China Stock Roundup: China Unicom, Telefonica Set up JV, Alibaba Invests $1.25B in Food Delivery Service
Markets suffered a dismal week, marked by two halts in trading after the circuit breaker mechanism came into effect. Stocks began the year on a low note after trading was stopped during the afternoon session on Monday. The Shanghai Composite Index declined again on Tuesday as trading remained volatile.
The benchmark index posted its largest increase since Dec 14 on Wednesday after the government took steps to stem the rout. Trading was stopped within less than half an hour on Thursday after the CSI 300 dropped 7%.
China Unicom (Hong Kong) Ltd. CHU and Telefonica TEF have set up a joint venture which has been named as Smart Steps Digital Technology Company Limited. Alibaba Group Holding Ltd. BABA has agreed to invest $1.25 billion in Chinese online food delivery service, Ele.me, according to a report from Caixin Media.
Last Week’s Developments
Last Thursday, the Shanghai Composite Index lost 0.9% as trading volumes remained low ahead of the New Year. Markets also refrained from making big bets ahead of manufacturing data to be released on Friday. The Hang Seng increased 0.2%, cutting annual losses to 7.2%.
The benchmark index closed the year 9.4% higher, emerging as one of the top performers among global indices. This was its second consecutive annual increase, primarily due to a slew of government measures implemented following market losses of $5 trillion. The Hang Seng China Enterprises Index slumped 19% over the year following concerns over a weakening economy.
Efforts by the government to transform the economy into one dependent on consumer spending ensured that tech stocks were the leading gainers for the year. A sub-index of health care stocks garnered the second highest gains on the CSI 300.
Markets and the Economy This Week
Stocks began the year on a low note after trading was stopped during the afternoon session on Monday. The CSI 300 slumped 7%, triggering the new circuit breaker mechanism for the second time in the day. Earlier, a 5% decline in the index had led to a halt in trading which could not prevent the decline. The Shanghai Composite Index nosedived, losing 6.9%
The smaller Shenzhen Composite plunged 8.2% while the Hang Seng China Enterprises Index declined 3.6%. At one point, the H-share index had lost nearly 4.4%. The reason for the day’s plunge in stocks was weak private manufacturing data. The Caixin manufacturing PMI declined to 48.2 in December from 48.6 in November. The index has fallen below 50 for the 10th straight month.
The Shanghai Composite Index declined again on Tuesday, losing 0.3%. However, the CSI 300 gained 0.3% after declining 2.7% and moving up 1.4% at different points in the day. Trading remained volatile even as reports emerged that funds supported by the government stepped in after Monday’s rout which erased $590 billion in terms of market value.
Additionally, the China Securities Regulatory Commission (CSRC) indicated that a ban on sales for major investors will continue beyond the expiry data set for this week. The CSRC may also change the circuit breaker mechanism. Additionally, the People’s Bank of China injected short term funds worth 130 billion yuan ($19.9 billion) into the country’s financial system.
The Hang Seng China Enterprises Index moved 1% lower, intensifying a fall which began in August. Even though stocks recovered from Monday’s plunge, conditions remained volatile. The benchmark index’s 10-day historical volatility touched 39.4. This was the highest level experienced since September.
The benchmark index posted its largest increase since Dec 14 on Wednesday, gaining 2.3%. Steps taken by the government to stem the market rout seemed to have had a significant impact. The CSI 300 rose 1.8%, marking its largest increase since Dec 21. Meanwhile, Premier Li Keqiang promised to tackle overcapacity in the coal industry, leading to increases for the sector’s stocks.
Meanwhile, the Caixin China services purchasing managers’ index dropped to 50.2 in December from 51.2 in November. Additionally, China’s central bank guided the yuan to a five year low in off-shore trading on Wednesday, which raised expectations of further weakness in Chinese economy. However, China believes that this move to devalue its currency will boost its ailing export industries. The Hang Seng China Enterprises Index moved 0.9% lower while the Hang Seng lost 1%.
Trading was stopped within less than half an hour on Thursday after the CSI 300 dropped 7%. The CSRC held an unscheduled meeting to discuss the developing crisis. Meanwhile, the People’s Bank of China reduced its reference rate for the eighth consecutive day. As a result the onshore yuan declined to its lowest level in five years.
The country’s central bank disclosed that forex reserves had fallen by an unprecedented $108 billion in December. The decline of the yuan has led to concerns that the crisis in China’s economy is far worse than what government data indicates. The Hang Seng China Enterprises Index slumped 4.2% to its lowest point in four years.
Stocks in the News
Alibaba has agreed to invest $1.25 billion in Chinese online food delivery service, Ele.me, according to a report from Caixin Media. The report also stated that Alibaba will receive 27.7% stake in Ele.me, becoming its largest shareholder. However, both the companies declined to comment on the issue.
The new program will offer a competitive advantage to Alibaba in China's rapidly increasing e-Commerce arena especially against the country’s search giant, Baidu BIDU.
Online-to-offline commerce, or O2O, is deemed to be the next big thing in China’s e-Commerce space. Earlier this year, Alibaba and its finance affiliate, Ant Financial, agreed to invest around $483 million each in a new venture — Koubei.com — which will initially focus on China’s fast growing food-delivery market.
China Unicom and Telefonica have set up a joint venture which has been named as Smart Steps Digital Technology Company Limited. The JV aims to offer big data services to the Chinese market. China Unicom will have a 55% stake in the JV while Telefonica will hold the balance.
The JV seeks to utilize the strength of China Unicom’s network along with proven big data technology from Telefonica. Smart Steps mines anonymized customer data, for instance location, from a mobile network. This is converted into information which may be profitable for corporate customers.
China Mobile Limited’s CHL research wing China Mobile Research Institute (“CMRI”) recently inked a Memorandum of Understanding (“MoU”) with Ericsson ERIC to foster 5G research and development. According to this agreement, the companies will work together to develop innovative 5G mobile network technologies to help revolutionize global information and communication technology.
The MoU will allow development of 5G radio technology and creation of a comprehensive 5G infrastructure. The companies aspire to come up with a 5G Air Interface, which is expected to gain huge traction when the 5G networks goes fully commercial from 2020.
Qihoo 360 Technology Co. Ltd. QIHU recently announced the appointment of Jie Chen as the Chief Operating Officer (COO). Chen joined the company in 2006 and was appointed the senior vice president in 2014. Effective immediately, she will be responsible for the company's general operations and report to Chairman and CEO, Zhou Hongyi.
Chen was the deputy chief editor and director at Yahoo! YHOO China from 2004 to 2006. Alongside, she has worked at various organizations, including Sohu.com Inc. SOHU and Sina Corporation SINA.
China Petroleum & Chemical Corp. SNP or Sinopec disclosed that the company has discovered high yield oil and gas on China’s southwestern coast. The discovery was made in an offshore test well in the country’s Beibu Bay. Named Wei-4, the well is located around 110 kms southwest of Beihai city.
The well has a depth of 3,783 meters. The first layer of the well was estimated to provide daily output of 71,800 cubic meters of natural gas and 1,264 tons of crude oil. Sinopec discovered natural gas of 76,000 cubic meters and daily oil flow of 1,184 tons on the second layer.
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 | -10.1% | -2.9% |
BIDU | -7.3% | -1% |
CTRP | +0.4% | +34.7% |
EDU | -10.5% | +25.4% |
JD | -11.5% | -2.8% |
KANG | +5.4% | +38.3% |
QUNR | -25.9% | +13.6% |
SFUN | -11.7% | -4.8% |
TSL | -4.6% | +6.4% |
VIPS | -8.4% | -29.3% |
Next Week’s Outlook:
China’s markets have endured a week of continual disappointment. The circuit breaker mechanism has helped to curtail losses to a certain extent. However, experts believe that it has failed to rein in market volatility. Meanwhile, the government has taken a slew of measures to curb market losses. As of date, they have met with limited success.
Additionally, both economic reports released during the week have been dismal in nature. In particular, data on manufacturing has raised grave concerns about the country’s economy. Also, the plunge in yuan levels has led to an alarming decline in forex reserves.
Several crucial economic reports are scheduled to be released next week. This includes data on inflation, FDI, new yuan loans, money supply as well as trade numbers. The tone of these reports is likely to determine the direction of stocks to a great extent in the week ahead.
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