Markets experienced a volatile week, with gains and losses on an equal number of days. Stocks gained on Monday as a substantial number of stocks resumed trading. The Shanghai Composite declined on Tuesday on concerns that recent gains were excessive in nature. Stocks declined on Wednesday, despite several bullish economic reports. The Shanghai Composite Index rebounded on Thursday amidst volatile trading.
WuXi PharmaTech (Cayman) Inc. is planning to create a new venture capital fund which will concentrate on Chinese and U.S. healthcare companies. China Eastern Airlines Corp. Ltd. (CEA - Free Report) will purchase 50 Next-Generation 737-800s from Boeing (BA - Free Report) as stated in their public disclosure to the Hong Kong stock exchange.
Last Week’s Developments
The Shanghai Composite jumped 4.5% last Friday, posting the largest two-day gain in seven years. Since around 1,300 companies had stopped trading on mainland markets, only 53% of stocks were still being traded. However, 90% of these stocks increased by the 10% limit.
These gains helped the benchmark increase 5.2% over last week after slumping to a three-month low last Wednesday. A series of measures taken by the government to end a slump, which has erased market value of $3.9 trillion, seemed to be having its desired impact.
The CSI moved up 5.4%, with sub-indexes of healthcare, consumer staples and industrial stocks increasing at least 7%. The Hang Seng advanced 2.1% while the Hang Seng China Enterprises Index gained 3.6%. However, margin traders continued to reduce their positions on the Shanghai Stock Exchange, marking a 14-day record.
Markets and the Economy This Week
Stocks gained again on Monday as a substantial number of stocks resumed trading. Meanwhile small cap stocks posted a record advance and export data was bullish in nature. PetroChina (PTR - Free Report) lost 4.3% after advancing 24% over the last two weeks, weighing down the benchmark index substantially.
However, the Shanghai Composite increased 2.4% while the small-cap heavy CSI 500 jumped 6.2%, posting its highest gains in nearly seven years. Meanwhile, exports increased 2.1% in June, exceeding estimates while imports declined 6.7%.
Significantly, margin traders boosted share purchases made with borrowed funds, improving their positions for the first time in 15 days. The CSI 300 advanced 2.6% while the ChiNext index, dominated by small cap stocks, spiked 5.8%. Both the Hang Seng and H-share index increased 1.2%.
The Shanghai Composite declined 1.2% on Tuesday bringing a three-day rally to a close during which stocks gained 13%. Financial and materials stocks were the biggest losers, following concerns that recent gains were excessive in nature. Fears that GDP data due on Wednesday would signal a slowdown also led to losses for stocks.
The benchmark closed in the red due to losses suffered in the final half hour of trading. Earlier in the day, the Shanghai Composite had increased above the 4,000 mark. These gains were a result of speculation that government measures to stem the rot in the stock market were having their desired effect.
The CSI 300 declined 2.4% while the ChiNext advanced 1.6%. With this increase, the small cap index has increased 16% from the low it touched on Jul 7. Only one of the sub-indexes within the CSI 300 managed to register gains. Materials and financial stocks were the biggest losers for the index, each declining in excess of 3%. The Hang Seng slipped 0.4% while the Hang Seng China Enterprises Index declined 1.4%.
Stocks declined for the second successive day on Wednesday. Losses came despite several better-than-expected economic reports. The Shanghai Composite Index declined 3%, recovering somewhat from an initial downturn of 4.7% after the country’s largest companies rallied.
Successive losses on Tuesday and Wednesday reduced the benchmark’s recovery from the low it hit on Jul 8 to 8.5%. The CSI 300 declined 3.5%. Sub-indexes of pharma, industrial and utilities stocks lost a minimum of 6%. The Hang Seng slipped 0.3% while the Hang Seng China Enterprises Index declined 1.3%.
Meanwhile, second quarter GDP increased 7%, remaining unchanged from first quarter numbers. GDP data also matched the official target for the current year. Additionally, industrial output increased 6.8% in June while fixed asset investment rose 11.4%, exceeding estimates. Retail sales also beat estimates, increasing 10.6% in June.
The Shanghai Composite Index increased 0.5% on Thursday, negating losses of nearly 3.1%. Stocks rebounded amidst volatile trading. Small caps gained while trading remained halted for nearly 25% of stocks. A measure of 100-day volatility spiked to its highest level in more than six years. The CSI 500 moved up 2.3%. Meanwhile, margin traders once again reduced their positions built up with borrowed debt.
The CSI 300 increased 0.8%. The small-cap dominated ChiNext gained 1.4% while the Hang Send increased 0.4%. The Hang Seng China Enterprises Index moved up 0.6%. Financial stocks declined as a whole. However, financial services companies registered a 17.4% year-over-year increase during the first half of the year.
Stocks in the News
China Eastern Airlines Corp. Ltd. will purchase 50 Next-Generation 737-800s from Boeing as stated in their public disclosure to the Hong Kong stock exchange. The single-aisle aircraft are crucial to the state-owned airline’s plans to increase its business in the budget segment.
The deal will be valued at $4.6 billion at list prices once all contingencies are cleared. The deliveries are expected to be between 2017 and 2019. The aircraft are expected to be utilized by the company’s China United Airlines unit. This is part of China United’s efforts to change into a low-cost airline.
WuXi PharmaTech (Cayman) Inc. is planning to create a new venture capital fund which will concentrate on Chinese and U.S. healthcare companies. This fund is looking to raise nearly $250 million, per a filing with the SEC. The company has already pledged an anchor investment of $50 million.
The company has an existing internal VC fund which concentrates on the life-sciences segment. This was also set up with an initial $50 million investment which has grown to $63 million. Around 18 companies have received funds of $36.1 million from the fund, which has earned $17.8 million in terms of profits. WuXi PharmaTech expects the new fund to deliver better performance and has several partners in this new venture.
ReneSola Ltd (SOL - Free Report) revealed that it has acquired project development rights to build 22.5 megawatts (“MW”) of ground-mounted, utility-scale solar projects in Japan. The company, however, did not disclose the name of the seller and terms of the deal.
The China-based company plans to use its Virtus II photovoltaic modules in the construction of these utility-scale facilities. The solar power plants are expected to complete grid connection and start generating electricity by the end of 2015 or early 2016.
Alibaba Group Holding Ltd. (BABA - Free Report) has decided to provide legal support to Patrick Liu, president of its digital entertainment unit, after he was detained by the police.
However, in a statement on its microblog Alibaba stated that it has ensured Liu’s absence will not hamper Alibaba Pictures’ business. Liu is also an executive director of Alibaba Pictures.
Earlier, Alibaba stated that Liu’s arrest had nothing to do with his role at the company. In the past, Liu had been a vice president at Chinese Internet company Tencent Holdings Ltd. (TCEHY - Free Report) . In 2013, Tencent won a lawsuit against Liu in a non-compete case, following which he left to join Alibaba.
According to Tencent, the Chinese authorities have detained five to six former employees of the company, as part of a graft investigation following an internal company probe. Bloomberg also said that Liu did not reply to the e-mails seeking comment.
China Mobile Limited (CHL - Free Report) and Alcatel-Lucent have successfully pioneered the “field trial” of a virtualized radio access network (“vRAN”) based architecture using the network functions virtualization (“NFV”) technology.
Beijing’s Tisinghua University, with its 442-hectare campus, was chosen as the venue for the trial, touted as the industry’s first field test of the vRAN. The outcome of the trial signaled three major benefits for clients, namely high flexibility, superb scalability and cost & energy-efficiency.
China Petroleum & Chemical Corp. (SNP - Free Report) or Sinopec said that it expects second-quarter profit to increase 11 times. China’s petroleum giant informed the Shanghai Stock Exchange that it expects second quarter profit attributable to shareholders to spike in excess of 1000% compared with the first quarter.
First quarter net profit came in at 2.17 billion yuan ($349.5 million), representing a year-over-year slump of 85%. At 31.43 billion yuan ($5.06 billion), second quarter profit will come in still be lower on a year-over-year basis, Despite the estimated jump in profits.
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
Next Week’s Outlook:
Equity markets are passing through a significantly volatile phase. As government measures to boost stocks begin to have their desired impact, several companies have resumed trading. This is reducing the impact of such steps and increasing market volatility at the same time. Such a phenomenon has possibly led to the consecutive declines for the benchmark on Tuesday and Wednesday. Following a rebound on Thursday, market watchers expect volatility to remain at unprecedented highs.
In fact, it may be some time before profit taking ends and the bulk of stocks resume trading. Till then, investors will have to live with volatility. Another area of concern is the reduction in stock positions built up by loans, which had fueled the record busting market rally. Additionally, there are fears related to record gains made by the financial sector, which many analysts believe are unsustainable.
Though a number of impressive economic reports have had a limited impact on markets, this trend may be reversed going forward. Starting today, some important reports are slated for release. This includes data on housing prices as well as private and official data on the manufacturing sector. Stocks may gain in the week ahead if most of these reports are positive in nature.
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