Shanghai Composite Index Up on Late Day Energy Stock Surge

The Shanghai Composite Index gained 13.36 points today to close at 3,250.81 for a gain of 0.41 percent. The gains came thanks to a sharp upswing in the final hour of trading. Stocks around the region took an early hit at the conclusion of the G20 summit, when the U.S. issued a statement warning that it reserved the right to use sanctions and other measures to retaliate against perceived unfair trade measures.

Chinese stocks were also lower earlier in the day due to investor anxiety about new government-imposed speed bumps in the property market, which impacted shares in real estate companies. However, energy companies rallied late in the day after Hong Kong’s country’s biggest coal company, China Shenhua, announced plans to make a major dividend payment of 59 billion yuan ($8.54 billion) after it posted a profit increase of 40.7 percent for the past year. The dividend puts the dividend yield at 20 percent. China Shenhua shares gained 16 percent to reach an 18-month high in today’s trading.

The Shanghai Composite has gained 0.43 percent over the past five trading days and is up 4.26 percent over the past three months. Year-to-date, the index has generated gains of 4.74 percent, and is up 7.69 percent over the past year.

South Korean Kospi slipped 0.35 percent today, and the Nikkei fell 0.35 percent. The Taiex, representing Taiwanese shares, gained 0.04 percent after some early losses. The Hong Kong Hang Seng Index rose 0.79 percent. The Shenzhen Composite gained 6.32 points, or 0.31 percent to start the week.

The China Securities Regulatory Commission has blessed off ten new IPOs over the weekend, which is the same number as last week. Five of them will open on the Shanghai Stock Exchange, two of them on the Shenzhen, and three on the ChiNext board. The ten offerings are to raise not more than 5.1 billion yuan (US$740 million). The CSRC has vowed to speed up their IPO approval process and transform the approval process from a bureaucratic one to a more market-oriented one. As of right now there are still hundreds of companies waiting for the chance to float shares on one or more of China’s exchanges, and companies often have to wait months or years for the chance to go public.

SSE Winners and Losers

The Shanghai Exchange’s big winners today were Anhui Expressway, gaining 10.05 percent, Aurora Optoelectronics Co., up 6.85 percent, Chongqing Three Gorges Water Conservancy & Electric Power Co., up 6.67 percent, Harbin Air Conditioning, which heated up 6.31 percent, Hubei Yangfan Holding Co., which held on to a 6.20 percent gain, Shanghai Datun Energy Resources Co., surging 6.17 percent, and Jiangxi Luanchang Optoelectronic Science & Technology Co., up 5.45 percent for the day. Anhui Hengyuan Coal Industry & Electricity Power co. also powered up a gain of 5.45 percent.

Today’s biggest losers on the exchange were P2P Financial Information Service Co., falling 10.18 percent, Tongling Jinda Special Magnet Wire Co. down 8.28 percent, Hubei Mailyard Share Co. fell 6.31 percent and China Grand Automotive Services Co. slipped 5.99 percent.

Chinese Economy

Galaxy Securities issued a mixed report on the outlook for Chinese equities. “The market is concerned about two things: whether the economic recovery is sustainable, and the reality of tighter liquidity,” they wrote this week. UBS Securities analyst Gao Ting wrote, As improved economic fundamentals allow the PBOC more room to manoeuvre, we think monetary policy will remain in tightening mode for a longer period. As tight liquidity usually has a negative impact on the stock market, we want to keep an eye on the PBOC’s subsequent actions.”

Hongkong and Shanghai Hotels reported a 32.5 percent drop in earnings for 2016 on Monday, worse than expected, thanks to international jitters over Brexit and the U.S. presidential election as well as global terrorist threats that have affected travel all over the world. However, air passenger growth is way up, with passenger trips surging 17.6 percent in January on a year-over-year basis, and up 11.8 percent for the year 2016.

Chinese Currency Overview

The Chinese central bank lowered the daily reference point against the dollar by 125 basis points compared to Friday. The onshore yuan weakened slightly against the dollar, as did the offshore yuan in early trading.

The governor of the People’s Bank of China, Zhou Xiaochan, announced that China would maintain “stable and neutral” monetary policy going forward. The governor also announced that in his view, the financial system in China was healthy in general, but some risks came from high leverage, property markets and unregulated ‘shadow banks.’

Real estate markets seem to have stabilized in China, as five new cities have issued capital curbs to discourage real estate speculators and deflate a perceived bubble in home prices. Out of 70 city markets surveyed, over half of them remained within 0.5 percent of last month’s data, indicating a big drop off in price volatility.

New home prices in Beijing and Shanghai rose just 0.1 percent in February, on average. Second and third-tier cities saw higher gains of 0.3 or 0.4 percent, according to the National Bureau of Statistics.

China’s Economic Outlook

For a country as highly developed as China (in its big cities, anyway), there are still compelling values available, especially for stockpickers who follow a value approach. Bank of China and China Construction Bank are both selling at a P/E of around 6 times earnings, while Industrial and Commercial Bank of China is selling at a P/E of 5.7. The tech giant Tencent Holdings is selling at a much higher PE of 47.8, but on a PEG basis it’s 1.2 ratio is cheaper than Google, with more potential for future growth, in our view.

That said, China is beginning to see tighter monetary policy – money market rates went up last week – and Beijing is definitely tapping the brakes on economic growth, so we may not see Wild West style gains for a while.

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.