Major News and Events:
Morgan Stanley Sees Mainland A Share Demand Catching Up to Hong Kong Shares
The days of paying different prices for the same stock in Hong Kong and Shanghai are numbered, according to Morgan Stanley.
Valuation gaps between dual-listed shares will disappear as an exchange link, called the Hong Kong Shanghai connect, between the two cities leads to the creation of a “one-China” market, Jonathan Garner, the head of Asia and emerging-market strategy at Morgan Stanley recently told Bloomberg Asia. RMB denominated mainland A shares are valued at a discount of approximately 7 percent versus Hong Kong counterparts as, known as H shares, according to the Hang Seng China AH Premium Index as of August 2014.
“We’re looking for A-H stock price convergence,” Garner said. Over time,the gaps “will effectively come down to zero,” he said.
The Shanghai Composite Index (SHCOMP) has rebounded approximately 11 percent since mid-March on speculation government stimulus will revive growth in the world’s second-largest economy. The SHCOMP has lagged behind a 20 percent surge in the Hang Seng China Enterprises Index (HSCEI) of H shares however. The new connection, scheduled to start in October, will give foreign investors unprecedented access to the mainland market while opening a route for Chinese investors to buy Hong Kong stocks
China Inflation Numbers Benign-Leaving Door Open for More Stimulus
Data from the China’s National Bureau of Statistics (NBS) showed that the country’s consumer price index (CPI) held steady at 2.3 percent year-on-year in July, while the producer price index (PPI) fell 0.9 percent for the 29th consecutive month. Both indicators matched analyst forecasts. Analysts attributed the steady CPI to slides in prices for fresh fruit and vegetables, which offset rises in other categories.
This is viewed as important because benign inflation numbers are another tool to give China’s central bankers wiggle room to adopt more stimulus measures if need be.
China’s consumer confidence rebounds in July
Chinese consumer confidence rebounded for a second month in July on a month-on-month basis amid an upward trend for economic growth, according to the Bankcard Consumer Confidence Index (BCCI), compiled by Xinhua News Agency and China UnionPay, a national bank card association. The index edged up 0.06 points from June to 85.33 points in July.
A higher reading in the index shows a boost in consumers’ desire to spend. A report released along with the index attributed the rebound mainly to rising travel and consumption during the summer. Promotions by businesses also helped.
In July, the spending of bank card users in hotels and plane tickets rose 13.05% and 34.29% from June, respectively, and spending on tickets for large tourist resorts soared 61.81 percent.
The report also forecast that consumer confidence may continue to rise as the government has adopted a number of pro-growth measures, including stepping up construction of affordable housing and infrastructure building.
China E-Commerce Delivery Methods Are in Stark Contrast to the US
China’s e-commerce is ahead of the US not only in sales and revenue numbers but also in services offered. As Reuters recently pointed out, same day delivery for items as large as refrigerators is commonplace in China whereas US companies are far less likely to offer such options due to cost constraints.
The main reason behind this is the delivery man. In a country in its development stages, China can put together a labor force where the demand for jobs such as delivery men is still high. In contrast the US population is far less inclined to take on those types of menial jobs.
As the industry quickly develops in China and competition between e-commerce companies remains fierce, giants such as JD.com and Alibaba will likely continue to assess the viability of delivery methods and be forced to evolve with the times. These developments are expected to also lead to new companies and industries focused on areas such as logistics and transportation.
Ogilvy Sees Big E-Commerce Demand
In a sign of how advanced mobile e-commerce is in China, consulting firm Ogilvy China recently presented this case study: On social app WeChat (owned by Tencent) a few months back, 388 Smart cars sold in three minutes in a flash sale. People also made 1,751 down payments for Smart cars and sent in 6,677 sales queries.
Ogilvy Public Relations Beijing worked on the Smart campaign, through advertising and social content. Separately, it also helped out as Chinese internet giant Tencent raised enough donations in one week to build 120 sports fields for kids in rural China, through storytelling that spurred people to share the campaign, and through a hassle-free donation button on WeChat.
Ogilvy has found that there may be an even wider range of opportunities in China than in other parts of the globe. The firm cited that China is the world’s largest smartphone market, possibly already the biggest e-commerce market and the world’s second largest economy.
Beijing’s Air Pollution Begins to Improve
Beijing cut total coal consumption by 7 percent in the first half of 2014 as part of its efforts to tackle smog, the Xinhua news agency reported, citing data from its environmental protection bureau.
Beijing is at the front line of a “war on pollution” declared by the central government earlier this year in a bid to head off public unrest about the growing environmental costs of economic development.
The city has already started to close or relocate hundreds of factories and industrial plants. It will also raise vehicle fuel standards and is mulling the introduction of a London-style congestion traffic restriction.
To reduce coal consumption, it is in the process of shutting down all of its aging coal-fired power plants and replacing them with cleaner natural gas-fired capacity or with power delivered via the grid.
Based on last year’s coal consumption level of 19 million tonnes, the 7 percent cut would amount to around 1.33 million tonnes per year. Beijing has said previously that it plans to reduce total coal use by 2.6 million tonnes in 2014. By 2017, it aims to slash consumption to less than 10 million tonnes a year.
Local Broker Insight:*
Essence Securities:
In September, we expect the new-energy vehicle sector will be driven by favorable policy and robust sales. A unified national catalog of new energy vehicles may be introduced in August, which will help end local protectionism as well as increase production and sales of new energy vehicles with lower costs for car manufacturers. Consumption tax breaks may come in October on top of auto-purchase tax exemptions that will go into effect on September 1.
http://www.essence.com.cn/essence/english/index.jsp
UBS:
We expect July macro data to exhibit a smooth trend in the real economy, aided by a continuous export recovery, stepped-up policy support as well as steady credit expansion in the previous two months and improved business sentiment. We forecast industrial production will continue to see strong growth in July despite a high base figure in 2013.
CICC:
- HK/China Sees 9th Consecutive Week of Inflows; More Upside in Both A&H (Hanfeng WANG)
- Over the week ending Aug 6th, HK & China equity markets saw ~US1.9bn in inflows, the 9th consecutive week of inflow and reflecting sustained interest in Chinese equities.
- We think the heating up of Shanghai-Hong Kong Stock Connect and SOE reform themes may have been the catalyst that has driven fund inflows to their highest levels since 2008.
- While H-share markets consolidated last week on overseas uncertainties (US Fed, geopolitical tensions and surprisingly weaker Eurozone growth prospects) and concerns over liquidity, we think after a breather, markets will rise higher and re-rate on better growth and reforms that are far from over yet.
- For now, we urge investors to focus on fundamentals as interim results are about to flood in over the next few weeks and think growth visibility especially from any potential surprises could be the main return drivers.
- Similar story in A-shares as investors took profits on concerns over room for policy easing, but we remain upbeat on anti-corruption measures improving efficiency, activity and structure as they become a long-term mechanism coupled with reforms
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