Driving the Day
1. Stellar start for STAR market
On Monday, the Shanghai Stock Exchange debuted its new high-tech STAR market.
Some context: Colloquially known as “China’s Nasdaq”, the new board currently showcases 25 of China’s leading tech up-and-comers.
More context: The STAR market is unique in that it doesn’t have daily trading limits for the first five days that each stock trades.
Suffice it to say that investors were psyched.
- On the first day of trading, the 25 companies saw an average increase of almost 140% on their IPO prices.
- Anji Microelectronics Technology ended the day up 400%.
- Some stocks were in such high demand that trading had to be suspended for several 10-minute blocks.
Despite the pervasive bullish mood, shares also experienced a high turnover rate, suggesting that the right valuation of the stocks is anybody’s guess.
Get smart: The new board is definitely a big deal for China’s financial markets. It has the potential to spur both technological innovation and better financial regulation.
Get smarter: But the enthusiasm also means there’s big potential for market volatility.
The bottom line: The STAR market won’t be a panacea for China’s capital markets – but it is a step in the right direction.
Caixin: China’s New Nasdaq-Style Board Takes Off in Roller-Coaster Debut
SCMP:Star Market, a ‘breakthrough in 30-year history of China’s stock market’, gets off to shining start as all debutants see share prices soar
2.Regulators tighten financing for real estate developers
A new round of impending regulatory inspections are aimed at tightening up on real estate financing (Caixin):
- “The China Banking and Insurance Regulatory Commission (CBIRC) is set to launch special inspections of 75 banks in 30 cities later this year to crack down on violations by institutions in lending to property developers and home buyers.”
- “The inspection is likely to start with banks in Beijing … to examine banks’ property-related loans in all aspects.”
Some context: In an effort to contain property prices and reduce financial risk, regulators have introduced an array of policies over the past 12 months that have significantly limited funding sources for real estate developers.
The most recent regulatory actions include:
- Cracking down on off-the-books property loans in May
- Banning indirect financing through equity investments and bond subscriptions in May
- Asking trust companies to scale down or cut investments in real estate earlier this month
- Limiting real estate financing through both domestic and overseas bond sales
Get smart: Despite the slowing economy, regulators are still keen on controlling the property market – not pumping it up.
Caixin:Exclusive: Regulator to Inspect Banks’ Property Loans to Curb Risks
3. Ford struggles in China
As regular Tip Sheet readers know, China’s auto market is struggling.
But the pain is not universally applied.
Just ask the Ford (WSJ):
- “Last year, Ford’s sales in China plunged 37%, much sharper than the broader market’s 3% decline.”
- “It reported a $1.5 billion loss in the country in 2018, its first after several profitable years.”
- “Ford’s China market share was 2.1% in the first quarter this year, down from 5% the same period in 2016.”
Much of Ford’s misfortune in the Middle Kingdom can be attributed to classic causes including:
- Failure to develop a unique strategy for the China market
- An outdated line of vehicles which lack features that appeal to Chinese consumers
- A poor working relationship with its JV partner, Chang’an Automobile Company
- Erosion of market share by ever-improving domestic brands
Get smart: In general, the foreign companies that have been most successful in China are those that have taken the time to localize their products and understand the market.
That may seem obvious, but it is shockingly rare.
Get smarter: Trivium provides companies with the insights they need to build a smart and effective China strategy. We’re just an email away.
4.China and UAE pledge closer cooperation
On Monday, Crown Prince Sheikh Mohammed bin Zayed Al Nahyan of the United Arab Emirates met with Xi Jinping in Beijing.
Some context: Xi visited the UAE last July. At the time, the two countries announced the creation of a comprehensive strategic partnership.
In recent months, trips by Middle Eastern potentates to China have followed a fairly predictable pattern. Al Nahyan’s visit was no different.
According to Xinhua:
- Xi hailed the progress of the strategic partnership and stressed the importance of win-win cooperation.
- He also called for greater alignment on development issues and held up the China-UAE Industrial Capacity Cooperation Demonstration Zone as an example of the benefits of China’s Belt and Road Initiative.
- Xi additionally expressed the hope that trade between China and the UAE would top USD 200 billion 2030.
- Finally, Xi thanked the UAE for its support for China’s“anti-extremism” policies in Xinjiang.
Get smart: China’s dollar diplomacy in the Middle East has won it many friends…and kept would-be critics remarkably quiescent about its repressionof muslims in Xinjiang.
Xinhua:China, UAE pledge to boost comprehensive strategic partnership
5.Trade negotiations reportedly resume next week
Here we go again: The SCMP is reporting that US-China trade negotiations will resume next week.
- “US negotiators led by trade representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are likely to fly to China next week.”
- “The initial arrangements for the meeting in Beijing … came after the United States announced that it would offer exemptions to 110 Chinese products … from import tariffs.”
Some context: Two bilateral phone calls took place since a temporary ceasefire was reached between Xi Jinping and US President Donald Trump last month at the G20 summit in Japan.
The phone calls were led on the American side by:
- US Trade Representative Robert Lighthizer
- Treasury Secretary Steven Mnuchin
On the Chinese side by:
- Vice-Premier Liu He
- Minister of Commerce Zhong Shan
Get smart: If face-to-face negotiations do indeed resume next week in Beijing, these four guys will be running the show.
Get smarter: Minister of Commerce Zhong Shan is a new presence in thetalks. A seasoned trade negotiator, his inclusion shows that China is looking to up its game.
The bottom line: Don’t get excited. We said it before, and we will say it again. We are nowhere near the end of the trade war.