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Stocks had a largely positive week following indications that the government would implement various policy measures to boost growth. Markets gained on Monday following indications that the government will introduce measures to support growth.

However, indexes moved downwards on Tuesday ending a three-day winning streak. Markets returned to their winning ways on Wednesday, powered by tech stocks while they ended flat on Thursday. Only Hong Kong shares moved upwards today boosted by gains in Chinese insurance stocks. Qihoo 360 (QIHU - Snapshot Report) beat profit estimates while earnings from JinkoSolar Holding Co. Ltd. (JKS - Snapshot Report) and Giant Interactive Group Inc. came in below expectations.

Last Week’s Developments

The benchmark index increased on Friday following reports that the government would relax restrictions on the property sector. Such action would also help the economy to achieve its yearly growth target. The Shanghai property sub index increased 2.1%, the largest gain made since April 22. The Shanghai Composite Index gained 0.7% while the CSI increased 0.8%. The Hang Seng Index gained 0.1%.

Gains for the CSI 300 came on the back of a rally in tech stocks, led by software companies. The Hang Seng China Enterprises Index moved up 0.1%. For the week, the Shanghai Composite Index gained 0.4% while the Hang Seng Index added 1.1%. A decline in home sales and construction has impeded economic growth and concerns about the property sector remain.

Markets and the Economy This Week

Markets gained on Monday following indications that the government will take measures to support growth. Economists interpreted comments from Premier Li Keqiang as an indication that there would be monetary easing. President Xi Jinping said the country should increase investment in the airlines sector and stressed on the development on new energy vehicles. These statements led to gains for transportation stocks.

Premier Li’s comments helped the Shanghai Composite Index gain 0.3% while the CSI 300 increased 0.4%. The ChiNext, which is an index of smaller stocks, surged 1.9%, its sixth successive day of gains. The Hang Seng China Enterprises Index moved up 0.2%. The Bloomberg China-US Equity Index declined 0.3%.

Stocks declined on Tuesday following three successive days of gains. Material and industrial companies lost the most as volumes remained low on the Shanghai exchange. The Shanghai Composite Index lost 0.3% after trading volumes declined 19% from their 30-day average.

At this point, the benchmark index had lost 3.85% over the year. This was primarily due to apprehensions that lower growth and a slowdown in the property market would impact earnings. The CSI 300 declined 0.4% while its sub index of industrial and material stocks lost 0.7%. The Hang Seng China Enterprises Index moved down 0.4%.

The Shanghai Composite Index increased 0.8% on Wednesday, poised to finish 1.2% higher for the month. Gains were led by tech stocks which increased the most in three months. According to reports, the Chinese government is evaluating whether the domestic banking sector’s dependence on servers from IBM Corp. (IBM - Analyst Report) is undermining the country’s financial security.

This development fueled gains in tech stocks, with the CSI 300 Information Technology Index moving up 2.8%. There are expectations that domestic technology companies will get a boost following such reports. The CSI 300 added 1% while the Hang Seng China Enterprises Index gained 1.1%. The Bloomberg China-US Equity Index increased 0.6%.

The Shanghai Composite Index ended flat as telecom and commodity producer stocks took losses. The CSI 300 also ended flat. Pharma stocks made gains following the announcement of new policies allowing private hospitals greater access to the healthcare system.

Shares in Hong Kong gained, led higher by Chinese insurance companies. The insurance sector posted strong increases following an upgrade by Morgan Stanley. The Hang Seng increased 0.5%, moving closer to the highest point achieved in April. The Hang Seng China Enterprises Index gained 0.7%.

Stocks in the News

Qihoo 360 reported first-quarter 2014 earnings per ADS of 40 cents, exceeding the Zacks Consensus Estimate of 34 cents. Qihoo’s total revenue was $265.1 million, up 19.6% sequentially and 141.3% year over year. Reported revenues were above management’s expected range of $117.8 to $228.0 million.

Online advertising revenues were $140.0 million, flat sequentially but up 120.9% from the year-ago quarter. The increase was driven by increased monetization of user activities on 360 Personalized Start-up Pages and strong contribution from search and mobile advertising.

Internet value-added service revenues were $124.8 million, up 58.2% sequentially and 172.2% year over year. The increase was driven by strong ramp-up in mobile games and healthy performance in PC game operations.

JinkoSolar Holding Co. Ltd. reported first quarter 2014 results with adjusted earnings per American Depositary Share (ADS) of 20 cents (adjusted earnings of 5 cents per share), much lower than the Zacks Consensus Estimate of 41 cents. The company, however, reversed its year-ago adjusted loss per ADS of 56 cents (adjusted loss of 14 cents per share) in the reported quarter. Each “ADS” represents four ordinary shares. Earnings in the quarter came on the back of JinkoSolar’s wide geographical expansion.

JinkoSolar’s revenues in the reported quarter were $323.9 million, beating the Zacks Consensus Estimate of $308.0 million by 5.2%. The top line decreased 8.0% sequentially but increased 73.1% year over year.

Lower-than-expected earnings nonetheless evoked a negative market reaction with the shares losing 3.0% to close at $25.08 on May 27. Share prices, however, recovered 4.5% to close at $26.21 on May 28.

Giant Interactive Group Inc. reported first quarter fiscal 2014 adjusted earnings of 22 cents (on a local currency basis). Earnings were almost flat year over year owing to weak sales. Earnings, however, lagged the Zacks Consensus Estimate of 25 cents by 12%.

Net revenue of $92.5 million was slightly up by 0.4% (on a local currency basis). Sales, however, lagged the Zacks Consensus Estimate of $102 million due to weak seasonality and lack of new game launches. Also, in-game spending declined sequentially as people traveled more during the Chinese New Year holiday.

The company witnessed a 5.6% increase in active paying accounts (APA) for online games mainly due to the contribution from the ZT Online franchise, while average revenue per user (ARPU) for online games declined 3.4% during the quarter.

Gross profit increased 3.9% year over year to $81.9 million due to a 20.1% decrease in cost of services, which was mainly due to lower costs accrued for the company's licensed games in first quarter 2014.

PetroChina Co. Ltd.’s (PTR - Analyst Report) parent company China National Petroleum Corporation (“CNPC”) – intends to invest roughly $2.0 billion in Peru over a period of 10 years. In the recent past, CNPC purchased a natural gas block in Peru form Petroleo Brasileiro SA or Petrobras (PBR - Analyst Report) – the largest integrated oil company in Brazil.

CNPC has already received permission from the regulatory bodies of Peru for investing $1.0 billion in upstream operations in the natural gas field bought from Petrobras. The mother company of PetroChina is also looking for opportunities to invest $4.0 billion in southern Peru for a natural gas pipeline project. The pipeline is expected to carry gas to the thermoelectric plants located at the Pacific coast of Peru from Camisea gas fields.

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

JD

+12.71%

NA

QIHU

+16.35%

+16.71%

SFUN

+19.55%

-79.43%

YGE

+14.24%

-35.05%

TSL

-13.65%

-5.43%

SOL

+10.79%

-40.27%

YY

+13.53%

+26.42%

JMEI

+24.19%

NA

BIDU

+4.35%

-0.24%

NQ

-0.96%

-43.72%

Next Week’s Outlook:

Despite Tuesday’s losses, markets have had a positive run this week. Indices are poised to finish the month with substantial gains. Weakness in the property sector has been a concern for the bourses for some time now. However, recent reports seem to suggest that the government will soon take measures to aid the sector. Such intervention is also intended to help the economy achieve its growth numbers.

Next week features several key economic indicators. These include official PMI numbers on the manufacturing and services sector. HSBC PMI numbers are also expected and together they will provide a clear indication of the state of the economy. These reports could well determine the direction of markets going forward.

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