Markets experienced a mixed week, marked by a long awaited reduction in reserve ratio requirements. Stocks declined on Monday following disappointing construction data and the resignation of the President of China Minsheng Banking Corp. The Shanghai Composite Index rebounded on Tuesday following speculation about further monetary easing.
Stocks advanced for a second consecutive day on Wednesday after gains from commodity stocks outweighed soft services data. The Shanghai Composite Index declined today despite a long expected cut in reserve ratio requirements.
CNOOC Ltd. (CEO) said it will cut capital expenditure for 2015 to 70 billion-80 billion yuan ($11.19 billion-$12.79 billion). Alibaba Group Holding Limited (BABA) reported third-quarter fiscal 2015 (ended Dec 31, 2014) earnings of 55 cents per share, which missed the Zacks Consensus Estimate of 62 cents
Last Week’s Developments
Last Friday, the Shanghai Composite Index declined for a fourth consecutive day, losing 1.6%. Concerns that regulatory action on margin loans and a slump in economic growth would lead to an end to the market’s rally led to losses for stocks. Insurance companies took losses following increased regulatory scrutiny on margin lending. The CSI 300 lost 1.4% while the Hang Seng declined 0.4%. The Hang Seng China Enterprises Index slipped 0.1%, bringing monthly losses for January to 1.9%.
The benchmark index lost 4.2% over last week. This is the steepest decline experienced since Dec 2013. The Shanghai Composite ran out of steam in January after rallying 37% in the fourth quarter following action on margin loans. New account openings have fallen 44% while turnover has slumped 64% after touching a high in December last year.
During January, the Shanghai Composite declined 0.8% while the CSI 300 slumped 2.8%. This is the CSI 300’s worst performance over a month since Feb 2014. In contrast, the ChiNext Index of small caps surged 14%. Government action on margin lending has helped small caps since it has resulted in investors opting for tech and drug stocks. A sub-index of financial stocks within the CSI 300 lost 1.1% on Friday. The sub-index lost 7.7% during January, the most among the 10 industry groups.
Markets and the Economy This Week
Stocks declined on Monday following disappointing construction data and the resignation of Mao Xiaofeng, President of China Minsheng Banking Corp. The bank lost 3.2% following a report in Caixin magazine according to which the government was investigating Mao. Shares of Aluminum Corp. of China Ltd. slumped 7.1% after the company said it may have suffered a net loss of 16.3 billion yuan in 2014.
Industrial stocks declined after the official manufacturing PMI slipped from 50.1 in December to 49.8 in January. The benchmark index declined 2.6% and had lost 7.5% over five days at that point. The CSI 300 moved down 2.3%. The Hang Seng slipped 0.1% while the H-share index lost 1.2%. Sub-indexes of utility, financial and industrial stocks lost a minimum of 3.1%.
The Shanghai Composite Index rebounded on Tuesday, gaining 2.5%. Financial and energy stocks rallied following speculation of further monetary easing. The small-cap ChiNext index moved up 3.2% while the CSI 300 added 2.5%. The Hang Seng increased 0.3% while the Hang Seng China Enterprises Index advanced 1.6%.
Market watchers took the view that further monetary stimulus was likely after Monday’s manufacturing data indicated a slowdown. Analysts said speculation about a reduction in the reserve-requirement ratio was increasing. This was moving stocks northward despite any concrete indications. A sub-index of financial stocks within the CSI 300 moved up 3.4%, the most among the industry groups.
Stocks advanced for a second consecutive day on Wednesday. Gains made by commodity stocks outweighed soft services data. HSBC Services PMI declined from 53.4 in December to 51.8 in January. This was the slowest pace of expansion in six months. Analysts opined that this report was further indications of a slowdown. They said investors were expecting further monetary stimulus before the Chinese New Year day.
The Shanghai Composite Index increased 0.2% while the CSI 300 added 0.3%. Meanwhile, both the Hang Seng and the H-share index gained 0.9%. Despite optimism over a possible rate cut, some market watchers said a weak yuan may prevent the central bank from introducing further monetary stimulus soon. Meanwhile, the beginning of options trading next week is expected to spark demand for large caps.
The Shanghai Composite Index declined 1.2% today despite a long expected cut in reserve ratio requirements. The People’s Bank of China announced that it was reducing the reserve ratio by 50 basis points. However, the move failed to assuage investors who are concerned over an intensifying economic slowdown.
Analysts said that the central bank’s move followed a series of weak economic reports. This indicated that other measures needed to be taken by the government to boost the economy. The CSI 300 lost 1%. In contrast, the Hang Seng advanced 0.3% while the Hang Seng China Enterprises Index added 0.1%. A sub-index of financial stocks within the CSI 300 declined 0.4%. Meanwhile, sub-indexes of utility, material, energy and industrial stocks lost a minimum of 2.1%.
Stocks in the News
CNOOC Ltd. said it will cut capital expenditure for 2015 to 70 billion-80 billion yuan ($11.19 billion-$12.79 billion). This amounts to a reduction of 26-35%. Most estimates were for a spending cut of around 8%. Capital spending in 2014 amounted to $17.3 billion in 2014. This is the largest spending reduction that CNOOC has ever made.
This was the first public reaction to the continual plunge in oil prices by a Chinese oil major. Most of the reductions will focus on development spending, which will be cut 67%. Expenditure on production and exploration will be reduced by 10% and 21%, respectively.
However, the Chinese oil major also stressed that it would simultaneously attempt to increase production. CNOOC is targeting oil and gas production of 475m-495m barrels of oil equivalent (BOE). This is nearly 15% higher than the 432m BOE produced in 2014.
Alibaba Group Holding Ltd. reported third-quarter fiscal 2015 (ended Dec 31, 2014) earnings of 55 cents per share, which missed the Zacks Consensus Estimate of 62 cents due to increased investments in mobile, marketing and other new ventures. The adjusted earnings per share exclude one-time items but include stock-based compensation expense.
Alibaba Group reported revenues of RMB26.2 billion (US$4.219 billion), surging 55.6% sequentially and 39.7% from the year-ago period. Revenues also beat the Zacks Consensus Estimate of $4.436 billion. The increase was mainly driven by growth in China commerce and retail business.
Reported gross margin was 71.3%, down 640 basis points (bps) from the year-ago quarter. Adjusted EBITDA was RMB15.1 billion, up 34% from the year-ago quarter.
JA Solar Holdings Co., Ltd. (JASO) declared that supplying its solar products in New Zealand, Fiji and Papua New Guinea in 2014 has been a major development in the South-Pacific market.
Most of the projects in these regions are first of their kind and reflect JA Solar’s focus on strengthening its global footprint. The Auckland Shopping Centre Project in New Zealand is currently the largest solar installation in New Zealand with a capacity of 350 kilowatts (“KW”). Cook Islands’ Raratonga Airport Project is one of the first solar power stations on the island and will help the airport to lower its diesel consumption by 400,000 liters annually. It has a capacity of 1 megawatt (“MW”).
Moreover, the 1.96-MW Tuvalu Islands Project is the first local off-grid clean energy system to be developed by the New Zealand government. Other project includes Papua New Guinea’s 128-KW Centre Tower Project and 550-KW Fiji Radisson Hotel Project.
Trina Solar Limited (TSL) will supply modules to renewable energy company Gestamp Solar for a plant which will be set up in Marcovia, located in the Republic of Honduras. Trina will provide in excess of 160,000 of utility grade high efficiency modules for the 42.5MW PV plant.
The project has been named Marcovia Solar and will be spread over 180 hectares upon completion. In order to maximize efficiency, the plant will have 300 solar trackers. The plant is expected to become operational by 2Q15 and will generate 93 GW/h per year. This is enough energy for 45,000 homes and 135,000 people and will result in CO2 savings of 43,000 tons.
China Mobile Ltd. (CHL) and Huwaei have completed uplink carrier aggregation (CA) testing and validation on the commercial network of Jiangsu Mobile. The companies have said that this is the world’s first such trial and has shown a 180% increase in the uplink rate.
Huwaei said that this validation has demonstrated uplink CA’s performance over a live network. Commercialization of such technology is now a step closer, Huwaei added. According to a statement released by Huwaei: “Uplink CA is a key LTE-Advanced technology and can dramatically increase uplink data rate. Practical applications include but not limited to pictures and video sharing by individual users, as well as video surveillance, telemedicine, and shoot-and-transmit for enterprise users.”
China Unicom (Hong Kong) Ltd.’s (CHU) unit Guangdong Unicom and Huwaei have commercially launched the Atom Router. The first of its kind, the router was launched at the Mobile World Congress held in Barcelona, Spain. The router is the size of a finger and is thought to be the smallest in the world.
Using this new router will enable Guangdong Unicom to create bearer networks which can provide ‘optimal user experience.’ Huwaei has said that the Atom Router supports seamless OAM capability expansion and enables access to 3G or 4G mobile bearer networks.
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 |
-12.7% |
-15.2% |
|
SFUN |
-4.1% |
-42.1% |
|
JD |
+8.4% |
-3.9% |
|
VIPS |
+2% |
+12.4% |
|
TSL |
+19.7% |
-6.2% |
|
YOKU |
+5.6% |
-6% |
|
BIDU |
-6.9% |
-0.8% |
|
EJ |
+10.9% |
-33.8% |
|
YGE |
+5.3% |
-36.7% |
|
JKS |
+21.2% |
-14.4% |
Next Week’s Outlook:
Markets experienced a mixed week, with gains coming from speculation over possible monetary easing. However, stocks declined when the reserve ratio requirement was ultimately reduced. This has caused analysts to opine that the move was aimed at reducing outflow of capital and reduce the reduction in forex reserves. This was not the kind of aggressive stimulus the market would have responded to.
Ultimately, investors remained concerned about the slew of weak economic reports released recently. This indicates that other measures need to be taken to shore up the economy. Profit taking also occurred following indications that the slowdown was intensifying. There is also little hope for further stimulus measures in the near future since the ratio reduction had come ahead of the Lunar New Year.
This means that economic data has again taken center stage. Inflation numbers for January, to be released on Feb 10, acquires particular significance. Data on trade balance and new yuan loans will also be released over the next few days. Any positive indications on this front will provide stocks with a much needed boost in the days ahead.
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