Major News and Events
Companies in ChiNext Small-Capitalization Stocks Have Never Been So Big:
The Mainland ChiNext Index surged 80 percent in the 12 months through mid-January as the median market value of its components jumped to a record $1.1 billion on Jan. 15 according to Bloomberg. That’s the highest ever relative to the nation’s benchmark Shanghai Composite Index (SHCOMP), which has a median value of $784 million, and the biggest among small-cap measures in the world’s 10 largest equity markets. Gauges for small companies in Brazil, Russia and India have dropped at least 10 percent during the same period.
President Xi Jinping is seeking to boost the technology and services industries, which comprise about half of the ChiNext’s weighting, and curb the role of state-owned companies as growth in the world’s most-populous nation slows. While UBS AG says ChiNext valuations may fall as a flood of new share sales diverts funds, Bocom International Holdings Co. and Dragon Life Insurance Co. predict a further rally as earnings increase and the government encourages ownership of small companies.
Money managers in China have increased positions in smaller companies to about 33 percent of holdings, a six-month high, while allocations to large-caps have fallen to 25 percent, according to Hao Hong, chief China strategist at Bocom International, who cited Wind data. The ChiNext may jump as much as 29 percent this year as earnings grow at a 20 percent pace and more funds purchase the shares, Hong said.
Premier Li Keqiang has signaled he will tolerate slower growth to shift the economy away from the state-led stimulus that sparked the 2009 recovery, to a more sustainable model based on services and consumer demand.
Instant-Messaging App Usage Takes Off in China:
The number of users of instant-messaging apps in China has climbed 14% (64.4 million), to 532 million, prompted by the fast growth of China’s mobile Internet, according to a recent report from the official China Internet Network Information Center (CNNIC) and highlighted by Bloomberg.
The total number of mobile Internet users reached 500 million as of the end of 2013, a whopping penetration rate of 81%, data showed. WeChat, an increasingly-popular instant-messaging service for mobile platforms developed by China’s Internet giant Tencent appears to have been one of the main beneficiaries of this upswing.
WeChat’s popularity is considered to be due in part to its privacy features. A user can only see a post after subscribing to a public account or becoming friends with a private user. And the post can only be forwarded to a user’s own circle of friends.
Given the trend, analysts are bullish on the future development of mobile Internet apps in China.
In a report Friday, Barclays highlighted the high popularity of China’s mobile IM apps like WeChat, and predicted that “the faster growth rate of mobile Internet, e-commerce and online video” would be key themes in the Chinese Internet industry this year.
“As low-end smartphone penetration continues to rise this year, we expect mobile Internet usage to continue to outpace the growth of traditional PC Internet users,” Barclays said.
China’s Private Company R&D Spending Grows:
In a study conducted by PricewaterhouseCoopers and reported in the Wall Street Journal, China’s technology sector is reaching a critical mass of expertise, talent and financial firepower that could realign the power structure of the global technology industry in the years ahead.
“Traditionally Chinese companies were fast followers, but we are starting to see true innovation,” said Colin Light, partner at PricewaterhouseCoopers.
The rise of China’s tech industry is fueled in part by its growing investment in research and development. According to a study released in December by U.S.-based Battelle Memorial Institute, R&D spending in China will likely reach $284 billion this year, up 22% from 2012. That compares with just 4% growth forecast in the U.S. to $465 billion for the same period. It forecasts China will surpass Europe in terms of R&D spending by 2018 and exceed the U.S. by 2022
China is also moving up the technological curve in sophisticated areas like mobile processor chips, where it used to be absent. U.S. competitors like Qualcomm Inc and Nvidia Corp are still far ahead, but Chinese companies are increasing their presence in the fast-growing market for chips used in low-end smartphones and tablets. Last month, the Chinese government announced plans to spend almost $5 billion to create a fund to make investments in the country’s microchip industry.
Tencent’s WeChat was ahead of competitors in offering an easy-to-use feature for sending recorded voice messages and it is challenging the dominance of Silicon Valley’s WhatsApp, which has more than 300 million monthly active users globally.
“In handsets or laptops, Chinese tech companies’ global expansion has been much more of a hardware story so far, and I think what’s fascinating about Tencent is that it’s becoming a software and services story,” said Michael Reynal, a portfolio manager at San Francisco-based RS Investments, which has about $27 billion in total assets under management.
Local Broker Insight:
Bank of China – Monetary Policy: We expect the People’s Bank of China (PBOC) will stick with prudent monetary policy, and monetary policy management will become more market-driven. For 2014, the Bank Of China projects M2 growth of about 13.5%, while credit growth will continue to slow, resulting in new loan growth of 9-10 trillion yuan in 2014. Regarding the exchange rate, BOC forecasts the CNY/USD will break 6 at some point in 2014, but not likely to see continued strong appreciation.
CICC – Interest Rates: Rising interest rates have not yet inhibited total demand, and in the short-term, the impact will not be significant. The rising interest rates partly reflect the expansion of demand in the second half of 2014. Rising real estate prices and local government financing platforms are insensitive to interest rates. Thus, the impact on real estate and infrastructure investment will be limited. Rising interest rates are positive for the flow of income from the government and enterprises to residents, supporting private sector consumption.
UBS Securities – Automobile: We forecast electric cars will post an annual compound growth of 20% over the next 2 years. During this period, the development of the electric car sector will see a shift in focus from quantity to quality.
SWS – Interest Rates: There is more evidence indicating the current high interest rate level is not simply a cyclical problem, but is instead a structural problem. It is more likely that China will use a gradual approach, and establish a buffer to prevent and resolve current financial risks, which includes:
1. fully monitor the shadow banking system
2. establish a deposit insurance system, enhance exit mechanism for financial institutions
3. set up local government debt control system
4. establishment of a market-driven financing system for local governments.
These are big changes that cannot be accomplished in just one step. At the early stage of this transformation, policies that China takes to address risks will raise the market’s risk awareness and ease the mismatch between risks and returns
SWS – State-owned assets reform: SWS thinks the reforms this time are genuine as it is only by deepening reforms in state-owned assets that monopolies could be broken up, creating room for the development of the private economy. We do not see any development of the private economy or a fair marketplace without SOE reforms.
Also, governments are eager for new revenue sources, and revitalizing state-owned assets is a realistic choice.
*KraneShares is not affiliated with any of the brokers listed, and neither KraneShares nor SEI Investments Distribution Co. sponsor the opinions or information offered by these brokers, nor do they assume liability for any loss that may result from relying on these opinions or information. The material is not intended as an offer or solicitation for purchase or sale of any security, nor is it individual or personalized investment advice.
For more information about investing into China, KraneShares or KraneShares’ ETFs please contact Brendan Ahern at brendan.ahern@kraneshares.com or +1.646.218.9852