Markets had a disappointing week, experiencing severe losses on all but one day. Investors ignored a rate cut as stocks continued to move lower on Monday. The Shanghai Composite rebounded on Tuesday, posting the first gains in four days, following speculation that the government will take measures to prevent market losses from widening.

Stocks lost out on most of Tuesday’s gains as margin debt declined for the seventh successive day on Wednesday. The Shanghai Composite Index nosedived on Thursday, falling below the 4000-mark for the first time since April.

Baidu, Inc. BIDU said it will invest $3.2 billion over the next three years to boost its O2O or online-to-offline commerce service offerings by stimulating group-buying website Nuomi. Yingli Green Energy Holding Company Ltd. YGE announced that it has issued project bonds for a four-megawatt (MW) solar project following the completion of bond financing of $3.2 million (RMB 20 million yuan).

Last Week’s Developments

The Shanghai Composite Index slumped 7.4% last Friday, registering the largest decline in five months. The decline in stocks was a result of leveraged investors drastically reducing their holdings. Additionally, Morgan Stanley (MS) warned that stocks were overvalued, joining several analysts which had joined similar concerns during last week.

The financial services company said that a larger number of companies, excessive valuations and high margin debt were proving to be detrimental for China’s markets. It added that the benchmark could lose nearly 30% up to mid-2016.

Tech and small cap stocks led the losers. Incidentally, it was these categories which had powered gains during China’s record breaking rally until the middle of last month. The ChiNext declined 8.9%, taking its losses to 27% since it hit its highest point on Jun 3. The Shenzhen Composite Index also took losses, declining 7.9%.

The CSI also lost 7.9%. The Hang Seng declined 1.8% while the Hang Seng China Enterprises Index lost 2.8%. The largest stock on mainland indices, PetroChina PTR, declined 7%.

The benchmark declined 6.4% over last week, following a 13% nosedive the week before. The 13% plunge was the deepest since the financial crisis struck markets worldwide.

Markets and the Economy This Week

Investors ignored a rate cut as stocks continued to move lower on Monday. This fourth successive rate cut was accompanied by statements from the country’s securities regulator that it had the ability to reduce the risks presented by widespread margin trading. Despite such assurances, the benchmark index declined 3.3% and had lost 20% from the high achieved on Jun 12.

Volatility continued to plague markets on Monday. The Shanghai Composite lost as much as 7.6% on Monday while gaining 2.5% at one point. This led to the largest intraday variation in terms of points in 23 years. A gauge of tech stocks declined 7.5%, leading the losers among all industry groups.

The CSI 300 lost 3.3% while the Shenzhen Composite slumped 6.1%, sinking to its lowest point in nearly two months. The ChiNext declined 7.9%, taking its monthly losses to 24%. The H-share index lost 3% while the Hang Seng declined 2.6%.  

The Shanghai Composite rebounded on Tuesday, posting the first gains in four days. The benchmark registered an intraday swing of 432 points before ultimately gaining 5.5%. A measure of volatility hit its highest point in seven years. Gains were a result of investors speculating that the government will take measures to prevent market losses from widening.

The CSI 300 surged 6.7%. All of its 10 sub-indexes posted gains with the sub-index of tech stocks rallying 8.3%. This increase halted a slump of 22% which had occurred over three days. The ChiNext gained 6.3% while the Hang Seng advanced 1.1%. The Hang Seng China Enterprises Index gained 2.3%.

Despite the day’s gains, the Shanghai Composite slumped 7.3% in June, the largest loss registered in a month since Jun 2013. The CSI lost 7.6% over the same period. Sub-indexes of tech and telecom stocks each declined 19%, emerging as the highest losers among the industry groups.

Stocks lost out on most of Tuesday’s gains as margin debt declined for the seventh successive day on Wednesday. Additionally, economic data indicated that the country’s growth remained a matter of concern. The benchmark index declined 5.2% while the 30-day gauge of volatility surged to its highest level in more than six years. Commodity, industrials and financial stocks led the decliners.

The government’s manufacturing PMI came in at 50.2, lower than most estimates. Meanwhile the HSBC/Markit manufacturing PMI came in at 49.4, also missing estimates. The CSI 300 declined 4.9%. Sub-indexes of material and industrial stocks lost a minimum of 5.4%. Financial markets in Hong Kong were closed because of Hong Kong Special Administrative Region Establishment Day.

The Shanghai Composite Index nosedived on Thursday, falling below the 4000-mark for the first time since April. Margin traders played their part in stocks’ downfall as they reduced holdings further. Additionally, investors remained skeptical about the efficacy of steps being taken by the government to boost markets.

The benchmark declined 3.5% and has lost 24% since the peak achieved on Jun 12. Nearly $2.4 trillion of market value has been erased in the process. Power, commodity and industrial stocks led the losers as 15 stocks declined for every stock that registered gains. The CSI 300 lost 3.4% as sub-indexes of commodity, technology and utility stocks lost in excess of 4%. The H-share index lost 1.5%, while the Hang Seng managed to move up 0.1%.

Stocks in the News

Baidu, Inc. said it will invest $3.2 billion over the next three years to boost its online-to-offline commerce service offerings by stimulating group-buying website Nuomi. The amount represents about 40% of the cash on its books. Baidu purchased Nuomi for $160 million in 2014 which operates in more than 330 Chinese cities as well as 650,000 online stores.

Baidu also introduced “Membership Plus,” which combines Nuomi's membership program with merchants’ personal client relationship management systems via member-only prepaid cards, a payment-after-service option and other offerings. Nuomi tested Membership Plus in restaurants and movie ticket categories this year.

According to Baidu, this strategy will help merchants in the network to form their own marketing platform, increase traffic to their sites or physical business locations and take advantage of its vast user base.

Yingli Green Energy Holding Company Ltd. announced that it has issued project bonds for a four-megawatt (MW) solar project following the completion of bond financing of $3.2 million (RMB 20 million yuan). The company’s project financing partners include Tianjin Xinhai Financial Leasing Co., Ltd. (Xinhai Leasing) and Principal Shield (Xiamen) Financial Technical Service Co., Ltd.

The project bonds will be available to the Chinese public at Shicaidai, a China-based Internet finance firm offering person-to-business (P2B) online financial products, including loans and wealth management tools.

The solar project is located in Hengshui City in China’s Hebei Province. It will generate 6.5 million kilowatt-hours of solar electricity per year, which is equivalent to not using 2,600 tons of coal and eliminating more than 6,700 tons of carbon emissions.

Alibaba BABA has entered into an agreement with DMG entertainment, a film company and Hunan Satellite Television. This deal will increase the size of subscription-based cable, mobile and Internet entertainment offerings available to consumers in China. The service will be the first bundled offering of mobile, cable television and Internet entertainment in the country.

The service will first be jointly offered to television subscribers of Hunan Satellite, who add up to more than six million. This includes film, gaming and television content. It will then be expanded across China. Alibaba will offer the service via its TMall website. The deal is being viewed as part of Alibaba’s larger efforts to increase its entertainment offerings in China.

CNOOC Ltd.’s CEO Bozhong 28/34 oilfields comprehensive adjustment project started production and yielded its first oil. 

Located in Bohai, the Bozhong 28/34 oilfields lie in an average water depth of about 22 meters. The project comprises three sub-projects – Bozhong 28-2S oilfields comprehensive adjustment project, Bozhong 34-1 oilfield comprehensive adjustment project and Bozhong 34-2/4 oilfield comprehensive adjustment project.

Six offshore platforms and 79 producing wells form the main production facilities of the project. Presently, 39 wells are engaged in the production of about 22,000 barrels of crude oil per day. The adjustment project is anticipated to reach its ODP-designed maximum production capacity of about 30,000 barrels of crude oil per day in 2016.

CNOOC is the operator of the independent oilfield – Bozhong 28/34 – with a 100% holding.

Cheetah Mobile Inc. CMCM has expanded its partnership with Shenzhen Tencent Computer Systems Company Limited, also known as Tencent Shenzhen. The company is a subsidiary of Tencent Holdings Limited TCEHY. An agreement in addition to its existing deal has raised the maximum amount of promotional services fees, which may be paid to Cheetah Mobile by Tencent and its subsidiary companies for the year ending Dec 2015.

The maximum amount payable has been raised to RMB250 million from RMB105 million. Tencent’s higher demand for Cheetah’s mobile advertising services has led to the increase in this amount. Apart from this, all terms and conditions of the original agreement remain unchanged.  

China Unicom CHU and Telefonica S.A. TEF have entered into a partnership to jointly procure smartphones of identical specifications. This will aid these companies to provide better data services to their customers in Europe, China and Latin America.

The first of these collaborative initiatives, intended to procure 4G smartphones has already been accomplished. This was made possible due to combined processes which began in end-2014. As a result, significant economies of scale have been achieved to procure smartphones at relatively lower costs from TCL and Lenovo LNVGY. These smartphones will become available in Europe, China and Latin America from the second half of the year.

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:

The benchmark index has declined consistently over the week, posting record losses. China’s world-beating rally seems to have come to an end and the market seems to be in correction mode. The immediate reason for losses seems to be the consistent reduction of margin debt. Additionally, economic data has been far from inspiring.

The government has stepped in again to stem the rout. However, a fourth successive rate has been largely ignored by investors. This is also true for assurances as well as action from the country’s securities regulator. Warnings from global investment majors have not helped matters.

Next week features key data on inflation and loans. If these reports are positive in nature, they may help to curb losses plaguing the markets. Additionally, it remains to be seen what additional steps the government takes to stop the current market slide. Whether investors respond to such measures will also be an important factor determining market direction going forward.

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