Markets experienced another volatile week, plunging on Monday before gaining on all subsequent days. China’s stock market experienced its sharpest decline since Jun 2008 on Monday. The Shanghai Composite Index rebounded on Tuesday following better than expected GDP data.
Stocks gained again on Wednesday following speculation that Monday’s losses were excessive since additional monetary easing was likely going forward. The Shanghai Composite Index moved up today following encouraging comments on the economy by Premier Li Keqiang.
Baidu Inc.’s (BIDU) independently operated subsidiary, iQIYI, entered into a strategic alliance with chipmaker Intel Corp. (INTC) in a bid to ramp up its online video platform. Meanwhile, China Mobile Ltd. (CHL) has expanded its 4G subscriber base beyond the 90-million mark in 2014.
Last Week’s Developments
Last Friday, the Shanghai Composite Index gained following speculation that the government will take further measures to stimulate growth. The benchmark index increased 1.2% as tech shares surged following indications from the State Council that it would create a fund to support new industries.
The CSI 300 moved up 0.9% while the tech-heavy index added 3.4%. In contrast, the Hang Seng and the Hang Seng China Enterprises Index lost 1% and 0.9%, respectively.
The Shanghai Composite Index gained 2.8% over the week, marking its 10th successive weekly increase. This is its longest series of gains since May 2007. A rise in credit growth and speculation about a possible cut in reserve requirement ratios led to the gains.
A sub-index of financial stocks added 3.1% over last week. Additionally, a sub-index of tech companies advanced 3.7% on Friday. This resulted in an 8.5% increase for the gauge over the week, the highest among the index’s 10 industry groups.
Markets and the Economy This Week
China’s stock market experienced its sharpest decline since Jun 2008 on Monday. Fears arose that speculative traders would withdraw from the market following the country’s securities regulator’s crackdown on 3 major brokerage firms: Citic Securities Co., Haitong Securities Co. and a unit of Guotai Junan International Holdings Ltd.
These companies are being held accountable for extending “margin trading” contracts, which is when money is being loaned specifically for stock purchases. As punishment, the firms are forbidden to offer credit to new customers for 3 months.
The benchmark index plunged, losing 7.7%. Nine stocks declined for every one that gained on the Shanghai Composite Index. The CSI 300 index lost 9.6%, the steepest fall since Jul 2007. A sub-index of financial stocks within the CSI 300 moved down 7.7%. The Hang Seng declined 1.5% while the H-share index lost 5%.
The Shanghai Composite Index rebounded, increasing1.8% on Tuesday. Industrial and consumer stocks moved up following better than expected GDP figures. China’s economy registered growth of 7.4% in 2014. Growth is only slightly short of its official target of 7.5%.
Also, fourth quarter growth is flat at 7.3% compared to the year-ago period and a shade better than estimated. Retail sales and industrial production also exceeded predictions to increase by 11.9% and 7.9%, respectively.
The CSI 300 advanced 1.2% while the ChiNext added 4.3% to touch a record level. A sub-index of industrial stocks within the Shanghai Composite increased 3.2%, emerging as the highest gainer for the five groups. Financials were the only losers for the CSI 300, following losses for brokerages.
Stocks completed their strongest two day rally in nearly six years, moving upward on Wednesday. Speculations that Monday’s losses were excessive since additional monetary easing was likely going forward led to these gains. The Shanghai Composite Index jumped 4.7% as developers rallied and IPOs advanced on their first trading day.
Analysts took the view that new investors were looking to take advantage of Monday’s plunge. They also opined that the market had overreacted to the regulator’s crackdown on margin traders.
The CSI 300 gained 4.5% with a sub-index of financial stocks moving up 6.5%. The Hang Seng increased 1.7% while the Hang Seng China Enterprises Index added 2.4%.
The Shanghai Composite Index increased 0.6% today, gaining for the third successive day. Premier Li Keqiang stated that the government will see to it that an “appropriate” rate of growth is maintained, boosting investor sentiment. Speaking at the World Economic Forum in Davos, Premier Li said despite pressures, the economy would not face systemic risks.
Additionally, the People’s Bank of China took steps to increase liquidity ahead of the Lunar New Year holiday. The central bank utilized seven-day reverse repos to add 50 billion yuan to the system.
The CSI 300 added 0.5%. A sub-index of materials stocks within the index gained 2.2%, emerging as the largest gainer among the 10 industry groups. The Hang Seng advanced 0.7% while the Hang Seng China Enterprises Index added 0.2%.
Stocks in the News
Baidu Inc.’s independently operated subsidiary, iQIYI, recently entered into a strategic alliance with chipmaker Intel Corp. in a bid to ramp up its online video platform.
iQiyi is an online video content provider, in which Baidu owns over 16% share. iQiyi was launched in 2010 with investments from both Baidu and Providence Equity Partners.
Per the collaboration, the companies will work toward enhancing iQIYI's video storage, trans-coding distribution, cloud computing and big data analysis.
China Mobile has expanded its 4G subscriber base beyond the 90-million mark in 2014. The company gained around 19 million 4G subscribers in Dec 2014. This is significantly higher than the total number of 4G additions for China Unicom (Hong Kong) Ltd. (CHU) and China Telecom Corp. Ltd. (CHA), which stands at around 3.2 million.
The world’s largest carrier (in terms of subscribers) experienced its highest monthly 4G additions to date in Dec 2014. This was primarily because of a new strategy to concentrate only on showcasing its 4G network. China Mobile has reportedly decided on slowly phasing out its 3G network. This is because of low demand for such services as well as the remarkable success of its 4G network.
China Mobile has a TD-SCDMA 3G network, which is more compatible with the TD-LTE 4G standard. The government had awarded licenses for this standard in Dec 2013. This has helped China Mobile increase its number of 4G subscribers from 1.3 million to 90 million from Feb 2014 to Dec 2014.
China Telecom, the third-largest telecom carrier of China, is mulling over a possible investment opportunity in Mexico, according to Reuters.
The company is looking to invest in the upcoming state-owned mobile network project in Mexico which is valued at an astounding $10 billion. Although China Telecom refused a direct comment on the matter, it did state that management is looking for a suitable investment opportunity in Mexico.
Last year, the Mexican government had reformed its telecommunications sector to curb the monopolistic power enjoyed by the incumbent America Movil SAB (AMX).
Alibaba Group Holding Ltd. (BABA) is looking to purchase a stake in government-operated company New China Life Insurance Co Ltd. This was revealed by Shanghai Securities News on Wednesday. According to the newspaper, government investment company Central Huijin Investment Ltd will sell part of its stake to Alibaba. Details regarding the size of the deal remain undisclosed.
According to the newspaper, Central Huijin presently holds 31.34% of New China Life Insurance. The insurance company requested a trading suspension on Jan 19 because ongoing negotiations would alter its shareholding structure. Both companies have declined to comment on the issue.
Renren Inc. (RENN) has made a $40 million investment in Motif Investing, a stock trading website based in California. The social networking company’s investment will help Motif Investing with its plans to expand its business internationally. Additionally, Renren founder Joe Chen will join the board of directors of Motif Investing.
This latest deal is part of a series of investments made by the company in financial tech start-ups. Chen believes that this could become a future business model for his company. Additionally, Renren’s founder believes that it is becoming difficult to generate revenue from advertising because of the shift to mobile devices. This is why the company was exploring new streams of revenue.
Qihoo 360 Technology Co. Ltd. (QIHU) has been ordered to pay Sohu.com Inc.’s (SOHU) subsidiary, Sogou, 51 million yuan ($8.2 million) by a Beijing court. In 2013, the search engine had filed a lawsuit against Qihoo, accusing its security software Qihoo Defender of preventing users from installing Sogou’s Internet browser.
The court said that the behavior of Qihoo represented a case of unfair competition. Additionally, the court said Internet companies with products in multiple industry segments should avoid using their dominance in one segment to force users from using products in other segments.
Performance of Most Actively Traded US-listed Chinese Stocks
The table given below shows the price movements of 10 Chinese companies with the highest three-month average trading volume on U.S. exchanges. Price movements over the last five days and during the last six months have been included.
|
Ticker |
Last 5 Day’s Performance |
6-Month Performance |
|
BABA |
+0.2% |
+10% |
|
SFUN |
-12.9% |
-34.2% |
|
JD |
-1.8% |
-14.2% |
|
VIPS |
-2.3% |
+10.8% |
|
BIDU |
+0.6% |
+15.5% |
|
CTRP |
+4.4% |
-19.9% |
|
YOKU |
+4.9% |
-14.2% |
|
TSL |
-4.2% |
-25.3% |
|
QIHU |
-1.3% |
-37% |
|
NQ |
-11.2% |
-27.1% |
Next Week’s Outlook:
Stocks experienced a particularly volatile week, tanking on Monday following regulatory action on margin trading. The Shanghai Composite gained 7.3% over the next three days following assurances from the securities regulator that it was not trying to place curbs on equity trading by imposing regulations. Additionally, economic indicators have exceeded estimates. Premier Li has also made encouraging comments about the economy.
Market watchers have been divided on the fortunes of the market going forward. Some believe that stocks are still attractively priced while others believe that the rally is losing steam. However, opinions converge when it comes to prospects of stimulus. While some believe that further monetary easing is forthcoming, others think more targeted measures can be expected.
Next week is devoid of any major economic reports. In their absence, it is likely that the markets will look to further indications of stimulus measures for guidance. Any such signals are likely to boost stocks in the days ahead.
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