Chinese stocks ended lower Wednesday as overseas momentum and the country's biggest initial public offering failed to ignite buying. The Hang Seng slid 0.3% to 15,823, while the Shanghai Composite Index lost 0.9% to 1591.
Bank of China
, the country's second largest bank, priced new stock worth $9.7 billion in Hong Kong Wednesday; 25.6 million shares at roughly 38 cents apiece. The deal eclipses last year's $9.2 billion offering by China Construction Bank as the country's biggest sale of equity to the public. The event was massively hyped, with local press describing eager Hong Kong investors lining up outside banks to get application forms so they can take part.
On Tuesday, Chinese stocks rolled in green in New York as energy names gained amid news that Beijing will raise retail gasoline prices by nearly 10%. The main beneficiary,
China Petroleum & Chemical
, or Sinopec, popped 8.7% to $5.04 on the news.
gained 5.7% to $110.30 and
China National Offshore Oil Corp.
, or Cnooc, rose 4.8% to $77.43, rebounding after an extended commodities selloff.
So will the latest gasoline price hike be a boon for China energy investors? Not quite, since consumers in China still pay below-market prices for gas. Including an earlier price hike in March, China retail gas prices have risen about 16% over the past three months. But they're still 20% to 25% below world market prices, says David Hurd, head of Asian oil and gas research at Deutsche Bank.
The impact of recent price increases "are all being offset by higher
global oil prices so far," he says. That said, the latest price increase should at least help stanch some of the bleeding in Sinopec's refining operations.
With a $55 billion market cap, state-run Sinopec is an energy player to be reckoned with. In fact, its market value ranks second only to PetroChina, which claims a capitalization of nearly $200 billion.
Yet with current oil prices, its refining arm is practically destined to lose money. A quick primer on Sinopec's rather distressing business model: Step 1. Import crude oil at ultra-high market prices (since the company doesn't produce enough to satisfy its refining needs). Step 2. Refine it. Step 3. Sell it within China at below-market prices set by the government.
It's a recipe for hurt, especially when the world price of oil has shot through the roof.
According to DBS Vickers analyst Gideon Lo, in the first half of the year, Sinopec's refining business is expected to show a loss. The outlook beyond that is only slightly better: "If we assume crude oil stays at the current level, I think Sinopec may just break even in the second half," he says.
For now at least, Sinopec's refining acts as a big drag on profits in its other business arms: exploration, marketing (retail sales at the pump) and chemicals. Given the state of the energy market, that's probably not going to change any time soon. The OECD yesterday forecast in its twice-annual report that oil will stay at its current stratospheric levels of around $70 per barrel in the coming year or so.
Meanwhile, on Wednesday, online bulletin boards lit up with Chinese kvetching about the impact of higher gasoline prices. Among the complaints: motorists can't afford prices at the pump, and spiraling gasoline costs make them less likely to buy a car. (One wit observed that oil prices are outperforming the stock market in China).
The gas hike underscores the tough choices Beijing faces: if it liberalized the market and allowed companies like Sinopec to pass on true costs, energy inflation would shock consumers long-insulated from real world prices and likely stun economic growth.
In that vein, the OCED report highlighted the upside of China's capped prices, from the consumer end: last year consumer price inflation declined to 2%, in part because its energy users were largely shielded from world oil prices.
Away from energy stocks, online game outfit
( SNDA) announced it will develop a game with
featuring some of its cartoon characters. Debuting next spring, the game is intended to target female players in part, tapping a broader audience than traditional online games.
If it's a hit, this could be a savvy way for Disney to make inroads with a young demographic, given the entertainment giant isn't allowed to operate its own channel in China. Broadcasting regulations limit foreign content to less than 50% of television programming, with only limited exceptions (such as foreign residential compounds).
Meanwhile, online gaming, already huge, is expected to get even bigger. Piper Jaffray analyst Safa Ratschy forecast earlier this month that China's game population of 30 million could rise to 80 million over the next five years.
That said, the Disney game won't tap into the hard-core gamer set who account for the bulk of the industry in China. It's intended as a "casual" online game, per industry parlance. In contrast, most gaming companies, including Shanda, focuses on so-called "massively multilayer online role playing games." These involve multiple players -- usually young, chain-smoking males found round the clock in local Internet cafes -- who interact with each other in the game.
Finally, Beijing revised up its estimate first quarter GDP growth to 10.3% from its preliminary estimate of 10.2%. While U.S. investors are used to an unending stream of bureaucratic economic rewrites, in China, the policy of GDP revisions only dates from last year.
"Investors may recall the bad old days when the authorities would announce the GDP growth data on the last day of the quarter and never revise it," reflects Tim Condon, chief Asia economist for ING, in a Wednesday note. The greater concern with accuracy suggests economic management is improving, he says.