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China markets round-up: Global investors dump stocks on virus fears, Hong Kong set for record budget deficit, outbound investment dips

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By Addison Gong, Rebecca Feng
28 Feb 2020

In this round-up, the sell-off in equities continues to worsen as Covid-19 spreads, Hong Kong’s financial secretary forecasted a budget deficit of HK$139.1bn for the 2020-21 fiscal year, and China’s January non-financial outbound investment dropped by 9.5% in US dollar terms.

The Covid-19 fear continued to rattle global equities market this week, with the Dow Jones Industrial Average on Thursday suffering its worst intraday drop in point terms, falling 1,190 points, more than 4%. Both the S&P 500 and Nasdaq also plummeted by over 4%. Futures prices indicate the likelihood of a further 800 to 900 point slide in the Dow at the Friday open. 

In Europe, major stock indices including the FTSE 100 and Euro Stoxx 50 all sank by at least 3% on Thursday. The sell-off continued in Asia on Friday, with China’s CSI 300, Hong Kong’s Hang Seng, Japan’s Nikkei 225 and Topix, as well as South Korea’s Kospi indexes plunged between 2.7% and 4.2% by around lunch time.

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China’s GDP grew by 6.1% in 2019 to nearly Rmb99.09tr, preliminary data from the National Bureau of Statistics (NBS) showed on Friday. The GDP per capita reached Rmb70,892, or $10,276 in dollar terms — the first time it has surpassed the $10,000 mark.

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The International Monetary Fund is likely to downgrade its global growth projections in the World Economic Outlook in April, according to a spokesperson. The IMF in January lowered the growth forecast by 0.1 percentage points for 2019 and 2020 to 2.9% and 3.3%, respectively, and by 0.2 percentage points for 2021 to 3.4% compared to its October 2019 estimates.

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Having entered recession in the third quarter of 2019, Hong Kong’s economy contracted by 1.2% for the full year, marking its first annual decline since 2009, according to Paul Chan Mo-po, the financial secretary of the special administrative region (SAR).

January’s seasonally-adjusted unemployment rate shot up to a three-year high of 3.4%, Chan said on Wednesday at the government’s 2020-21 budget speech, expecting possibly greater impact from the Covid-19 epidemic on the local economy.

“Hong Kong's economy is facing enormous challenges this year,” Chan said, forecasting full year growth of -1.5% to 0.5% in real terms in 2020 and a recovery after the outbreak to an average of 2.8% per annum in real terms from 2021 to 2024.

The budget focus this year will be on “supporting enterprises, safeguarding jobs, stimulating the economy and relieving people's burden”, said Chan.

The underlying inflation rate was 3% for 2019 — netting out the effects of the government’s one-off relief measures — which was 0.4 percentage points higher than the previous year. Chan expects the underlying inflation rate to ease in 2020 to 2.5%, which will also be the average for 2021-2024.

Having seen 15 years of fiscal surplus, Hong Kong’s budget balance came at a deficit of HK$37.8bn for the 2019-20 financial year, or 1.3% of GDP. The estimated deficit for 2020-21 is a record high of HK$139.1bn (4.8% of GDP). The government is expected to continue to run on a deficit for the four financial years after that, ranging between HK$7.4bn and HK$17bn, as its revenue “cannot keep up with drastic increases” in expenditure. Hong Kong’s fiscal year ends on March 31.

The headline relief measures the SAR government announced on Wednesday totalled about HK$120bn, including HK$71bn of cash handouts to permanent residents aged 18 or above.

“What really matters for Hong Kong’s fiscal situation is economic activity,” said Alicia Garcia Herrero, chief economist, Asia Pacific at Natixis, in a Thursday research note titled ‘Hong Kong budget: throwing untargeted cash will not solve a well-defined problem’.

“Down the road, it all depends on Hong Kong keeping its competitive edge, which looks increasingly difficult as no major measures have been announced by the government in future direction but only relief,” Herrero said.

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In financial services, Hong Kong promised to issue HK$66bn of green bonds within the next five years.

The government plans to waive the stamp duty on stock transfers paid by exchange-traded fund (ETF) market makers for creating and redeeming ETF units listed in Hong Kong.

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China’s non-financial outbound direct investment (ODI) dropped by 7.7% year-on-year to Rmb57.6bn in January, or by 9.5% to $8.32bn in US dollar terms, according to the Ministry of Commerce. That carried on a downward trend — in dollar terms the non-financial ODI declined 8.2% in 2019.

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Data from the Securities Association of China showed that the total revenue from 133 securities houses in 2019 reached Rmb360.5bn, and their combined net profit stood at Rmb123.1bn. According to the SAC, 120 firms were profit-making last year.

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Nomura Orient International Securities, a majority-owned securities joint venture of Nomura Holdings, has received an ETF market maker licence from the Shanghai Stock Exchange, according to a Wednesday announcement.

Nomura owns 51% of Nomura Orient International Securities. Orient International and Shanghai Huangpu Investment Holdings hold 24.9% and 24.1% of the entity respectively.

The securities JV received a securities business licence from the China Securities Regulatory Commission (CSRC) three months ago.

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Hillhouse Capital is spinning off its venture capital unit into an independent fund, according to a statement on the company’s’ website. The fund, GL Ventures, will mainly invest in four areas – biomedicine and medical devices, software services and original tech innovations, consumer internet and technology and emerging consumer brands and services.

The new fund has raised Rmb10bn in new funding, Caixin reported.

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Nine renminbi-denominated Chinese government bonds will be included in the JP Morgan Government Bond Index-Emerging Markets (GBI-EM) series starting Friday, following the index provider’s announcement in September 2019. The full inclusion of the bonds will be completed in 10 months.

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Onshore bond defaulter Peking University Founder Group Co has told its debtors to declare their rights by April 21, before it executes a reorganisation plan. The issuer was ordered to start a restructuring process by a Chinese court at the request of one of its largest lenders, Bank of Beijing.  

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Shanghai-based technology companies have raised Rmb5.46bn since the official launch of the Star market in June 2019, according to the People’s Bank of China. The Star market is seen as the Chinese equivalent of Nasdaq.

Separately, New York Stock Exchange-listed electronic car maker Nio, dubbed China’s Tesla, has reportedly said it will aim at a listing on the Star board before 2025, at a signing ceremony for a funding agreement reached with the government of Hefei city earlier this week.

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China Resources Microelectronics, the first red-chip company to have listed on the Star board, has seen its share price surge by over 228% on its trading debut. After being priced at Rmb12.8 per share earlier this month, the stock closed at Rmb42 on Thursday after opening at Rmb50.

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The Asian Development Bank has agreed to extend a Rmb130m loan to China’s Jointown Pharmaceutical Group Co on Monday. According to the supranational, the financing was its first private sector assistance to support health security.

Headquartered in Wuhan city in Hubei province, the epicenter of the Covid-19 outbreak, the company is the largest private pharmaceutical distributor in the country and has been designated by the provincial government for the procurement and distribution of antiviral drugs and medical supplies during the outbreak. It has raised Rmb2bn from three domestic bonds labelled coronavirus prevention and control.

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The CSRC is investigating HNA Group after a letter of complaint from a holder or holders of a private bond, reported Bloomberg. According to the newswire, the letter accused HNA of issuing a new public bond on the same day it defaulted on a private note in July last year, alleging it has since repaid a number of other onshore and offshore bonds without solving the default.

By Addison Gong, Rebecca Feng
28 Feb 2020