This week, the Shanghai Composite Index reached a 40-month peak; experts speculated on future PBOC rate cuts, following last week’s interest rate cut which was the first since 2012; and Tencent and Alibaba were at daggers drawn.
More cuts to come?
China’s central bank’s decision to cut interest rates last Friday evening, the first time since 2012, may have ruined the night for financial reporters, but the market loved it: the Shanghai Composite index has risen 8% since Monday, and analysts clapped enthusiastically for what they called “the start of a new round of rates cuts”.
And their hope is not at all groundless, given the fact that the Chinese economy has continued to lose steam in recent months, and that Zhou Xiaochuan, the central bank’s governor for 12 years now, has a track record of cutting rates several times in a row.
While most observers estimate that the People’s Bank of China (PBOC) will cut rates again if the country’s fourth quarter economic data remains anemic, the bank’s Chief Economist Ma Jun has told the public that last week’s cut does not indicate a change of direction for China’s monetary policy, which supports moderate stimulus measures but not aggressive easing.
Not everyone believes him. Analysts at many financial institutions including JP Morgan, Nomura and Goldman Sachs wrote in their notes that the cut signals a change of heart of people at the policy-making level, and more easing measures will likely follow in the near future.
They could be right. On Wednesday PBOC did not sell repurchase agreements (repos) to banks like it has routinely done since late July. As a result, RMB 20 billion was added to the financial system through mature contracts.
By cutting the loan rate (which is not mandatory but very influential), PBOC hopes to lower the financing cost for companies and spur business expansion. But some economists worry that easing credit will only have limited impact on the economy because many firms, especially industrial firms, don’t have the incentive to borrow and expand due to severe overcapacity and lack of demand.
According to official statistics released today, Chinese industrial firms’ profits fell 2.1% year-on-year in October, reversing a 0.4% growth recorded in September. Although China’s service sector is doing better, growth has been slowing in recent months; the HSBC service purchasing managers’ index (PMI) dropped to 52.9 in October, the weakest reading since July.
The return of the bull
Despite the challenges faced by the economy, Chinese equity investors are longing for the return of a booming market. On Wednesday the Shanghai Composite Index reached a 40-month peak after rising for five consecutive days, prompting at least one economist at a local securities firm to advise people to “sell your houses and buy stocks”, according to the Chinese media. Trading on the Shanghai Stock Exchange almost doubled the five-year average, according to Bloomberg; it was even 29% higher than turnover on the New York Stock Exchange (NYSE).
If nothing dramatic happens, the index will have risen seven months in a row by the end of November. The growing confidence in the Chinese market is also reflected by the skew of the US’ largest Chinese exchange-traded fund. Options traders apparently are bullish, making the ‘puts’ of iShares China Large-Cap ETF increasingly cheaper than ‘calls’ (‘puts’ protect a market slide and ‘calls’ bet on a rally).
But experts warn that even if the bull has returned, it doesn’t guarantee against near-term corrections when the market is overbought. Bocom International’s Chief Strategist Hong Hao told Bloomberg that the selling point might depend on when PBOC is going to cut rates again. Bank of America’s China Strategist David Cui even said, “we’re at a market top right now”, and the rising financial market won’t help the fundamentals of the Chinese economy.
Chinese internet observers will remember the clash between Tencent and Qihoo a couple years ago—at some point, the two companies threatened to reject services to each other’s customers, prompting the internet regulators in Beijing to step in and mediate.
In recent days, a similar fight erupted, but this time Tencent’s rival is not Qihoo, but someone 20 times stronger—Alibaba. The incident started as Tencent’s flagship product WeChat blocked the link on its platform that leads to coupons for users of Kuaidi Dache, a taxi-hailing app backed by Alibaba. Kuaidi users were able to get coupons by sharing a Kuaidi link to their friends on WeChat, and those who clicked on the link got coupons as well. But now the link can no longer be seen by anyone else other than the user who posted it.
Kuaidi released a statement protesting the block on Monday, but Tencent responded by saying that it’s only blocking links that will lead to over-sharing of commercial information, which it believes will interfere with the user experience. However, similar links shared from Didi, another taxi app backed by Tencent itself are not blocked.
Some observers raised an interesting theory that the block is Tencent’s “revenge” against Alibaba, which on the same day last year blocked WeChat users from accessing Taobao, the company’s online shopping website, within the app’s browser. Alibaba’s move prevented Taobao merchants to effectively advertise on WeChat, China’s largest mobile social network.
The timing of the block is pure speculation, but it’s a fact that the competition between the two is becoming more intense after Alibaba’s successful float on the NYSE in September; the e-commerce giant has since then dislodged Tencent as China’s largest internet firm in terms of market capitalization. The two are also engaging on more fronts as Tencent is betting on WeChat to serve as the key entry point for its mobile payment system TenPay, and WeChat’s public account platform, though still in its infancy when it comes to e-commerce, has become a potential threat to Alibaba as well.
The story doesn’t end with Alibaba sucking it all up.
On Wednesday, news began to circulate on social media that Weibo, China’s equivalent of Twitter, is clearing out users that excessively promote WeChat public accounts on the platform. Alibaba has an 18% stake in Weibo, and according to their contract, the number can go up to 30% if Alibaba chooses to increase it.
Weibo denied that the move is targeted at WeChat; instead it said that it’s only clearing out inappropriate advertising accounts, which might include the promotion of some WeChat accounts. Weibo Product Director Wen Xiangrui told the Chinese press that they are flattered that users think they can take revenge against Tencent, a much larger competitor, on Alibaba’s behalf, “We can’t contribute that much [to Alibaba],” he reportedly said. “[They] think too highly of us.”