Major Tian Authors

China Roundup: Chinese Economy Data Dampens Spirits

April 16, 2015

This week, new data on the Chinese economy painted a bleak picture; the Shanghai Composite Index surged (again); and a Chinese company bought Segway.

China’s most recent economic indicators don’t look so good. Take a look at these figures: the pace of GDP growth in the first quarter of 2015 declined to 7%, the lowest quarterly result in six years; exports and imports in March fell by 14.6% and 12.3% year on year; fixed asset investment, an important gauge for the manufacturing and real estate sectors, grew 13.5% in the first three months, slower than the 17.6% expansion recorded in the first quarter last year; value-added industrial output rose 5.6% in March from a year ago, the lowest level since late 2008.

The bumpy start has made it even harder for China to stay above the 7% annual growth rate target. And if you glance through the headlines published by global financial media—markets are expecting more monetary easing to come soon. So don’t be surprised if you see a cut in the required reserve ratio this month.

Shares are soaring in Shanghai this week—the Shanghai Composite Index rose to 4,194.82 by the end of Thursday, a new peak in seven years. The surge naturally triggered a debate over whether there’s a market bubble.

Those who say yes argue that prices are driven up by speculative, undereducated individual investors who have no better ways of investing after the property market slump; but optimists are pointing to the average price-earnings ratio (P/E) of 20.72 in Shanghai, which is comparable with that of the S&P 500 companies in the US, meaning that Chinese stocks are not that overpriced.

But one sector that investors may want to pay attention to is technology stocks. According to Bloomberg, tech shares are traded on average 220 times reported profits (including B shares listed in Shenzhen), higher than the 156 mean P/E recorded during the US’s dotcom bubble in 2000.

The Shanghai Composite Index reached its all-time high above 6,000 points in October 2007, but then tumbled 50% in the next six months.

The Wall Street Journal reported on Wednesday that regulators in the mainland and Hong Kong are considering relaxing controls in the Shanghai Hong Kong Stock Connect scheme that allows investors across the borders to tap into each other’s market.

Currently mainland investors need to have accounts larger than RMB 500,000 to qualify for the scheme, a requirement Beijing established to curb risks for retail investors. The newspaper reported that the threshold may be lowered, without mentioning specific sources of information.

Also considered in the government’s pipeline to encourage cross-border fund flow an expansion of the trading quotas in the existing program and a potential new link-up between the Shenzhen Stock Exchange and Hong Kong.

By February this year, Japan held $700 million more US treasury bills than China did, according to the US government announcement this week, reclaiming the top spot of US foreign debt holders the first time since 2008.

China, the former champion, has been reducing its holdings of US debt as the country’s exports slowed; compared with a year ago, China held $49.2 billion less while Japan boosted holdings by $13.6 billion. Analysts expect the trend to continue as Japanese investors, frustrated with low yields at home, turn to the US for better returns.

China’s Ministry of Finance announced on Wednesday that 57 countries from all around the world are set to become the rule makers of the Asian Infrastructure Investment Bank (AIIB). Other countries can still sign up as a member in the future but won’t be able to determine the policies and guidelines, under which the bank will run.

Japan and the US are two major powers absent from the $50-billion organization proposed by Chinese president Xi Jinping. Taiwan expressed its interest to become a founding member, but was kept out at the last minute due to its sensitive status as an autonomous island.

There’s still a lot of catching up to do for China’s No.2 e-commerce site. On Wednesday, launched a new site called JD Worldwide, a platform where consumers can buy directly from foreign retailers it hosts or other foreign goods imported on its own. This site comes more than one year after Alibaba kicked off its Tmall International, where 450 shops are selling products from more than 1,200 brands, the company claimed. Most similar sites in China feature products like baby milk powders, nutrition supplements, diapers, shoes and handbags.

Irony of the week? Well-known two-wheel scooter Segway is now owned by a Chinese start-up that it had earlier accused of being a copycat. Tianjin-based Ninebot, a three-year-old start-up, spent an undisclosed amount to acquire the struggling US company, whose products failed to impress American consumers.

It’s hard to predict whether such self-balancing electric vehicles will become a rage in China. Analysts say that while the acquisition will certainly boost Ninebot’s patent portfolios, it probably won’t help sales in the short term.

To pull off the deal, Ninebot raised $80 million from Xiaomi, Shunwei, Sequoia Capital and EZCapital recently. Ninebot CEO told Bloomberg earlier this week that the company is aiming to go public in the US in the next two years. And its valuation goal? $50 billion.

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