Shanghai Composite Index Slips, Lenovo Falls

The Shanghai Composite Index managed to stay above the 3,200 level despite a 27.54 point drop today. The 0.85 percent decline to cap off the week brought it to a final close of 3,202.08 as the market slid into the closing bell just above the day’s low at 3,199. Volume was 226.23 million shares.

The Shanghai Composite is up 2.53 percent over the previous month and 3.17 percent year to date. Over the trailing twelve months, the Shanghai Composite has netted investors 11.96 percent.

SSEC Winners & Losers

The biggest climber on the Shanghai Exchange today was North Electro-Optic Co., Ltd., with a 10.02 percent gain, followed by Xinjiang Qingsong Building Materials & Chemicals, up 8.25 percent, and Lucky Film Co., which rolled to a gain of 6.61 percent today. CSSC Steel Structure Engineering Co. gained 6.56 percent, Tibet Tianlu Co. gained 6.13 percent and Henan Oriental Silver Star Investment Co. was up 5.93 percent. CITIC Guoan Wine Co. gained 5.61 percent. And Gansu Mogao Industrial Development Co. was up 5.41 percent.

The biggest losers today were Zhejiang Wanjia Co., down 6.74 percent, Qinghai Spring Medicinal Resources Technology, down 6.10 percent, Henan Yinge Industrial Investment Co., down 5.7 percent, and Guangdong Boxin Investing & Holdings, down 5.63 percent.

All shares listed above were “A” shares.

Chinese Economy

Chinese employers are hiring – and paying more to attract Chinese talent. Half of all employers plan salary increases by six percent or more in 2017, but companies report they are finding it difficult to find skilled workers sufficient to meet demand.

49 percent of Chinese firms surveyed plan to increase their headcount, while just 11 percent planned net layoffs, according to British consulting firm Hays. The news indicates overwhelmingly positive sentiment among employers, who would not want to hire into a recession.

However, another report from recruiting consultant firm Robert Walters projects a hiring slowdown this year, with freezes in the financial industry and more emphasis on contractors rather than employees.

The Foreign Direct Investment figure came in much lower yesterday, with Beijing reporting a decline of 9.2 percent, compared to the increase of 4.1 percent he previous month.

Chinese technology leviathan Lenovo took it on the chin last year, with net profit falling by 67 percent year-over-year to just US$98 million in the 4th quarter. Analysts had been expecting earnings of $145.9 million. Top line revenues were also off by 6 percent, which is what happens when you get caught installing malware in the off-the-shelf model.

Also weighing on Lenovo’s sales: Consumers are increasingly choosing new smartphones and tablets in lieu of PCs. Lenovo is also caught between bruising competition from phone makers and rising component prices.

Meanwhile, the company’s two lines of mobile phones – Moto and Lenovo – fell 23 percent year over year in the final quarter as other Chinese manufacturers like Huawei chewed up their competition, stealing market share even from the formidable iPhone.

Lenovo’s PC and smart device sales were up 2 percent year over year in the 4th quarter, thanks to growth in North America.

China’s Politics & Policy

Equities have an opportunity to pick up some capital flows, as alternative investment vehicles in the form of universal life insurance products are losing their appeal. Chinese insurance companies have been marketing UL products as high-yield wealth management products with a life insurance death benefit kicker. Anbang Insurance Group sells one that promises a 4.18 to 4.38 percent return after two years, with no surrender charges. That’s a nice little boost compared to cash deposit interest rates at banks of about 1.5 percent.

It used to be 4.7 percent but the China Insurance Regulatory Commission has been cracking down on life insurance companies marketing their products in this way, undercutting their appeal. Which may help some dividend-paying, blue-chip stocks find some demand.

It may also help that the chairman of the China Securities Regulatory Commission has been publicly assailing the insurance companies that market these products – and then used the proceeds to finance leveraged buyouts, as “barbarians,” “robbers” and “ghouls” – rhetoric we haven’t seen between insurance and investment professionals since Americans tried to regulate fixed annuities as securities.

Exports from China to “Belt and Road” economies are way up, fueling a 19.6 percent surge in foreign trade in January. But exports to the European Union and the United States were also sharply higher, by 13.6 and 17.2 percent, respectively. Exports to Japan rose 18 percent.

Chinese Monetary Policy

You remember back before we had ATMs and everybody flooded the bank and the supermarket check cashing line on Friday afternoon because that was the only way you could get spending cash for the weekend? Banks and supermarkets had to ramp up their supply of cash on hand on Friday to meet the demand. Well, that’s what central banks do, and the People’s Bank of China is no different: For the second Friday in a row, The People’s Bank of China once again injected more liquidity into the Chinese economy as it tries to ease a cash crunch. Open market operations netted an 80 billion yuan increase in the money supply.

From an econometric perspective, increases in the money supply tend to be a bullish indicator for stocks.

Meanwhile, the yuan weakened against the dollar today in open market trading, despite a higher daily reference point peg from the People’s Bank of China. The PBOC set the peg at 6.8456 today, but onshore currency traders weren’t buying it and bid the yuan down 0.16 percent, or 113 points, to 6.8631. Offshore traders bid the yuan down by 0.03 percent, or 19 points.

The PBOC has moved the daily trading fix higher for four days in a row. Onshore traders are allowed to trade yuan for dollars within 2 percent of the daily trading fix. The yuan actually staged a mini rally this week before retreating again against the dollar in today’s trading.

China’s Economic Outlook

The next major data release will be the House Price Index, due out Tuesday, and then nothing until the following Tuesday, the 28th of February, when we’ll see the NBS and Caixin Manufacturing PMI figures released, as well as the official NBS Non-Manufacturing PMIs.

Given the strong payroll projections we mentioned above, it seems like Chinese employers have some pricing power to offer pay increases, so we are overall bullish about PMI and market prospects over the coming days.

Donald is a strategist for economiccalendar.com. He specializes in a fundamental approach while informing traders of relevant economic data. Actively trading since university, Donald trades indices and commodities. He earned his Bachelor's in Finance from Baruch College's Zicklin School of Business in New York City.