Krane Funds Advisors is the advisor to the KraneShares CSI Five Year Plan ETF and the KraneShares CSI China Internet ETF. Enclosed is a weekly update of China’s economic and capital markets activity that was assembled by KraneShares and its Shanghai based partner, CapitalVue. Please contact us if you have any questions or comments.
Major News and Events
Alibaba Announces Major Logistics Joint Venture: In a major push into the logistics business, the Chinese e-commerce giant Alibaba Group said on Monday that it would invest around $360 million in the Haier Group, one of China’s biggest manufacturers and distributors of household appliances. The deal calls for the two companies to set up a joint-venture logistics business, bringing together Alibaba’s huge online retailing platform and client network with Haier’s logistics unit, Goodaymart, which has an especially strong presence in China’s smaller inland cities and provinces.
Haier, also sold a 10 percent stake in itself to the private equity firm Kohlberg Kravis Roberts & Company, this past September.
China Retail Sales Soar: China released a string of economic data that showed retail sales came in much higher than expectations for November. Retail sales climbed 13.7% year-over-year in November, from 13.3% in October. In real terms it surged to 11.8% on the year, from 11.2% the previous month. The number was largely driven by sales of goods.
The jump in retail sales is being attributed to huge “online sales on China’s Singles’ Day (November 11) – the equivalent of Cyber Monday in the US,” according to Societe Generale. Bank of America also pointed out that retail stores offered strong discounts at the time to compete with online retailers. Chinese consumers spent a record $5.7 billion in sales at Alibaba, China’s largest e-commerce company. This compares with $1.9 billion that American consumers spent online overall during Black Friday.
Breakdown of retail sales:
•Home appliance sales ticked up to 24.8% in November, from 20.6% the previous month.
•Home electronic sales surged 19.6% in November, compared with 12.5% the previous month.
•Food and beverage sales ticked up 14.1%, from 13.7%
•Gold/jewelry sales were up 14.8% in November, compared with 14% the previous month.
•Sales of autos in value terms, slowed to 11.6% on the year, from 14.2%.
Cleaning Up the Environment: New figures in China show the country adding clean, renewable electricity generation faster than it is expanding capacity of more polluting sources. Led by hydropower, renewable energy sources made up 57% of newly installed electricity-generating capacity during the first 10 months of 2013, according to China’s National Energy Administration. The figures, published to the NEA’s website Wednesday, showed 20% expansion from the same period a year earlier.
Renewable energy accounted for a larger portion of growth in electricity-generating capacity than traditional, more polluting sources such as coal. Thermal-power capacity accounted for 43% of the additional capacity added.
PBOC Continues on Financial Reform Path: The People’s Bank of China officially announced the inter-bank negotiable certificate of deposits (CDs) on Saturday. The interest rate on these CDs will be determined by the market. These certificates of deposit “can help banks secure a more stable funding source and offer liquid and safer underlying securities for investment products targeting individual investors,” according to Societe Generale. While this move was anticipated, it signals an important step in interest rate liberalization.
Local Broker Insight:
Essence: Retail
We forecast that a low rate of industry-wide growth will continue in 2014, while retailers with physical outlets continue to experience difficulties. With this is mind, we are still optimistic about traditional retail companies that are integrating their existing business with new technology, including the internet and transformation to an Online to Offline (O2O) business. www.essence.com
CICC: Two New Reform Initiatives and Their Market Impact
Two additional reform measures were recently released : new Pension Tax Rules & the Negotiable Certificates of Deposits (NCD). Our analysts are of the view that following the third plenum, China’s reform seems to be progressing quicker than many expected. Other recently announced measures include real estate registrations, free-trade zone financial support, the IPO resumption, the introduction of preferred stocks, and 4G licenses. CICC remains positive on China’s reform initiatives and hence A/H share performance in 2014. For the two newly released measure, the new pension tax rule should benefit China Tiapei Insurance Holdings the most given their share in corporate annuities, while the NCD should have an overall neutral impact on banks. www.cicc.com
CITIC Securities: IPO
The IPO restart will pressure the media sector which has a high valuation. Companies waiting in line for IPOs are mainly those that will list on the SME and ChiNext Boards. We forecast the media sector will trade at a low level at the beginning of 2014 before rebounding later in the year, and there will be divergences in individual share performance. We favor the new media sector represented by the Internet, video content and integrated marketing companies, as well as leading players that are transitioning to digitalization and are carrying out further reform measures. www.citics.com
Goldman Sachs China: IPO
IPO resumption and reforms such as the introduction of preferred shares will support the investment banking business in 2014, and this is especially true for industry leaders. The underwriting of preferred shares may help boost 2014 revenue forecast. This is dependent upon the market condition and the review process. We reiterate CITIC Securities as our top pick due to its reserves of IPO assignments and high investment banking revenue contribution. www.goldmansachs.com
Ping An Securities: Shanghai Free Trade Zone (FTZ)
We think the Shanghai FTZ has some characteristics of offshore financial markets. However, the “PBOC’s Opinions” regarding the offer of financial support for the construction of the Shanghai Free Trade Zone (FTZ)” are not enough for it to compete with Hong Kong or Singapore in the financial sector. The “Opinions” offer relatively comprehensive financial support in trade and investment, while the reforms in sectors such as liberalization of the interest rate and exchange rate, capital account convertibility, and yuan internationalization, are still cautious. www.pingan.com
ATTENTION: This is not an investment recommendation or a solicitation to become a client of Krane Funds Advisors, LLC (“Adviser”). Unless indicated, these views are the author’s and may differ from those of Adviser or others in the firm. We do not represent this as accurate or complete and we may not update this. Past performance is not indicative of future returns. For additional information and important disclosures, please contact Brendan Ahern at (646) 218-9852 or brendan.ahern@kraneshares.com. This communication is solely for the addressee(s) and may contain confidential information. We do not waive confidentiality by mis-transmission. Contact me if you do not wish to receive these communications.