Chinese markets had a largely positive week on expectations that the government would step in to boost the economy. Positive signals in the form of reforms of a key state-owned enterprise added strength to these predictions. The low points occurred last Thursday, due to a fall in the value of the yuan, and on Monday, when the *flash” Markit/HSBC PMI fell to an eight-month low.
Last Week’s Developments
The yuan fell to its lowest point in a year and The Goldman Sachs Group, Inc. (NYSE:GS) lowered its GDP forecast last Thursday. The financial major reduced its GDP forecast for China from 7.6% to 7.3%. This reduction was primarily due to the largest reduction in exports after the global slowdown and the slowest increase in factory output during the January-February period since 2009.
Consequently, markets felt the heat. The Hang Seng China Enterprises Index declined 1.7%, while the Shanghai Composite Index dropped 1.4%. The CSI 300, which is a broad measure of performance of stocks on the Shanghai and Shenzhen exchanges, also decline 1.6%.
The Bloomberg China-US Equity Index dropped 1.1% following indications that the Fed may hike interest rates after mid-2015. The index is a gauge of the most actively traded US-listed Chinese stocks.
Markets recovered on Friday following speculation that restrictions on funding of property developers and banks would be relaxed by the government. The move is an attempt to boost economic growth. After markets closed, the China Securities Regulatory Commission announced that lenders could now issue preferred shares.
All the indexes moved upwards following these developments. The Hang Seng China Enterprises Index gained 2.8% while the CSI 300 surged 3.4%. The Shanghai Composite Index increased 2.7%, the largest gain since mid-November last year.
Markets and the Economy This Week
The rally continued on Monday following expectations that the government will step into boost the economy after the initial or “flash” Markit/HSBC Purchasing Managers’ Index fell to an eight month low of 48.1 in March from 48.5 in February. The decline indicates a possible decline in China’s manufacturing activity for the third straight month.
According to a report in the China Securities Journal, the government plans to create trade zones in the Beijing, Tianjin and Hebei provinces. Meanwhile, Barclays Plc (NYSE:BCS) said the government may undertake reforms of state-owned corporations and launch investment projects.
The Shanghai Composite Index and the CSI 300 gained 0.9% and 0.8% respectively. The Hang Seng China Enterprises Index advanced 2.8% while Bloomberg China-US Equity Index gained 1.1%.
Shanghai-based companies notched up gains on Tuesday following news that the city will increase the pace of reforms for state-owned organizations. According to a report by China Central Television, Shanghai International Port (Group) Co. will invite new strategic partners and open up to private and foreign investment.
The broader market reacted positively to these developments, with the Shanghai Composite Index and the Hang Seng China Enterprises Index gaining 0.1% and 0.2% respectively. The Bloomberg China-US Equity Index gained 0.6%.
Encouraging results from Agricultural Bank of China Ltd. And China Mengniu Dairy Co. provided a boost to China stocks traded in Hong Kong on Wednesday. Both companies beat estimates. The Hang Seng and the Hang Seng China Enterprises Index gained 0.7% and 1.6% respectively.
Some analysts were of the view that this was a technical rebound. Meanwhile, the Bloomberg China-US Equity Index gained 0.2% after the Consumer Confidence Index hit the highest level since January 2008. The report had helped U.S. markets end higher after three days.
Stocks in the News
PetroChina Co. Ltd. (NYSE:PTR) announced full-year 2013 earnings of RMB 129.6 billion or RMB 0.71 per diluted share, against RMB 115.3 billion or RMB 0.63 per diluted share a year ago. The improvement can be primarily attributable to superior operations from the Refining and Chemicals business and outstanding results from the Natural Gas & Pipelines segment. PetroChina opened at $102.22 per ADR the next day, up 2.6% from Thursday’s close.
China Petroleum and Chemical Corporation (SNP), aka Sinopec, reported full-year 2013 net income of 66.1 billion yuan (US$10.7 billion), up 3.5% year over year. Diluted earnings per share of 0.534 yuan ($8.62 per ADS) declined 2% year over year, as per the International Financial Reporting Standards (IFRS). The drop in earnings was mainly attributable to the sharp decline in oil prices.
China Mobile Limited (NYSE:CHL), the world’s largest mobile operator by subscriber base, announced the results for full-year 2013 with adjusted net income of RMB 121.69 billion ($19.65 billion) that fell 5.9% year over year owing to higher infrastructure cost and stiff competition. The reduction in earnings affected the stock price as it declined 6.23% after market close on NYSE last Thursday.
ReneSola Ltd (SOL) reported its first quarterly profit in the fourth quarter 2013 following ten quarters of reporting in the red. This was backed by record solar module shipments. ReneSola reported earnings per American Depositary Share (ADS) of 1 cent in the fourth quarter of 2013, beating the Zacks Consensus Estimate of a loss of 11 cents per ADS.
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:
The single negative economic report has acted somewhat as a mixed blessing next week, fueling speculation about government action. Next week also has several key reports lined up. These include the final numbers on the HSBC Manufacturing PMI as well as service sector data.
Additionally, Wednesday has key trade data lined up. These reports will largely indicate the strength of the economy and markets going forward. At the same time, earnings may continue to influence market movements.