Markets endured a disappointing week, dragged down by concerns on weak data and overvaluation of stocks. The Shanghai Composite Index declined on Monday, dragged down by concerns created by weak data on inflation. Fears arising out of disappointing inflation data carried over into the second trading session of the week as stocks declined on Tuesday.

The Shanghai Composite Index advanced on Wednesday following an encouraging report on retail sales. The benchmark index moved lower on Thursday following concerns about overvaluation of stocks.

Alibaba Group BABA has entered into a definitive agreement to acquire Chinese Internet TV platform Youku Tudou Inc. YOKU, also known as China's YouTube, in an all-cash transaction. China Lodging Group, Ltd. HTHT reported third quarter 2015 earnings of 55 cents per share, exceeding the Zacks Consensus Estimate of 46 cents.

Last Week’s Developments

Last Friday, the Shanghai Composite Index increased 1.9%, helping the benchmark index to advance 6.1% over the week. Tech and brokerage stocks led gains for stocks as retail investors came back to the bourses. Speculation arose that further steps will be taken by the government to boost China’s economy.

The CSI 300 added 2.4%. Sub-indexes of financial and tech stocks advanced a minimum of 3.2%, emerging as the highest gainers. The Hang Seng lost 0.8%, while the Hang Seng China Enterprises Index declined 0.6%. Stocks of companies from the Fujian mopped up gains after President Xi and Taiwan’s President Ma Ying-jeou decided to meet last Saturday in Singapore. Fujian is a province with geographical proximity to Taiwan.

After trading ended on Thursday, the China Securities Regulatory Commission said it would allow resumption of IPOs by the end of 2015. Stocks were also lifted last week by news of a possible linkup between the Hong Kong and Shenzhen exchanges.    

Markets and the Economy This Week

The Shanghai Composite Index dipped 0.4% on Monday, falling for the first time in five days. Inflation data came in below expectations heightening concerns that weak demand is creating a slowdown in China’s economy. Industrial and financial stocks were the leading decliners for the day.

The producer price index lost 5.9% and has now declined for the 44th consecutive months. The consumer prices index dipped 1.3%, coming in behind most estimates. Analysts took the view that CPI data would increase concerns about domestic consumption even as stocks declined after the recent rally.

The CSI 300 declined 0.4%. The Hang Seng lost 1.2%, while the Hang Seng China Enterprises Index moved 1.2% lower. The benchmark index’s relative strength index neared the 70-mark, indicating that overbuying was occurring.

The benchmark index declined again on Tuesday, losing 0.2%. Concerns arising out of disappointing inflation data carried over into the second trading session of the week. This report was the latest in a series which raises questions about the efficacy of the government’s monetary policy initiatives. In October, exports fell for the fourth consecutive month.

The CSI 300 declined 0.2%. The Hang Seng lost 1.4%, while the Hang Seng China Enterprises Index moved 1.8% lower. This was the largest decline for the H-share index in a week. The Shanghai Composite recouped losses of nearly 1.1% as new economy and brokerage stocks gained.

This was a result of optimism over the upcoming linkup between the Shanghai and Shenzhen stock exchanges. Meanwhile, a top official at the Shenzhen stock exchange said that stocks which compose the ChiNext index will be part of the Hong Kong-Shenzhen link.  

The Shanghai Composite Index advanced 0.3% on Wednesday, recouping the day’s losses during the last minutes of the session. Health care and tech stocks led gains following an improvement in retail sales data. This was an indication that steps taken by the government to move from a manufacturing based economy to one dependent on consumption and the services sector was meeting with some degree of success.

Retail sales increased 11% in October, registering the sharpest gains for the year. However, growth in industrial output came in below estimates, registering the slowest growth since last month’s credit crisis. Materials and energy stocks moved lower during the trading day.

The CSI 300 closed nearly flat. Tech and healthcare stocks increased by a minimum of 1.1%. The small cap heavy ChiNext index gained 2.1% on the Shenzhen index. The Hang Seng lost 0.2%, while the Hang Seng China Enterprises Index moved 0.7% lower.  

The Shanghai Composite Index lost 0.5% on Thursday, registering its steepest decline for the week. Tech stocks suffered losses following concerns that recent gains were excessive. Additionally, ZTE Corp called off a plan to repurchase shares. Fears that mainland stocks are overvalued have increased since the 24% rebound for the benchmark from its lowest point in August.

The CSI 300 moved 1% lower. The sub-index of tech stocks within the CSI 300, which has accrued the highest gains for the year, lost 1.8%, suffering the second sharpest lost among all the industry groups. The small cap heavy ChiNext index declined 0.8%.

The Hang Seng gained 2.4%. Financial and energy stocks moved upward on the Hong Kong exchange, helping the H-share index move up 1.6% after four consecutive days of losses.

Stocks in the News

Alibaba has entered into a definitive agreement to acquire Chinese Internet TV platform Youku Tudou also known as China's YouTube, in an all-cash transaction.

Alibaba will pay $27.60 for each Youku American Depositary Share (ADS, each representing 18 ordinary shares of Youku Tudou) in cash, which represents 35.1% premium over the ADS' closing price on Oct 15, a day before Youku announced that it had received a "going private" proposal from Alibaba. Therefore, the transaction is valued at around $3.7 billion and is expected to close in the first quarter of 2016.

The current amount is higher than $26.60 per ADS offered by Alibaba in October. Alibaba owned 18.3% of Youku Tudou as of Oct. 16, when the initial offer was made. In return, Alibaba will gain access to about 570 million online video users, helping the company to deliver American films and drama series to the Chinese audience, thereby increasing its push into the Chinese digital media market.

JA Solar Holdings Co., Ltd. JASO has completed module shipment of 92.5 megawatts (“MW”) for the largest solar photovoltaic (PV) power project in Philippines.

The facility is located in Cadiz City of the Negros Occidental province, near the equator and around 3 km away from the coastline. It is has a total capacity of 132.5 MW, of which 92.5 MW will be equipped with JA Solar’s JAP6-72 310W modules, including an initial on-site installment of more than 30 MW.

According to the company’s president, module shipments for the Cadiz City solar project mark its entry into the Philippine market as well as its commitment to build its presence in emerging markets.

China Lodging Group, Ltd. reported third quarter 2015 earnings of 55 cents per share, exceeding the Zacks Consensus Estimate of 46 cents. Revenues came in at $251.8 million, representing a 15.3% increase on a year-over-year basis. Net income jumped 49.5% on a yearly basis to $ 35.2 million.

The total number of hotel rooms rose 34% on a yearly basis to 264,076. China Lodging Group added 204 hotels during the third quarter. Occupancy rate increased from 85.8% reported in the last quarter to 89.2%, but declined from the year-ago rate of 92.5%.

Phoenix New Media Ltd. FENG reported third quarter 2015 earnings of 5 cents per share, lower than the Zacks Consensus Estimate of 18 cents. Revenues declined 9.6% year-over-year to $61.4 million.

The new media company’s net advertising revenues declined 7.9% to $47.2 million due to falling demand for brand advertisements on PCS. This effect was somewhat offset by the 89.8% jump in advertising revenues from the mobile segment. However, revenues from all other segments, such as paid services, mobile value-added services, games and others, declined 14.8%, 8.7% and 31.5%, respectively.

Bitauto Holdings Ltd. BITA reported third quarter 2015 earnings of 17 cents per share. Revenues came in at $167.6 million, exceeding the Zacks Consensus Estimate of $160 million. This represents a year-over-year increase of 75.2%. Gross profit rose 47.4% to $113.2 million.

The auto sector content and marketing services provider’s advertising business revenues increased 39.6% from the year-ago period to $68.7 million, following heightened recognition of the company’s website. The EP platform business made a major contribution to the company’s success with revenues jumping 144.6% on a yearly basis to $86.6 million.

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:

Data on inflation and industrial production have dragged down stocks this week. Meanwhile, tech stocks have witnessed a significant decline. This is a significant development given that new economy stocks have powered the market’s rebound. Investor sentiment has been boosted by the possibility of a link between the Hong Kong and Shenzhen stock exchanges in the near future.

Next week is mostly devoid of any important economic reports, but for Tuesday’s report on housing prices. This means that markets will be guided by political developments and international factors like oil prices.

Over the next few days investors will once again assess if government initiatives to boost the economy have been effective enough. Secondly, market watchers will dwell on whether the recent rebound has been excessive in nature. These are the two major factors which will determine the course of markets in the days ahead.  

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