Stocks have had a mixed week up to now, as fears that IPOs will lure funds away from existing stocks have returned to plague the markets. The benchmark index gained the most in more than a month on Monday, following a government decision to purchase more electric cars.
An increase in the broader gauge of credit helped stocks gain once again on Tuesday. But markets took losses today and on Wednesday, when concerns about new share sales resurfaced. Telecom majors China Mobile Ltd. (CHL), China Telecom Corp. Ltd. (CHA) and China Unicom (Hong Kong) Ltd. (CHU) formed a joint venture to share telecom infrastructure. Meanwhile, SouFun Holdings Ltd. (SFUN) entered into strategic cooperation agreements, which boosted its stock.
Last Week’s Developments
Stocks gained on Friday, reducing the benchmark’s losses for the week. Speculation that local governments would ease restrictions on property to arrest a slowdown in economic growth boosted stocks. The two largest real estate developers gained following reports that Jinan has joined the list of cities to remove limits on home purchases.
A sub-index of property developers within the benchmark index gained 0.7%. Automaker and shipping stocks also clocked gains. The Shanghai Composite Index increased 0.4% while the CSI 300 moved up 0.2%. The Hang Seng China Enterprises Index gained 0.1%. The Bloomberg China-US Equity Index increased 0.5%.
The benchmark index lost 0.6% over the week. This was its first five day loss in three weeks. Disappointing data on producer prices and export growth were the primary reasons for this decline. The Hang Seng experienced its largest weekly decline, losing 1.3%.
Markets and the Economy This Week
The Shanghai Composite Index gained 1% on Monday, its largest increase since June 10. Gains were fuelled by automakers who received an assurance from the government that it would buy more electric cars. In its latest attempt to combat pollution, the Chinese government has said electric cars must constitute 30% of all government vehicles by 2016.
Meanwhile, utilities and consumer staples stocks gained following speculations that earnings will exceed estimates. A sub-index of consumer staples stocks within the CSI 300 gained 2.7%, leading gains among the industry groups. The CSI 300 increased 1.1% while the Hang Seng China Enterprises Index gained 0.8%. The Bloomberg China-US Equity Index moved up 1.8%.
The benchmark index gained for the third successive day on Tuesday. The country’s broader gauge of credit exceeded analysts’ estimates, negating concerns that IPOs will lure funds away from existing shares. The most comprehensive measure of money supply, M2, increased 14.7% year over year. This was its fastest pace of increase since August.
Industrial stocks rallied while the sub-index of consumer staples stocks within the CSI 300 moved up 2%, the highest among the industry groups. The government said it will provide six state owned companies with more freedom in recruitment and decision making. Both the Shanghai Composite Index gained and the CSI 300 increased 0.2%. The Hang Seng China Enterprises Index gained 0.3%. The Bloomberg China-US Equity Index gained 0.3%.
Stocks declined for the first time this week on Wednesday. The specter of IPOs diverting funds from older stocks returned to haunt the markets. These concerns overshadowed bullish data on economic growth and home sales. GDP grew after three quarters following a series of measures from the economy to boost economic activity. Industrial production and retail sales also experienced gains.
Developers rallied following a 33% increase in home sales last month. The Shanghai Composite Index declined 0.2%. The tech and healthcare heavy ChiNext lost 1.7%. The CSI 300 declined 0.2% while the Hang Seng China Enterprises Index lost 0.1%. The Bloomberg China-US Equity Index gained 0.4%.
The Shanghai Composite Index lost 0.6% today, declining the most this week. Concerns over IPOs continued to plague investors. Indications that auto demand would decline after the government decided to stop giving cars to junior functionaries also weighed on stocks. This is part of a series of austerity measures initiated by President Jinping which may negatively impact growth. Several key auto stocks experienced declines. The sub-index of tech stocks within the CSI 300 lost 0.9%. The CSI 300 lost 0.6% while the Hang Seng China Enterprises Index declined 0.4%.
Stocks in the News
China Mobile Ltd., China Telecom Corp. Ltd. and China Unicom (Hong Kong) Ltd. have established a joint venture company named China Communications Facilities Services. This will allow the three state-run telecom operators to share telecom infrastructure and reduce their related capital expenditure.
The newly formed company has a registered capital of 10 billion yuan ($1.6 billion) with the world’s largest wireless carrier in terms of subscriber base – China Mobile Limited – holding a majority 40% stake. Meanwhile, China Unicom Hong Kong Limited will have a 30.1% stake, while China Telecom Corp. Limited will hold the remaining 29.9%.
China Communications Facilities Services will focus on construction, maintenance and operations of wireless towers apart from providing power and air conditioning for base stations. Additionally, the company will also outsource maintenance services of base station equipment to third party vendors. The three operators are currently mulling over the respective tower assets which they will contribute to the joint venture to make it a success.
SouFun Holdings Ltd. has entered into strategic cooperation agreements with Shenzhen World Union Properties Consultancy Co., Ltd. and Hopefluent Group Holdings Limited, the leading new home agency companies in China. Shares of the leading real estate Chinese Internet portal jumped 6% to close at $10.07 last Thursday, following the announcement.
This arrangement brings together three prominent players, with one online and two offline entities collaborating to not only serve China's growing new home and resale market but to also give a boost to the platform.
Apart from other activities, the two companies will jointly work on advertising, e-commerce, listing service, new home agency and consultancy. The companies might also partner in Internet and real estate financing businesses. Additionally, SouFun will also have a 10% stake in World Union following a private placement for new shares.
Giant Interactive Group Inc. (GA) announced that approximately 99.6% shareholders are in favor of the company’s merger agreement with Giant Investment Limited and Giant Merger Limited, a wholly owned subsidiary of Giant Investment.
The merger agreement was confirmed in Mar 2014, which was later amended in May 2014. Under the agreement, Giant Investment will acquire Giant Interactive for $12 per share and $12 per American Depositary Share (ADS), totaling $3 billion. Each ADS represents one ordinary share of the company.
The merger is expected to be completed by the end of July. Following the merger, Giant Interactive will become a privately held company and no longer trade on Nasdaq.
CNOOC Ltd. (CEO) is part of a partnership that has made yet another major find in the deepwaters of the Gulf of Mexico in the Norphlet play. Royal Dutch Shell plc (RDS.A) announced the discovery, the third in the region, which was made using the Rydberg exploration well.
The exploration well, drilled to a depth of 26,371 feet, is located 75 miles off the Louisiana coast. Though evaluation of well results is still under progress, Shell estimates resource potential of about 100 million barrels of oil equivalent (mmboe).
Shell, with its 57.2% interest, is the operator of the partnership that made the discovery. Other parties include Ecopetrol SA (EC) and a subsidiary of CNOOC Ltd., Nexen. Ecopetrol has 28.5% interest in the partnership while CNOOC holds the remaining 14.3%.
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.
Last 5 Day’s Performance
6 Month Performance
Next Week’s Outlook:
Most economic reports during the week have been on the positive side. Economic growth has increased for the first time in three quarters. Industrial production and retail sales also increased. However, concerns surrounding new share sales negated the optimism generated from this data.
On the other hand, an increase in the broader gauge of credit boosted indices on Tuesday. Government efforts to curb pollution lifted indices while austerity measures pushed stocks downwards.
Next week is largely devoid of economic data, but for the HSBC Flash PMI report. If concerns over new share sales persist, markets may continue to suffer losses. Economic growth has rebounded and if earnings remain on the positive side, markets could return to their winning ways.
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