Markets experienced a volatile week, following China’s central bank’s decision to devalue the yuan. The Shanghai Composite surged on Monday following speculation that authorities will speed up mergers of government companies. However, the benchmark slipped lower on Tuesday after a 1.9% reduction in the yuan’s daily reference rate.  The Shanghai Composite Index moved lower on Wednesday after the yuan declined again, heightening fears that China’s economic health was worsening. The Shanghai Composite rebounded on Thursday as the yuan freely traded offshore gained 1.2%.

Alibaba Group Holding Limited’s BABA reported first-quarter fiscal 2016 (ended Jun 30, 2015) earnings of 34 cents per share, which missed the Zacks Consensus Estimate of 41 cents. Revenues of RMB20.2 billion (US$3.27 billion) missed the Zacks Consensus Estimate of $3.36 billion. JA Solar Holdings Co. Ltd. JASO posted second-quarter 2015 adjusted earnings of 27 cents per diluted American Depositary Share (ADS), surpassing the Zacks Consensus Estimate of 9 cents by an impressive 200%.

Last Week’s Developments

The Shanghai Composite Index increased for the first time in three years on Friday, gaining 2.3%. Tech and industrial stocks emerged as the major gainers following speculation that the government will take additional steps to arrest the equity markets’ downtrend.

According to reports, China Securities Finance Corp, which has been designated to boost the market through stock purchases, was attempting to get access to another $322 billion of funds.

The benchmark’s increase on Friday helped to negate losses for the week. The CSI 300 increased 2%. Gauges of tech, telecom and industrial stocks within the index surged 2.9%. The Hang Seng advanced 0.7% while the Hang Seng China Enterprises Index added 1.2%.   

Markets and the Economy This Week

Gains continued into Monday, with the benchmark posting its largest increase over a month. The Shanghai Composite surged 4.9% following speculation that authorities will speed up mergers of government companies. This is among the series of measures being taken to boost economic growth.

Energy, industrial and telecom shares led gains for the day. According to reports, the government was contemplating the merger of two major state owned shipping companies.

There was fresh evidence of an economic slump over the weekend. Producer prices dropped 5.4%, declining to the lowest level in six years in July. Additionally, exports recorded a greater-than-expected decline, falling 8.3% from year-ago numbers.

The CSI jumped 4.5%. Sub-indexes of energy, telecom and industrial within the index increased 5%, gaining the most among the 10 industry groups. The Hang Seng declined 0.1%, while the H-share index advanced 0.6%.

China reduced the yuan’s daily reference rate by 1.9% on Tuesday, the largest devaluation of the yuan in nearly 20 years. Additionally, the People’s Bank of China (PBOC) said that aggregate financing fell from initial estimates of 1.86 trillion yuan in June to 718.8 billion in July.

The Shanghai Composite declined marginally, by 0.1%, ending two successive days of increases during which the benchmark rallied 7.3%. The CSI 300 slipped 0.4% while the Hang Seng lost 0.1%. The Hang Seng China Enterprises Index declined 0.2%, negating an increase of nearly 2.6%.

China Southern Airlines Co. Ltd. ZNH slumped 18% on the Hong Kong exchange following this move. This comes as no surprise, since according to its 2014 numbers, a 1% decline in the yuan reduces $122 million of annual profit. The reason for this is that 93.3% of the airline’s debt was dollar denominated in 2014.

The yuan declined for a second successive day on Wednesday, heightening fears that China’s economic health was worsening. The Shanghai Composite Index declined 1.1% after the yuan declined 1.9% in domestic trade. This was an outcome of the PBOC’s decision to reduce the reference rate by 1.6% at 6.3306 per dollar.

Meanwhile, industrial output increased 6% in July, coming in below estimates. This was also lower than the 6.8% increase recorded in June. Retail sales increased 10.5% in July even as fixed assets investment moved up 11.2% during January-July 2015.

China Southern Airlines experienced the largest two-day loss since 2009, suffering the effects of an increase in the cost of servicing dollar-denominated debt. The CSI 300 lost 1.2% while the Hang Seng declined 2.4%. The H-share index dropped 2%, taking quarterly losses to 15%.

The Shanghai Composite rebounded on Thursday, gaining 1.8% as the yuan freely traded offshore gained 1.2%. Tech and power stocks led the gainers. An assistant governor of the PBOC commented that the exchange rate adjustment following the change in the method of setting rates was “basically already completed.”

A deputy governor of the PBOC said the central bank will maintain a consistent exchange rate. Steps to adjust the rate will be taken only when volatility rises considerably. The central bank is moving toward a more market determined method of fixing the exchange rate. This takes into account the last day’s closing spot price, the movement of other important currencies and the supply-demand situation for foreign exchange.

The CSI 300 increased 1.5%. Sub-indexes of utility and tech stocks gained a minimum of 2.8%, emerging as the highest gainers among the index’s 10 industry groups. Both the Hang Seng China Enterprises Index and the Hang advanced 0.4%.

Stocks in the News

Alibaba Group Holding Limited’s shares dropped 5.1% on Aug 12 after reporting first-quarter fiscal 2016 (ended Jun 30, 2015) earnings of 34 cents per share, which missed the Zacks Consensus Estimate of 41 cents. Increased investments in mobile, marketing and other new ventures led to the earnings miss.

The company reported revenues of RMB20.2 billion (US$3.27 billion), up 16.2% sequentially and 28% year over year. However, revenues missed the Zacks Consensus Estimate of $3.36 billion. Strong growth in mobile business and in China’s commerce retail business aided Alibaba’s revenues.

Total revenue from China commerce business was RMB16.71 billion. The retail business recorded RMB15.71 billion (US$2.5 billion) as revenues, up 24% annually; driven by growth in online marketing services revenues and commission revenues.

Separately, Alibaba announced it was acquiring a 19.99% stake in Suning Commerce for $4.63 billion. Suning, on the other hand, will invest up to $2.28 billion for nearly 27.8 million newly issued Alibaba shares, for a 1.1% stake. Suning is one of the biggest consumer electronics retail chains in China.

JA Solar Holdings posted second-quarter 2015 adjusted earnings of 27 cents per diluted ADS, surpassing the Zacks Consensus Estimate of 9 cents by an impressive 200% and year-ago earnings by 92.9%.

Investors reacted positively to the earnings beat with the shares reaching an intra-day high of $8.35 to finally close at $7.85 on Aug 11, up 0.13%.

JA Solar expects to ship 900–9500 MW of cells and modules in the third quarter of 2015. The company reiterated 2015 shipments in the range of 3.6–4 Gigawatts. JA Solar expects to ship 150 MW of modules to its downstream projects.

JD.com, Inc. JD reported second quarter 2015 loss of 6 cents per share, narrower than the Zacks Consensus Estimate of a loss of 9 cents.  This was also a significant improvement over loss of 35 cents recorded in the year-ago quarter.

Revenues came in at $7.4 billion, exceeding the Zacks Consensus Estimate of $7.2 billion. Revenues also jumped 60.6% on a year-over-year basis. Services and Others contributed $0.5 billion during the second quarter, surging 10.8% from year-ago levels.

The number of annual active customer accounts jumped 72% from the year-ago quarter to 118 million. Number of fulfilled orders surged 87% from 163.7 million in the year-ago period to 305.6 million. 

Mindray Medical International Ltd. MR declined almost 1.6% (44 cents) to close at $27.18 on Aug 11 following dismal second-quarter 2015 results. The company reported adjusted earnings per share (EPS) of 39 cents in the second quarter 2015, which missed our estimate by 7 cents.

The EPS figure also decreased 26.4% year over year, primarily due to modest revenue growth and contraction in gross and operating margins.

Net revenue increased a modest 0.7% year over year to $334.5 million. Challenging market conditions, intensifying competition and foreign exchange headwinds impacted revenues.

Mindray Medical estimates year-on-year net revenue growth for 2015 in low-single-digit percentage (down from the previous guidance of mid-single digit). The company now expects 2015 adjusted net income decline of 30% (previous guidance was high-teens percentage), primarily due to lower revenues and interest income.

Baidu Inc. BIDU invested $100 million in Chinese online laundry firm Edaixi, as part of its efforts to position itself in the fast-growing “online to offline (O2O)” space. Existing investors Matrix Partners China and SIG also participated in the round of funding.

Edaixi is an O2O laundry mobile app created by Beijing-based laundry brand Rong Chang in 2013. It offers an on-demand laundry pickup service for busy urban citizens. The company has around five million customers in 16 Chinese cities, and handles about 100,000 orders per day.

The company raised $3.2 million of angel investment from Rongchang Group Co., Ltd. and Tencent Holdings Limited in July last year. With the new funding the company plans to reduce return hours from 72 hours to 48 hours.

NetEase, Inc. NTES posted second quarter 2015 earnings of $1.74 per share, beating the Zacks Consensus Estimate of $1.62 per share. This was also higher than year-ago earnings of $1.48 per share.

The company reported revenues of $779.5 million, which represents a 65% increase from the year-ago level. Advertising services contributed revenue of $77 million while revenues from e-commerce, email and others was $81.5 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:

The move to reduce the yuan’s daily reference rate by 1.9% is the latest in the series of attempts to prop up the economy. To international analysts and market watchers, it reflects the extent to which authorities are concerned about the state of things. Globally there have been fears that the move may spark off a currency war.

In this situation, it is likely that China may devalue its currency again in the coming months. This is expected to trigger reprisals in the form of similar lowering of exchange rates by currencies worldwide.

However, a section of analysts believe that such fears have been disproportionate to actual events. The financial markets may have been taken aback by the PBOC decision, but this may have been a move which China’s central bank was planning for quite some time. Ultimately, it may prove to be beneficial for the country over a longer period.

At the same time, there may be more surprises in store as the government attempts to boost a flagging economy. Data on FDI and housing prices are lined up for release in the days ahead. But ultimately, government measures to prop up growth moves and related speculation hold the key to market movements in the days ahead.

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