverse repos on the open market yesterday to guarantee liquidity during the period of epidemic prevention and control, raising it in the banking system by CNY900 billion (USD130 billion) from the same period last year, the central bank said.

The stock market had expected the big drop yesterday because Singapore's A50 Index Futures and the Hang Seng Index, which tracks the Hong Kong Stock Exchange (these two indexes are directly connected with the Chinese mainland stock market), fell over 5 percent during the holiday, Wang noted.

"Financial markets will have no systemic risk as long as liquidity is upheld," he said, adding over-the-counter leveraged fund activities on the stock market have been under strict control over the past five years, and risks from leveraging on the stock market mainly derive from stock pledges and securities margin trading, but the scale of such activities is under rein.

The current balance of stock exchange pledge financing is only CNY880 billion (USD126 billion), more than 45 percent lower than the peak value and the balance of securities margin trading on the entire market is about CNY1.05 trillion, taking up only 2.13 percent of the value of domestically-traded A shares, public data show. Potential risks of these businesses are generally controllable, the China Securities Regulatory Commission said on Feb. 2.

Oversea funds flowing into the Chinese mainland stock market via the Shanghai-Hong Kong and Shenzhen-Hong Kong stock connects totaled nearly CNY20 billion yesterday, despite the sharp decline in stock prices, Lu told Yicai Global. "Overseas investors are more reasonable, and this factor is deserving of the attention of domestic funds," Lu continued.

The Shanghai Stock Exchange Composite Index dropped 7.85 percent to 2,743.01 points, the Shenzhen Stock Exchange Composite Index fell 8.45 percent to 9,778.96 points, and the growth enterprise index declined 6.85 percent to 1,795.77 points at yesterday's close.

Editors: Tang Shihua, Ben Armour