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
Internet Companies Offer Popular Alternative to Banks:
Chinese internet giants Alibaba, Tencent and Baidu are now competing against both bank savings accounts and Wealth Management Products—and winning: according to the Financial Times and Quartz Magazine.
In November, deposits in Alibaba’s investment platform, Yu E Bao, surpassed 100 billion yuan ($16.4 billion), with 30 million users—astonishing growth in just six months of operation.
When Alibaba launched Yu E Bao—literally, “account balance treasure”—in June, it framed it merely as an account to store the balances leftover on Taobao, Alibaba’s wildly popular e-commerce site. But Yu E Bao offers roughly 5-6% annual interest. Chinese investors find it user-friendly and many feel that it offers an alternative to bank deposits.
Baidu launched a similar product in October, attracting one billion yuan on the first day. Tencent and Netease are now joining in which could have a further impact on bank deposits.
Chinese Mobile Space Opening Up to Competition:
An Alibaba Group unit and 10 other companies will be able to compete for wireless subscribers in China after regulators awarded new operating licenses, a step toward opening the world’s largest mobile market.
Alibaba’s HiChina unit, which offers website development services, and the other new operators can lease wireless capacity from the nation’s existing carriers in a trial intended to boost competition in the $213 billion market, the Ministry of Industry and Information Technology said. The country’s current carriers, China Mobile Ltd., China Unicom (Hong Kong) Ltd. and China Telecom Corp., are all state-run.
Opening the market to new operators, which also include Telling Telecommunication Holding Co., Beijing Bewinner Communications Co., JD.com and Lianlian.com, aims to help cut prices and bring more choices to the nation’s 1.2 billion wireless users. It also allows China’s largest e-commerce group to develop new services to boost user loyalty and further broaden their sources of revenue.
US Fed Taper Not Expected to Have Large Impact on China Investment Sentiment:
Emerging-market investors now favor China over any other Asian market, according to a December survey of fund managers by Bank of America Merrill Lynch. China also saw four months of foreign-currency inflows through November.
The U.S. Federal Reserve’s tapering of quantitative easing (QE) will not have a significant effect on China’s economic growth, analysts contend.
“Actually we believe it’s time for markets to revisit some of China’s strength while not forgetting many of China’s problems,” said Lu Ting, chief China economist with Bank of America Merrill Lynch, in a research note.
Lu maintains that China could be immune to the ill effects of QE tapering for several reasons: capital control; high savings, high investment and high manufacturing capacity; huge foreign exchange reserves; low foreign debt; and sustained current account surpluses. Furthermore, China is a very large economy with limited dependence on exports and a government which does not need to ramp up subsidies to maintain its power, Lu said.
Apple and China Mobile Finally Ink a Deal:
After years of talks, Apple recently confirmed that it has at long last reached a deal with China Mobile to officially carry the iPhone. China Mobile will start selling the iPhone 5s and 5c starting on Jan. 17, with pre-orders already started on Christmas Day.
Apple’s Tim Cook said he is excited to begin working with China Mobile. “China is an extremely important market for Apple and our partnership with China Mobile presents us the opportunity to bring iPhone to the customers of the world’s largest network,” Cook said.
Brokers such as Baird say the China Mobile deal could add 20M+ iPhones, and Stifel Nicolaus says it could add $4-$8/share to Apple’s bottom line.
Local Broker Insight:
XYFunds: Industrial Securities
We are optimistic on Shanghai-focused state-owned asset reform. New enterprises in the Shanghai Free Trade Zone could enhance market-based reform, along with the government streamlining administration and delegating power to lower levels, which could push the Chinese economy to new growth.
Shenyin & Wanguo Securities: SOE Reform
State Owned Enterprise (SOE) reforms can effectively raise company valuations, and SOEs that put stock option incentives in place in 2012 generally outperformed the Shanghai Composite Index in 2013.
Shenyin & Wanguo Securities: Urbanization
The most significant highlight of the Central Work Conference on urbanization is the “activation” of existing land. The central government has turned away from the previous model of urbanization that was characterized by administrative directives into one that is more healthy and sustainable. Small cities, towns and counties with low population density and where there are no economies of scale, will no longer be the focus of policy support. There will no longer be any uncontrolled expansion of construction land and industrial land usage must be reduced. The development of existing available land will become an important and even primary method of land supply in first tier cities.
For more information about investing into China, KraneShares or KraneShares’ ETFs please contact Brendan Ahern at brendan.ahern@kraneshares.com or +1.650.866.9975.
Brendan Ahern | www.kraneshares.com | Managing Director
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.