Notes From Hong Kong: Knee-Jerk Reaction

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L.Desjardins submits:

Shanghai and Hong Kong led the world's markets down on Tuesday with a knee jerk reaction to a slowdown in both imports and exports growth, interpreted as a sign that the economy may be slowing too fast. Imports climbed 22.7% from a year ago markedly lower than the 34.1% rise reported in June. The pace of increase in exports also fell to 38.1 per cent year-on-year, down from 43.9 per cent in June. On the other hand the trade surplus, rising to an 18-month high, was interpreted different ways but also negatively. Some fear growing pressures on Beijing to rise the value of the yuan and thus cut exporters profits. Other see a slower economy resulting in the central government capping the rise of the yuan. The camp seeing a lower yuan may be right, week on week the yuan fell 0.4% against the US dollar.

The Conference Board Leading Indicators Index for China will be released on Monday morning and this may accentuate the pessimistic trend.

INDICES 1 week 4 weeks YTD
Hang Seng Index -2.8% 4.1% -3.7%
HS China Enterprises -4.3% 1.9% -9.0%
FTSE/Xinhua A50 -2.2% 4.8% -25.0%
Shanghai Composite -1.9% 7.5% -20.5%
CSI 300 -0.4% 9.1% -19.8%
US ETFs
[[EWH]] -1.2% 7.3% 1.2%
[[FXI]] -4.5% 3.4% -7.2%
[[PGJ]] -4.3% 5.2% -4.4%

The economy weighed on the overall market but cyclical stocks did not do too bad apart from energy. Materials was the second best sector, up 1.5% on the week. More of a concern are the banks. Bank stocks have dropped close to 10% since August 3 when it was learned that the China's banking regulator ordered banks to conduct stress tests to gauge the impact of residential property prices falling as much as 60 percent. A recent report from the People's Bank of China disclosed that the balance of outstanding real estate loans by major Chinese financial institutions came to RMB 8.71 trillion (US$1.3 trillion) by the end of June, up 40.2% year-on-year. For the time being at least property prices are still rising although at a slower pace. Prices in 70 major cities climbed 10.3 percent from a year earlier, the statistics bureau announced on Tuesday. But on Wednesday came the news that China's banking regulator ordered banks to transfer off-balance-sheet loans estimated at around 2.3 billion yuan ($340 bn) onto their books and make provisions for those that may default. The assets linked to wealth management products provided by trust companies must be shifted onto banks' balance sheets by the end of 2011. These wealth management products are in many cases securised loans to regional governments. The move may increase pressure for capital-raising at Chinese banks, which have already been quite active raising capital.

On Wednesday China Everbright Bank rose 21.7 billion yuan (US$3.2bn) from its initial public offering, China's second-largest this year after Agricultural Bank of China $22.1 bn IPO. But the big money is in the secondary rights issues. Also on Wednesday China Citic Bank became the latest bank to announce plan to raise its capital through a 26 billion yuan ($3.84 billion) rights issue. The supply of new bank shares is not at an end with Industrial & Commercial bank of China planning to raise 45 billion yuan (US$6.6bn), Bank of China 60 billion yuan (US$8.8bn) and China Construction Bank 75 billion yuan (US$11bn) through rights issue in the coming months.

China's consumer price index rose 3.3% in July after 2.9% in June. But according to the Wall Street Journal, things should improve in the coming months. According to the Journal economists said the gain largely reflected a rise in food prices amid severe flooding in many areas across the country. Economists expect that one-off effect to dissipate in the months ahead, when most are forecasting inflation to decline. Underscoring those receding inflationary pressures, the producer price index rose 4.8% in July from a year earlier, down from June's 6.4%. The National Bureau of Statistics also disclosed that industrial output and retail sales eased in July, pointing to a slowing in the economy.

On Friday the Hong Kong government announced that the territory's second-quarter economic growth was slightly higher than expected, at 6.5 per cent, and revised upwards its full-year forecasts to between 5 and 6 per cent.

SECTORS - CHINA 1 week 4 weeks YTD
CSI300 Energy -2.1% 9.6% -30.4%
CSI300 Materials 1.5% 16.3% -23.4%
CSI300 Industrials -0.4% 10.7% -13.8%
CSI300 Cons. Discretionary 1.2% 11.6% -12.7%
CSI300 Cons. Staples 0.5% 14.6% -5.2%
CSI300 Healthcare 1.2% 17.0% 7.2%
CSI300 Financials -1.1% 4.4% -25.0%
CSI300 Technology 2.3% 17.1% 10.2%
CSI300 Telecom -4.6% 3.5% -27.6%
CSI300 Utilities -1.1% 5.8% -16.5%
SECTORS - HONG KONG 1 week 4 weeks YTD
HS Financials -3.9% 2.7% -7.6%
HS Utilities -1.2% 0.4% 9.2%
HS Property -1.3% 5.1% -1.3%
HS Commerce & Industry -2.0% 6.0% -0.3%

Interim results from FXI constituents:

Huaneng Power International: August 11, Bloomberg writes:

Huaneng Power International a unit of China's biggest electricity producer, unexpectedly posted an increase in first-half profit after ramping up output to meet demand in the fastest-growing major economy. Net income rose to 1.93 billion yuan ($284.7 million) from 1.87 billion yuan a year earlier, the company said in a statement to the Hong Kong stock exchange yesterday. The mean estimate of four analysts surveyed by Bloomberg News was a profit of 1.8 billion yuan.

China Citic Bank: August 12, Bloomberg writes:

Beijing-based Citic Bank yesterday posted a 45 percent jump in first-half profit to 10.7 billion yuan as renewed economic growth boosted demand for loans and fee-based services. The result was 22 percent ahead of the 8.8 billion yuan average of three analysts estimates compiled by Bloomberg.

China Coal Energy: August 13, Bloomberg writes:

China Coal Energy, a unit of the country's second-biggest producer of the fuel, posted a 25 percent increase in first-half profit after a rebounding economy drove up prices. Net income rose to 5.45 billion yuan ($803 million), or 0.41 yuan a share, from a restated 4.34 billion yuan, or 0.33 yuan a share, a year earlier, the company said in a statement to the Hong Kong stock exchange today, based on international accounting standards. That's higher than a median estimate of 4.9 billion yuan in a Bloomberg survey of three analysts.

Interim results expected this week:
Wednesday: Bank of Communications; China Merchants Bank (CIHHF.PK)
Thursday: China Mobile ( CHL ); Datang International Power (DIPGY.PK)
Friday: China Petroleum & Chemical (Sinopec ( SHI ))


FTSE Xinhua A50 is a market capitalization weighted index comprising the 50 largest "A" (domestic) shares listed in China. In Hong Kong the ETF 2823:HK tracks the index; in the US, FXI tracks a sister index including only the 25 largest mainland companies listed in Hong Kong. The Hang Seng China Enterprises Index covers 40 "H" shares issued by mainland companies listed in Hong Kong. In Hong Kong the ETF 2828:HK tracks the index. The Hang Seng Index currently covers the 43 largest Hong Kong listed companies by capitalization. These HK listed companies include a number of mainland Chinese companies. In Hong Kong the ETF 2800:HK tracks the index. In the US, EWH tracks the MSCI Hong Kong Index which is substantially different from the Hang Seng Index.




Disclosure: Long FT/Xinhua A 50

See also Big Q2 Earnings Out of Little China Sunergy - How Will Q3 Look? on seekingalpha.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , International

Referenced Stocks: CHL , EWH , FXI , PGJ , SHI

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