For the first full week of trading 2015, US-listed China stocks had a decent week, with the PowerShares Golden Dragon China fund (NYSE: PGJ) rising nearly +2%. The higher close was noteworthy considering US and global markets were lower by Friday. In the US, macro data (specifically mixed jobs numbers) helped push stocks lower, and ongoing challenges in Europe (Greece) gave bears enough reason to push down those shares (terrorism in France didn’t help). Mainland markets were again a standout, rising over 3% during the week, continuing their upward move seemingly defying gravity.
There was some eco data out this week, with the monthly read on inflation hitting the tapes Friday morning in China. Consumer prices edged up a bit MoM, but were still well below the official +3.5% YoY target, propped up by food prices (non-food inflation was a surprising +0.8%). Producer prices were -3.3%, underscoring the difficult operating conditions facing China’s major producing industries and adding to the possibility of deflationary pressure.
Naturally, calls for more stimulus were in popular shortly after Friday’s soft eco data hit the tape, specifically monetary easing. Economist Michael Pettis has a great discussion of why that standard line may not apply (read his note here), which is definitely worth the read. In a nutshell, simply boosting the money supply won’t fix any of the underlying reasons for deflationary pressures, and actually could exacerbate some of the causes. That conclusion may not seem terribly intuitive, but it takes into account more than just the near-term effect of monetary stimulus, and considers the increasing debt burden likely to follow. Mr. Pettis goes into much more detail in his article, and readers are encouraged to read the full article.
Our view is that although the data looks scary, Chinese policymakers are unable to stomach the likely social disruption following a marked slowdown in the economy, and will make every possible move needed to avoid a hard landing. There is a historical precedent for implementing price controls, purchase restrictions, and other drastic measures to control the economy. Further policy reform will likely follow, and compliance with new initiatives could be easier to achieve in the aftermath of power consolidation under the guise of a corruption crackdown.
For investors in US-listed China stocks, a troubled real economy could actually spell opportunity, as China’s brick-and-mortar businesses struggle to cope with the new-normal (the honeymoon days of >+7% growth may soon be a fond memory). Many industries in China are stuck somewhere between a state-run model catering to full employment and the desperate need to stop destroying capital (i.e. turn a profit), but lacking the expertise to do so. Partnering with companies that have technological expertise can be a path for modernizing some of these major industries. (The financial system is an easy target. As an example, there aren’t consumer credit ratings in China, so many services are pre-paid. Introducing consumer credit ratings could create an obvious boost to consumption, and therefore the economy.)
Additionally, it seems like Chinese policymakers are making efforts to not repeat past mistakes (the 2008 mass stimulus that has been partially to blame for current asset price bubbles). During the last week, statements from the NDRCrefuted earlier rumors that China had approved a massive 1.1 trillion USD infrastructure spending package, instead saying that earmarked spending would be very targeted, suggesting a focus on quality investments. Whether or not that scenario unfolds remains to be seen, but emphasizing prudent investment criteria (aiming for real returns would be a good start) would be a strong step in the right direction.
After a rough December which saw many US-listed China stocks trade lower, there may be some interest coming back into the sector. Near-term catalysts include potential policy changes to address the slowing economy as well as the upcoming earnings season
Next week should bring some more eco data, with PBOC loan data, imports and exports, and readings of FDI all on tap during the week. Next weekend should include the official release focusing on home prices (the NBS’ 70-city survey), however there has already been a preview in the form of CREIS data released on the first of the month.
ETF and Index Round-up
FXI: +1.4% (both US-listed and Hong Kong stocks, weighted toward financials)
PGJ: +2.1% (holds US-listed China stocks, weighted toward information technology)
S&P 500: -0.7% (index of US-listed stocks)
Nasdaq: -0.5% (index of US-listed stocks, weighted toward technology)
VIX: 17.55,-1.3% (volatility index, a gauge of implied volatility, the so-called “fear index”)
Cheetah Mobile (NYSE: CMCM): +24%; after flat-lining for the second half of December, the stock has found some buyers pushing it up strongly during the week. Take a look at the chart, and look at a Bollinger Band overlay, and note the narrowing of the bands seems to have telegraphed a breakout, right when it happened. Chinese tech names are a favorite among the day-trader types, and this week’s move, absent any major news, points to technicals. By Friday, the stock had become overbought, and declining daily volume through the week may point to some exhaustion, so there may be a downside blow-off next week.
eHi Car Services (NYSE: EHIC): +22%; this IPO has been somewhat of a disappointment, and after dropping below its $12 IPO price hasn’t managed to get back to that level. The timing for the deal wasn’t great (late November), which was right before a nasty market-wide sell down in December. This week’s gains came following the disclosure the Greenwoods Golden China, a long-short hedge fund, held a near 17% stake in EHIC.
BitAuto (NYSE: BITA): +19%; the stock popped +6.5% in Friday following the announcement that JD.com and Tencent were going to invest 1.5 billion USD in the company. Earlier gains during the week came following positive comments from ICBC, who had high expectations for BITA’s online advertising performance and dealer services revenue growth in Q4. BITA has been a bull favorite recently, and the positive sentiment seems set to continue, which could easily push the stock higher.
WuXi PharmaTech (NYSE: WX): +13%; some M&A announcements and an upward revision of its FY2014 guidance was enough to push this name higher on the week. The M&A news included the acquisition of NextCODE Health, an Amgen spin-off focusing on linkages between the genome and disease susceptibility, in an all-cash $65 million USD deal. For Q4 performance, management raised both its revenue and earnings estimates for Q4. The stock is rapidly approaching an overbought condition, so there may be some resistance coming, particularly considering that the Friday close at $36.76 was edging closer to its 52-week high of $40.72.
Yingli Green Energy (NYSE: YGE): -12%; one of the best reasons to invest in alternative energy sources, like solar, is expensive fossil fuels. Unfortunately for YGE and many other green energy names, the price of crude oil has been plummeting, and dropped even lower this week. By Friday, oil was selling for about $50 a barrel, well beneath the $80/bbl price in November. Investors have been sellers of Yingli for a while now, and with the combination of falling oil, turbulent end markets, and a heavy debt load pushing the scales to a negative outlook.
Lentuo International (NYSE: LAS): -13%; this stock has tanked over -60% over the past few months, pushed lower by concerns about flagging demand for luxury cars in China, in part due to the corruption crackdown (a new luxury car is a sure-fire way to draw attention to oneself), but also due to overall macroeconomic headwinds. This week’s drop is due to a monster day the previous Friday, when the stock added +21% on January 2, which it has since retraced, affecting the week-on-week change. Although the chart looks decidedly ugly for this name, management maintains a positive outlook for its business. The 2014 Chairman’s letter highlighted a few positives, namely the opportunity in pre-owned cars, expanding its geographic footprint, and the potential for O2O to drive the business forward.
Jinpan International (NASDAQ: JST): -15%; shares have been falling sharply over the last two weeks due to the failure of management’s earlier announced going private bid. The company announced receipt of the going private proposal in late September, and seeing it unravel in just three months may be adding to the selling pressure. Jinpan’s stock has reached a pretty oversold condition, something which may usually bring in buyers, but considering the special circumstances surrounding this name, calling for a reversal may be premature. Following the announcement that management was pulling its bid, the stock has closed up only twice – selling pressure has been relentless. Waiting to see the stock find support may be a less risky move than stepping in before the dust settles.
China Gerui (NASDAQ: CHOP): -30%; is it the beginning of the end for this name? Looks like it. The stock had an absolutely awful 2014, losing -85% during the year (yes, -85%). In the face of softness in its core business, management made the unusual move of diversifying into a completely unrelated area in early September 2014, investing about all of its cash in a porcelain collection. But wait, it’s antique porcelain. Naturally, lawsuits followed, and the stock began its flying lead balloon impression, accelerating losses through December. There is enough noise/rumor/speculation surrounding this stock to write a short novel, so avoiding the name may be a prudent approach.
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