Markets enjoyed a good week before declining significantly today, following indications that recent gains have been excessive. On Monday, stocks registered biggest gains on a year’s first trading day since 1993. The Shanghai Composite Index gained marginally on Tuesday, even as stocks continued to move upward.
Stocks gained for a fourth successive day on Wednesday, powered by gains from a state-owned oil major and gold mining companies. However, stocks declined the most in two weeks today following concerns that the Shanghai Composite’s recent gains were excessive.
China Petroleum & Chemical Corp. (NYSE:SNP), also known as Sinopec, announced that it has received government approval to sell a stake of its marketing subsidiary Sinopec Marketing Co. Ltd. China National Offshore Oil Corp. (Cnooc Ltd Hong Kong (OTC:CEOHF), also known as CNOOC, reported a natural gas discovery with its Lingshui 25-1-1 exploration well drilled in the northeast part of Ledong Sag in the Qiongdongnan basin of the South China Sea.
Last Week’s Developments
With markets on the mainland closed for the first two days of the year, the focus shifted to stocks listed in Hong Kong on Friday. The Hang Seng China Enterprises Index gained 2.2% to close at its highest level since Aug 2011. Speculation that the government will undertake further easing of money supply to boost China’s economy led to gains for stocks. The Hang Seng moved up 1.1%.
Stocks remained largely unaffected by the dismal factory output data. A measure of the country’s factory output declined to its lowest level in one and a half years. The government’s PMI reading declined from 50.3 in November to 50.1 in December. Weakness in the manufacturing sector has added to speculation of additional stimulus measures.
Meanwhile, the mainland and Hong Kong benchmarks ended 2014 on a high. The Shanghai Composite Index has rallied 53% over the last year while the H-share index has only gained 11%. A cut in benchmark rates has led to a surge in shares on the mainland with investors flooding the market.
Markets and the Economy This Week
On Monday, stocks added best gains to begin a year since 1993. Large cap and property stocks received particular attention from investors. This was due to the persisting view that further steps from the government to stimulate the economy were on the anvil.
Shares of Petrochina (NYSE:PTR) jumped 10%, increasing the most among a sub-index of energy shares, which posted their largest increase since 2008. The Shanghai Composite Index surged 3.6% to close at its highest level since Aug 6, 2009. Sub-indices of real estate and industrial stocks gained more than 3%. These gains came on the back of a government announcement, which offered housing fund loans for small first time home buyers.
The CSI 300 moved up 3.1%. Sub-indexes of energy and material stocks increased by a minimum of 6.5%, increasing the largest among the 10 industry groups. However, the H-share index lost 0.3% while the Hang Seng declined 0.6%.
The Shanghai Composite Index gained less than 0.1% on Tuesday, even as stocks continued to move upward. Small cap stocks took centrestage even as analysts opined that large caps, which were primarily responsible for recent gains may take a breather. The tech and pharma-heavy ChiNext jumped 5.1%, the highest gains since Jun 2013.
The CSI 300 ended the day nearly unchanged. However, gauges of pharma and tech stocks within the CSI 300 increased more than 3%. Airline stocks gained, aided by the slump in oil prices. A gauge of financial stocks declined 1.8%, the most among the industry groups. Meanwhile, the Hang Seng China Enterprises Index declined the most since Dec 9, losing 1.8%. The Hang Seng slid 1%.
Stocks gained for a fourth successive day on Wednesday powered by gains from gold mining companies and a surge in Petrochina (NYSE:PTR) shares. The oil major, which is also China’s most valuable company, surged 6% to its highest level in four years. These gains come on the back of speculations of further reforms of state-owned enterprises. Nearly 70% of the benchmark index’s gains were due to this significant increase.
The Shanghai Composite Index gained 0.7% even as gold prices reached a near three-week high. This surge in prices of bullion is a result of a continuing slump in oil prices and losses for the U.S. equity markets. The CSI 300 added 0.1% even as the H-share index ended the day nearly unchanged. The Hang Seng advanced 0.8%.
A sub-index of material shares advanced 1.4%, the highest among the 10 industry groups. Analysts took the view that gold was gaining from an increasingly risk averse environment.
Stocks declined the most in two weeks today following concerns that the Shanghai Composite’s recent gains were excessive. These fears were fuelled by projection for declines from Bank of America Corporation (NYSE:BAC) and HSBC Holdings Plc. (NYSE:HSBC). Financial stocks took the largest losses after HSBC downgraded the sector. This industry has been the second highest gainer in 2014.
The Shanghai Composite Index declined the most since Dec 23, losing 2.4%. The index ended the day above 3,200 despite these reverses. Bank of America predicts the benchmark will end the year at the 3,000 mark while HSBC predicts a level of 3,100. The CSI 300 declined 2.3%.
Both the gauges of utility and financial companies within the CSI 300 lost 3.6%, the highest among the 10 industry groups. Utilities were the best performing equity class last year, gaining 95%. The Hang Seng advanced 0.7% while the H-share index increased 0.3%.
Stocks in the News
China Petroleum & Chemical Corp., also known as Sinopec, announced that it has received government approval to divest 30% stake of its marketing subsidiary Sinopec Marketing Co Ltd. This capital injection of 107.1 billion yuan ($17.2 billion) is an important development for the ensuing reforms of China’s state-owned companies which are moving toward a mixed ownership pattern.
The company said that China’s Ministry of Commerce and the country’s top planning body, the National Development and Reform Commission, has provided approval for the injection of capital from 25 investors, both domestic and foreign. These investors will hold nearly 30% of the subsidiary while the rest remains with Sinopec. According to the company, the transaction is already underway.
China National Offshore Oil Corp., also known as CNOOC, reported a natural gas discovery with its Lingshui 25-1-1 exploration well drilled in the northeast part of Ledong Sag in the Qiongdongnan basin of the South China Sea. The well’s average water depth is about 980 meters.
The discovery follows the Lingshui 17-2 discovery in the same basin in first-quarter 2014. The two discoveries have not only established the exploration potential of the structural and lithologic trap in the central Canyon channel of Lingshui Sag but also validate the superior exploration prospects in the deepwater area of the Qiongdongnan basin.
The well was drilled and completed at a depth of 4,000 meters and encountered an oil and gas pay zone with a total thickness of 73 meters. On testing, the well produced at rates of 35.6 million cubic feet per day (MMcfd) of gas and 395 barrels per day (b/d) of oil.
Trina Solar Limited (NYSE:TSL) has announced the completion of its sale of a 13.2 megawatt (“MW”) solar power project to funds managed by Foresight Group LLP in Dorset, UK.
This Homeland Solar Farm employs 52,000 high quality and durable TSM-255-PC05A modules from Trina Solar. Capable of powering 4,300 homes in the region, this project is set to provide 14,000 megawatt hour (MWh) of solar electricity annually.
This project commenced construction in Dec 2013 and was successfully connected to the grid in Mar 2014. The transaction was completed at the end of 2014 and the financial impact will be reflected in the company’s fourth quarter results.
JinkoSolar Holding Company Limited (NYSE:JKS) subsidiary Zhejiang JinkoSolar Co., Ltd. inked an agreement to obtain a working capital loan from China Development Bank. Per the agreement, the company will get a $90-million loan for a tenure of one year.
Zhejiang JinkoSolar will utilize the fund to run its day-to-day operations. China Development Bank has disbursed the initial $50 million of the loan to the firm.
Alibaba Holdings’ (NYSE:BABA) e-commerce affiliate Ant Financial Services Group reportedly announced a new payment option called Huabei or Just Spend. This payment option will allow shoppers on Alibaba’s Tmall and Taobao e-commerce sites to take out month-to-month loans of up to $4,800.
According to a report by 2Tech Asia, Alibaba is yet to announce the official release date, as the service is still in beta testing stage.
The Just Spend service will enable consumers to pay off debts up to a month after delivery; provided they spend a minimum of $160 on purchases. Consumers are estimated to clear their loans by the 10th day of the month subsequent to the delivery.
Ant affirms that more than 1 million vendors are in favor of the credit service, which formally is in a test mode.
In October, Alibaba changed the name of its Alipay financial services affiliate to Ant Financial Services Group. This marked a push into the financial services industry.
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.
Next Week’s Outlook:
Analysts at Bank of America are of the view that the recent rally is excessive in nature and dominated by retail investors. A sudden exit by small investors could lead to a crash which would in turn impact investment on fixed assets as well as consumption. Meanwhile, HSBC analysts believe mainland shares no longer offer value while China stocks traded in Hong Kong are more attractively priced.
At the same time, 22 companies are slated to begin new share sales next week. China International Capital Corporation has opined that stocks on the mainland will gain 30% this year as the government works to reduce funding costs and steps up reforms. The organization’s managing director has said that a multi-year rally is taking place and valuations are still attractive.
Meanwhile, several important economic reports are slated to be released next week. These include data on inflation, trade and new loans. Going forward, any positive indications on this front will offer an important fillip to stocks.