China Market News: Shanghai Composite Index Flat But Growth Jitters Mount

The Shanghai Composite Index was essentially flat today, gaining just 1.05 points to close at 3,173.15 for a gain of 0.03 percent.

Yesterday the Shanghai Composite gained 0.04 percent, snapping a 4-day losing streak on strength in pharmaceuticals, the medical sector and in domestic consumption.

Big gainers on Thursday included Mayinglong Pharmaceutical Group, a maker of traditional Chinese remedies, which gained 10 percent for the day, and Anhui Yingjia Distillery, which bubbled up 7.46 percent.

Winners today included Bestsun Energy Co., which gained the market max of 10 percent for today, and Qinghai Spring Medicinal Resources Technology Co., which narrowly missed ringing the 10 percent gong today with a gain of 9.97 percent.

There were several big losers today: Anhui Xinke New Materials, Beijing Capital Co., Jinxi Axle Co. Baoding Tianwei Baodian Electric Co each fell by the 10 percent maximum, prompting a suspension of trading in those shares for the rest of the day. Nanjing Chixia Development Co. fell 9.84 percent, Tianjin Capital Environmental Protection Group Co. fell 9.77 percent and Zhongnongfa Seed Industry Group slipped 9.59 percent.

Investors recently have been spooked by saber rattling from the China Securities Regulatory Commission, which has threatened to crack down on investors they suspect of manipulating vulnerable small-cap stocks.

Clenergy Technology, which leapt over 600 percent since its debut initially, is down 33 percent over the past month as investors piled into stocks that looked likely to benefit from the massive Xiongan Special Free Economic Zone outside of Beijing. RiseSun Real Estate Development doubled in just two weeks but has since lost 18 percent over the past week.

Investors have also been rattled by warnings from both Haitong and Guotai Junan Securities that growth could be seen to falter over the next quarter thanks to a combination of lower producer prices, poor property markets and deleveraging.

Elsewhere in Asia, the Nikkei led markets up with a 1.03 percent gain, and the Taiwan TSEC 50 jumped 0.88 percent. The Korean Kospi gained 0.74 percent today, and Australia’s ASX All Ordinaries gained 0.53 percent. The Hang Seng Index, representing shares in Hong Kong, was down 0.15 percent to close the week.

China’s Economy

China’s central state-owned enterprises continue to work on reducing their production overcapacity. The nation’s 102 nationally-owned SOEs have committed to reducing steel capacity by 5.95 million tons and coal by 24.73 million tons. The planned cuts come on top of 10.19 million tons of steel production cuts and 34.97 million tons of coal production capacity that have already occurred over the course of the past year.

China Huaneng Group may cut 9.14 million tons of coal production capacity by the end of 2018. A number of ‘zombie’ subsidiaries may get shut down. China Poly Group Corporation, another state-owned conglomerate, will close poorly-performing mines and will restructure some 39 subsidiaries in order to boost earnings. State-owned industrials have reported stronger earnings during 2016 – up by 0.5 percent year-over-year. Profits accelerated for the first quarter, with SOE earnings up 26.5 percent, and 99 of the 102 SOEs reporting profits for the quarter, though the profitability has come at the cost of hundreds of thousands of layoffs.

Overall, including private companies, Chinese planners expect that the nation will cut coal production capacity by at least 150 million tons this year and steel production capacity by 50 million tons over the course of 2017.

Structural reforms include shuttering inefficient or unprofitable plants, closing down ‘zombie’ companies, eliminating excessive layers of management hierarchy, and pushing companies to find efficiencies and innovations. Authorities are also pressuring SOEs to improve corporate governance and boost labor productivity levels.

According to figures from the State-Owned Assets Supervision and Administration Commission, China’s centrally-owned state-owned companies cut 2,730 subsidiaries while saving an estimated 4.91 billion yuan in management costs.

Earnings are weak at China Mobile after it posted disappointing results for the first quarter of 2017. The world’s largest wireless company reported a 3.7 percent increase in 1Q net profits to 24.8 billion yuan, or US$3.6 billion. EBITDA was up 3 percent for the first quarter, according to a filing made late Thursday after markets closed. The earnings figures were weaker than expected due to lower service revenue, which was off by 19 billion yuan.

The China Volatility Index – a metric measuring the price changes of the biggest 50 stocks on the Shanghai Stock Exchange – reached a one-month high as of the close of trading on Wednesday as the Shanghai Stock Exchange logged its fourth consecutive day of losses. Stocks on the Shanghai exchange managed to eke out a slight gain on Thursday to snap the losing streak.

Investors have broken out of a quiet trading range thanks to the threat of regulatory action and evidence of hot money fund flows following news and events rather than responding rationally to market fundamentals.

“The market will probably be in for bigger volatility going forward as there will be increased selling from some investors who want to take profits from hot thematic plays,” said Wu Kan, a fund manager at Shanshan Finance, according to reporting from the South China Morning Post.

Nevertheless, Bloomberg notes that stocks on the Shanghai Exchange are now entering their longest streak without a loss of 1 percent or more since 1992 – 85 trading days as of yesterday’s close. There were 13 days on which the Shanghai Composite slipped below 1 percent on an intraday basis – but on each occasion traders – or the government – stepped in buying shares to rally the stock price back up to above the 1 percent loss mark for the day.

Domestic consumption seems to be pushing the Chinese recover, with consumer spending contributing 77.2 percent of Q12017 GDP growth according to the National Bureau of Statistics.

Chinese Economic Outlook

Xun Yugen, a strategist for Haitong Securities, advises investors to ‘sell in May and go away,’ as the saying goes. Haitong Securities data shows that the Shanghai Composite historically generates an average return of 4.6 percent between May and October, but gains an average 20.2 percent over the rest of the year.

Meanwhile, a new report from McKinsey warns that an environment of increasing interest rates could put a serious strain on Chinese banks.

Comments

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.