China Economy and Markets Report: Real Estate Rally Boosts Markets - Analyst Blog

Chinese markets continued their positive run following a rally by property developers who anticipated easing of restrictions by the government. A report in the Shanghai Securities News indicated such regulations would be eased in certain cities.

A fall in industrial profit growth dragged stocks last Thursday while markets moved lower ahead of key manufacturing data on Monday. PMI numbers were indeed disappointing, increasing speculation of government intervention.

Last Week's Developments

A reduction in industrial profit growth and an increase in money market rates dragged stocks lower last Thursday. Consequently, the Shanghai Composite Index experienced its largest loss in a week, losing 0.8% by the close. The index has lost 3.3% till date this year, following concerns that a slowdown will reduce profits and a resumption of IPOs will redirect funds.

Industrial profits increased 9.4% during January and February this year. This was lower than 12.2% growth registered in December. The CSI 300 Index fell 0.7%, with nine of its 10 industrial groups declining. The Hang Seng China Enterprises Index gained 0.3%.  

Stocks returned to their winning ways on Friday after larger profits from banks and automakers dispelled concerns that growth was declining. The Hang Seng China Enterprises Index increased 1.3% to close above 10,000, the first time in nearly six weeks.

The index gained 6.1% over the week, the highest increase since vital reforms were announced in November last year. The Hang Seng moved up 1.1% while the Shanghai Composite Index slipped by 0.2%. The CSI 300 Index declined 0.2% after gains by automakers failed to negate losses by small cap and tech stocks.

Markets and the Economy This Week

Markets took losses on Monday after industrial and consumer discretionary stocks declined ahead of the release of manufacturing data the next day. The Shanghai Composite Index declined for the fourth consecutive day, losing 0.4%.

The Shanghai Composite declined 1.1% last month resulting in a quarterly loss of 3.9%, the largest since June last year. Monthly losses were a result of the collapse of a private developer and fears that a resumption of IPOs will redirect funds. The CSI 300 dipped 0.3%, taking its quarterly loss to 7.9%. The Hang Seng China Enterprises Index increased 0.7% to gain 1.9% over March.

Infrastructure and property related companies rallied on Tuesday, following affirmative government action. The Chinese government has relaxed funding regulations for financial companies and increased the pace of construction projects.

The Shanghai Composite Index gained 0.7% while the Hang Seng China Enterprises Index lost 0.1%, reversing four consecutive days of gains. The CSI 300 Index moved up 0.8%. The Bloomberg China-US Equity Index, a gauge of the most heavily traded Chinese stocks in the U.S. gained for a third consecutive day. This index has now reduced its quarterly decline to 6.5%.

The official Purchasing Managers' Index improved marginally, rising from 50.2 recorded in February to 50.3. This was above the key level of 50, a reading below which indicates contraction. However, the final reading of the HSBC PMI declined from 48.5 in February to 48 in March. This was the lowest figure recorded since July. There are clear indications of weakness in the economy and swift government action is expected.

The property developers rally continued on Wednesday following speculation that the government will ease restrictions on housing. The Shanghai Composite Index gained 0.6% and the CSI 300 Index moved up 0.8%. The Hang Seng China Enterprises Index declined 0.7%.

A report in the Shanghai Securities News said certain Chinese cities were considering relaxing norms on home purchases. Consequently, a measure of developers within the Shanghai index registered a substantial 3.2% increase, the highest among the five industry groups.

Stocks in the News

China Southern Airlines Co. Ltd. ZNH experienced a 24% decline in net profit during 2013. Disappointing results are attributable to intense competition and the current economic situation.  Another reason for such results is the country's large and rapidly expanding high speed railways network.

Operating profit of the largest domestic carrier by fleet size declined 70%. Net profit came in at 1.99 billion yuan ($321 million), significantly lower than last year's figure of 2.62 billion yuan. Revenue declined by 1% to 98.55 billion yuan

China Petroleum and Chemical Corporation SNP, also known as Sinopec, has raised $5 billion from the largest issue of dollar-denominated notes made by an Asian issuer in more than 10 years. Sinopec issued notes with maturity periods of three, five and 10 years. 70% of the three years fixed rate notes were purchased by U.S. investors.

In another development, Sinopec intends to start producing from the Yuanba sour gas field in China's south western Sichuan province by the end of 2014. The Chinese oil production giant will use its own technology to tap resources from the Yuanba field.

Baidu, Inc. BIDU has successfully argued a U.S. lawsuit filed by pro-democracy activists. The plaintiffs had alleged that censorship by the website at the behest of China's government was in violation of rights as ensured by the First Amendment. However, according to the decision made by U.S. District Court Judge Jesse Furman: "The First Amendment protects Baidu's right to advocate for systems of government other than democracy (in China or elsewhere) just as surely as it protects plaintiffs' rights to advocate for democracy."

Dismissing the lawsuit, Judge Furman said the search engine's "editorial judgment" was comparable to that of a newspaper's editor who takes a call on which articles are to be published. The lawyer for the plaintiffs said his clients will appeal.

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:

Developers stocks have chalked up significant gains anticipating the easing of government restrictions. Some policy measures on this front have already had desirable effects. This trend is likely to continue intermittently as the government looks to invigorate the economy in multiple ways.

Soft PMI data has once again indicated inherent weaknesses in the economy. The need for government intervention has been felt for some time now and such action should happen soon, which would immediately move markets upwards.  

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