Markets had a holiday-shortened but eventful week, experiencing gains before losing on Thursday. Mainland markets were closed on Monday because of the Dragon Boat Festival holiday. Stocks rebounded on Tuesday riding on gains chalked up during late trading.

The benchmark index increased again on Wednesday, with energy and power stocks leading gains. However, stocks plunged on Thursday, with tech stocks emerging as the biggest losers.   

China Eastern Airlines Corp. Ltd. CEA, China Southern Airlines Co. Ltd. ZNH and Air China Ltd. AIRYY are merging their airline cargo operations. Baidu, Inc. BIDU announced that it intends to sell senior notes worth $1.25 billion.

Last Week’s Developments

The Shanghai Composite Index nosedived last Friday, losing 6.4% at the end of trading. Concerns that new share sales would divert funds from older stocks triggered losses. Market watchers also believed that a bubble had built up over time, pushing valuations to unsustainable levels.

The benchmark index declined 13% over last week. After losing more than 10% from the high hit on Jun 12, the gauge is possibly indicating that a correction is in progress.

A measure of 30-day volatility on the benchmark rocketed to its highest level in nearly six years after 400 shares listed on the Shanghai exchanges declined. The CSI 300, which is made up of the country’s largest stocks, declined 6%. Sub-indexes of tech, telecom and industrial stocks within the index lost a minimum of 15% over last week.

The tech-heavy ChiNext slumped 5.4% and has declined 17% since it achieved a record high on Jun 3. The Hang Seng China Enterprises Index also moved lower, losing 0.6%. The Shanghai Composite declined at the sharpest clip compared to other global indices over last week. The slump came after a 152% rise over the previous 12 months, the highest across the globe.

Markets and the Economy This Week

Mainland markets were closed on Monday because of the Dragon Boat Festival holiday. Shares in Hong Kong increased ahead of an emergency meeting convened in Brussels to discuss the debt crisis in Greece. The Hang Seng added 1.2%. For every share that declined, six shares posted gains. The Hang Seng China Enterprises Index surged 1.5%. This was its largest increase in 10 days.

Stocks rebounded after mainland markets reopened on Tuesday. Gains chalked up during late trading helped the Shanghai Composite stage its best intraday recovery in eight years. The benchmark index advanced 2.2% at the end of trading after plummeting during the morning session, losing 4.8%. It then went on to regain 312 points, rebounding by the highest margin since Jun 2007.

The CSI 300 surged 3.2%, boosted by gains from industrials and consumer shares. The Hang Seng increased 0.9% while the H-share index advanced 1.7%. The ChiNext also made a comeback during the day, gaining 2.4% by the end of trading, after losing 4.8% at one point.

The Shanghai Composite gained again on Wednesday, moving up 2.5%. Stocks made their largest two-day gains in three weeks, with energy and power stocks leading gains. Markets experienced renewed fund flows over two days following Friday’s slump.

The CSI 300 gained 2%. A sub-index of utilities surged 5.1%, emerging as the largest gainer among the 10 industry groups. A gauge of energy stocks advanced 4.8%. The Hang Seng added 0.3% while the Hang Seng China Enterprises Index increased 0.6%.    

Stocks plunged on Thursday, with tech stocks emerging as the biggest losers. Margin traders cut holdings of share purchases made with borrowed money triggered losses. The Shanghai Composite lost 3.5%, negating a 0.7% gain. This also brought an end to the two-day rally amounting to 4.7%. The benchmark index lost nearly 4.4% during the last trading hour.

Analysts opined that a correction was still in progress. Market watchers also said that stocks were taking losses because of the lack of further monetary stimulus. Investors now feel such a move is unlikely in June. The CSI 300 lost 3.6%. The Hang Seng declined 1% while the H-share index lost 1.6%.

Stocks in the News

China Eastern Airlines Corp. Ltd., China Southern Airlines Co. Ltd. and Air China Limited are merging their airline cargo operations.

This merger among the country’s largest airline cargo operators will create Asia’s biggest freight transport company. The development was reported by the official Xinhua news agency, which was quoting a high ranking official from the country’s civil aviation administration.

The company to gain most from this decision will be China Eastern since its cargo performance is the most disappointing of the three. However, no details regarding the valuation or timeline of the deal were revealed.

Ultimately, the structure of the new entity remains unknown. This is significant because Cathay Pacific Airways Ltd. CPCAY has a joint venture with Air China’s cargo business. Meanwhile, it also has thrice the registered capital of China Eastern.

Baidu, Inc. announced that it intends to sell senior notes worth $1.25 billion. The company has already filed a prospectus with the Securities and Exchange Commission.

Baidu stated that the net proceeds would be used for general corporate purposes. Goldman Sachs (Asia) L.L.C. and J.P. Morgan Securities LLC will act as joint book-running managers for the offering. Funds garnered from the senior notes offering is expected to bring down its cost of capital, thus strengthening the balance sheet and supporting growth.

The company’s proposed senior notes were assigned “A3” rating by Moody's Investors Service – the credit rating agency of Moody’s Corporation. Moody’s granted the rating based on its strong business profile and performance.

The A3 rating carries a positive outlook. Moody's anticipates sustainable growth in Baidu’s user traffic and online advertising services in the growing Chinese market. Additionally, Moody’s remains optimistic about Baidu’s strong dominance in the mobile search market and its continuous efforts to develop new products.

Alibaba BABA will feature 11 additional countries on its foreign brands portal Tmall Global. It will be the first company to offer these foreign brands in China as it looks to strengthen its position in the e-commerce arena. Alibaba is also partnering with 26 foreign embassies through its group shopping site Juhuasuan. The site will market products from these partner countries.

In a separate development, Alibaba and its finance affiliate, Ant Financial, have agreed to invest around $483 million each in a new venture — Koubei.com — which will initially focus on China’s fast growing food-delivery market.

While the Chinese e-Commerce giant will transfer Taodiandian, its online food ordering and delivery platform, to the joint venture (JV), its financial arm Ant will merge its offline merchant services. Koubei was previously operated through Taobao, Alibaba’s retail marketplace.

Ant Financial’s Alipay, which manages around 80% of Chinese online payments, will create the payment platform for Koubei’s services.

Yingli Green Energy Holding Company Limited YGE or “Yingli Solar” will provide 40 MW of solar panels to Sybac Solar for two power plants located in Honduras. These plants are the Las Lajas project, situated in Choluteca and the Pacific Solar project, situated in Nacaome.

The solar panels to be delivered are the multicrystalline high performance YGE 72 Cell Series panels, designed for large utility projects. At present, Yingli is providing 25 MW of these panels for phase one of the Pacific Solar project which will generate 50 MW of power. It is also providing 15 MW of these panels for the first phase of the Las Lajas project.

In another development, the company has signed an agreement with LONGi Silicon Materials Corp. ("LONGi") to jointly manufacture monocrystalline silicon wafers, ingots, solar cells and solar panels.

Yingli Solar will be able to incorporate LONGi's highly competitive technology into its production lines, while monocrystalline silicon manufacturer LONGi could expand into solar panel assembly. Thanks to the partnership, LONGi will also supply high quality monocrystalline wafers to Yingli at a competitive price.

China Life Insurance Co. Ltd. LFC is issuing China’s first perpetual securities which comply with rules aimed at shoring up the country’s insurance sector. China’s largest issuer of securities is offering Reg S US dollar-denominated Core Tier 2 60 non-call five notes. These are expected to return nearly 4.375% at initial price guidance.

A call option will be available within five years. The notes will be adjusted to the five-year US Treasury rate added to the margin payable on a semi-annual basis over every successive year period.

PetroChina PTR gained 3.4% on the Hong Kong stock exchange during the morning session of trading on Jun 23. The increase came after the company disclosed to Caixin that it expects it will post profits of nearly 40 billion yuan during the first half of 2015.

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:

Stocks rebounded from Friday’s losses to post strong gains for two consecutive days this week. However, the benchmark plunged again on Thursday, underlining the volatile state of markets. Analysts opined that markets had recovered from a short-term low. Investors were returning to the bourses after a bout of overselling, they said. However, they warned that volatility would remain high.

Next week features important reports on manufacturing and services. The nature of this data may well determine the direction of markets going forward. Any positive news on this front could reduce volatility and return a semblance of order to proceedings.

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