China Literature, Tencent’s e-book subsidiary, has seen strong demand for its Hong Kong stock market IPO and has priced shares at the top of the range, raising $1.1bn out of a total market capitalisation of $6.6bn ahead of its listing on November 8th. With a business model similar to Amazon’s Kindle, China Literature is China’s largest e-book company with over 175m monthly users, and Tencent will retain over 51% of the shares after the IPO, with private equity firm Carlyle Group holding just under 10%.
More to Come?
But Tencent, which owns China’s largest messaging app WeChat, is not stopping here. Yixin Group, China’s largest online car retailing platform in which Tencent holds a 24% stake, has launched an IPO to raise $870m for 10% of its shares and the tech giant is now considering another $1bn fundraise and IPO for its Tencent Music streaming business next year. And investors are reacting well to the spin-offs – Tencent’s shares are up 3.7% today and have risen over 106% year to date with the company hitting a market capitalisation of over $475bn.
Google to Open Artificial Intelligence Centre in China
Google will be opening its first artificial intelligence (AI) research centre in China, despite many of its services being blocked there.
Fei-Fei Li, Chief Scientist of Google Cloud, said:
“I believe AI and its benefits have no borders. Whether a breakthrough occurs in Silicon Valley, Beijing or anywhere else, it has the potential to make everyone’s life better for the entire world. As an AI first company, this is an important part of our collective mission. And we want to work with the best AI talent, wherever that talent is, to achieve it.”
The research centre will focus on basic AI research, and will consist of a team in Beijing, who will be supported by Google China’s engineering teams.
Google’s search engine and its Gmail are banned in China. However, the country has 730 million internet users, making the market too large to ignore.
Google is not the only tech giant facing restrictions in China. Facebook is also banned, while Apple’ App Store has been subject to censorship. In order to comply with government requests, Apple removed many popular messaging and virtual private network (VPN) apps from its App Store in China earlier on this year.
China has recently announced plans to develop artificial intelligence, and wants to catch up with the US. However, human rights groups are concerned by China’s use of artificial intelligence to monitor its own citizens.
Jack Ma Backs China’s Government
The Alibaba founder said that China’s one-party system benefitted the nation.
Speaking onstage at Fortune magazine’s Guangzhou conference, the Chinese billionaire contrasted the Chinese one-party system with the relative instability of the US political system. Ma said that the Chinese system is one of the reasons that he is optimistic about his nation’s prospects for economic growth, commenting that in America the Democrats and Republicans are polarised on many major issues. Earlier last week, Ma also said that foreign companies seeking to do business in China must “follow the rules”, which was interpreted as meaning western tech giants must comply with local censorship laws
Chinese Yuan Bear Market: Is It Coming?
As pessimism towards the Chinese economy reached bearish extremes last year, shorting the Chinese yuan became a favourite trade for many notable hedge funds.
The most famous bear, Kyle Bass, famously predicted that the yuan was set to fall by at least 30% as China’s credit problems kept ‘metastasizing’. His fund, Hayman Capital Management, raised a dedicated vehicle in order to take advantage of a slowdown in China.
Given that Chinese stock markets remain fairly underdeveloped, buying or selling Chinese equities is a poor way to express a view towards the country’s economy. Instead, hedge funds zeroed in on the currency as capital flight began accelerating in 2014. Yet, few noticed that the country had launched a new cycle of credit growth in early 2016.
Given China’s reliance on debt funding and investments to drive economic growth, looking at aggregate new financing is one of the best leading indicators for economic conditions.
Another good way of measuring onshore sentiment is to look at national house prices in rate-of-change terms. Given the huge gains in real estate over the past decade, local Chinese investors are watching house prices carefully. This is illustrated by the graph below:
Source: CEIC data
This marked the bottom for many assets with a high sensitivity to Chinese demand such as industrial metals and commodity currencies.
As house prices took off across China in 2016, Chinese residents regained confidence in the economy, and capital flight fell as a result. As of Q1 2017, Chinese house price growth has peaked and is now on a decelerating trend. Given the sharp rise of credit growth in 2016 and 2017, new credit growth is also likely to slow in 2018.
Another Bear Market on the Horizon
While the bull market that began in early 2016 has been great for assets that benefit from accelerating Chinese growth, the future outlook looks considerably cloudier. Our favourite indicator of the health of China’s economy is the Australian dollar.
Since the conclusion of China’s 19th Party Congress in October, the Australian dollar has been selling off sharply. Trending indicators for both the short-term and medium-term time frames on the Australian dollar have been bearish since that time.
This week, the currency has experienced another significant bout of weakness following poor GDP growth data. Earlier today, the currency sold off after export volumes missed expectations due to a sharp fall in iron ore exports (primarily destined for China). As the Australian dollar has historically served as a reliable front-runner to the Chinese yuan, the growing divergence between the two currencies is important to watch. This is shown below:
As can be seen from a recent history of AUD/USD versus CNH/USD (inversed), the Australian dollar tends to foreshadow the future of the Chinese yuan.
While AUD weakened materially in late 2014 and 2015, the Chinese yuan did not follow suit until mid-2015. Similarly, once the Australian dollar began strengthening in 2016, the yuan eventually followed in 2017.
Lately, the Australian dollar has been far weaker relative to the Chinese yuan. Given slowing credit growth and decelerating new house prices, there are reasons to be concerned about the outlook for China’s economy. As the Australian dollar is now also falling, all signs suggest a weaker Chinese yuan in the near future.
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