Hong Kong CNN Business  — 

Monday’s market sell-off in China was the worst in many years and wiped nearly half a trillion dollars off the value of the country’s biggest companies. Now the Chinese government has to find ways to stem the panic before the coronavirus epidemic makes things even worse.

Beijing already has a blueprint to work with. When the Chinese stock market bubble popped in 2015, sending shares into an even deeper tailspin, the government stepped in with a rescue plan. Using a state-owned financing company and its sovereign wealth fund, China spent more than 1.2 trillion yuan ($170 billion) buying shares to shore up prices.

This time, the country may have to do the same.

“I think the regulators are closely watching the situation and prepared to take direct action to intervene,” said Mark Huang, an analyst for Bright Smart Securities, a Hong Kong-based brokerage firm.

It’s too early to tell whether China is in for another prolonged markets rout. While the Shanghai Composite plunged nearly 8% Monday, it closed 1.3% higher Tuesday. Shenzhen stocks posted similar gains.

But the impact of the coronavirus is growing every day. The number of cases has now topped 20,000 worldwide, and more than 400 people are dead. Large parts of China are still on lockdown, while airlines have canceled flights to and from the country, and companies with ties to China are having to weigh the likely hit to sales and their supply chains.

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.

Fearing an economic crisis, the government fired its big guns. That July, China’s Securities Finance Corporation (CSF) announced it would lend billions to big Chinese brokerage firms so they could buy stocks. In the meantime, Central Huijin Investment, an arm of China’s sovereign wealth fund, also piled into stocks.

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.

Medical workers spray antiseptic outside the Shanghai Stock Exchange on February 3, 2020.

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.

In some ways, the government’s response already appears to be echoing 2015. State media reported this week that the securities regulator introduced a partial ban on short selling — when traders borrow shares to sell in the hope of buying them back at a lower price — to mitigate the slide in the markets. Back then, the country blamed short sales for exacerbating the crash.

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.”

The number of deaths from the coronavirus in mainland China has already overtaken the 2003 SARS epidemic, while the number of confirmed cases continues to grow. Some economists have also cautioned that the impact on China’s economy could be severe — a troubling prospect for an already fragile economy, and for global growth.

“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.