Markets had a largely positive week, following indications that the government will take further steps to boost the economy. Fears regarding the delay in the link-up between the Shanghai and Hong Kong exchanges led to losses for the benchmark index on Monday. The Shanghai Composite Index rebounded on Tuesday after an increase in industrial profits and indications that free-trade zones would be set up across the country.

Speculation that the People’s Bank of China is taking additional steps to decrease borrowing costs boosted stocks on Wednesday. Encouraging comments from the Chinese government helped the benchmark increase to its highest level in 20 months today.

Baidu, Inc. (BIDU) posted third-quarter earnings per ADR of $1.79, exceeding the Zacks Consensus Estimate of $1.62. However, PetroChina Co. Ltd. (PTR) reported third-quarter earnings per ADR of $2.45, missing the Zacks Consensus Estimate of $3.09.

Last Week’s Developments

Last Friday, the Shanghai Composite Index declined by less than 0.1%. However, the benchmark index experienced its largest weekly decline in four months, losing 1.7%. Fears that IPOs would lure funds away from older stocks and an economic slowdown would impact earnings led to losses for the markets. Additionally, concerns over a delay in the exchange link have pushed down mainland shares to a significant degree compared to those listed in Hong Kong.

The CSI 300 lost 0.2% on Friday while the Hang Seng China Enterprises Index declined 0.5%. The Hang Seng China AH Premium Index experienced its largest loss since March last week. The index is a gauge of the valuation gap between stocks listed in Hong Kong as well as Shanghai.

Meanwhile, a gauge of property stocks within the benchmark index declined 3.4% over the week. This sub-index was the highest loser for the week among the five industry groups. The decline follows a drop in new-home prices in 69 out of 70 cities for the month of September.

Markets and the Economy This Week

Stocks declined for the fifth successive day on Monday, marking the longest series of losses for the benchmark index. Fears that the delay in the link-up between the Shanghai and Hong Kong exchanges will reduce the demand for shares led to these losses.

The Shanghai Composite Index declined 0.5% while the Hang Seng China Enterprises Index moved down 0.8%. The benchmark index has declined 4.1% from the highest point achieved this year on Oct 9. This is primarily due to the inability of authorities to provide a date for the link-up between the Hong Kong and Shanghai exchanges. In April, an announcement was made that the link would become operational in six months.

The CSI declined 0.9% with financials leading losses. The Hang Seng declined 0.7%, with casino operators losing the most. There is speculation that pro-democracy protests in Hong Kong are delaying the exchange link up.

The Shanghai Composite Index rebounded on Tuesday, gaining 2.1%. An increase in industrial profits and indications from President Xi Jinping that free-trade zones would be set up across the nation. According to the Xinhua News Agency, President Jinping said Shanghai’s free-trade zone could be replicated across the country. Industrials gained after profits increased 0.4% for the sector, following a decline in August.

The CSI 300 gained 2% after nine of the ten industry groups added 1.4%. A sub-index of industrials moved up 3.4%, with rail and shipping shares leading gains. The Hang Seng moved up 1.6% while the Hang Seng China Enterprises Index increased 2.3%. Stocks stepped up gains in the afternoon following speculation that the People’s Bank of China is taking additional steps to decrease borrowing costs.

These speculations spilled over into Wednesday, helping stocks rally late in the day. Targeted measures implemented earlier this month have triggered such speculation. The Shanghai Composite Index moved up 1.5%, gaining for a second day.

The CSI 300 increased 1.4% while the Hang Seng China Enterprises Index increased 1.7%. The Hang Seng moved up 1.3% with casino operators led gains. Stocks in Hong Kong moved up to the highest level in five weeks following an increase in profits for insurance companies. Gains made by power stocks following prospect of reforms in prices also boosted markets.

The Shanghai Composite Index increased 0.8% today, moving up to its highest level in 20 months. Comments from the Chinese government that it will act to increase consumption in six industries led to gains for stocks. This includes the housing sector, which has been suffering for some time, even as the prospect of an economic slowdown continues to loom.

The CSI 300 increased 0.7%. A gauge of utility stocks within the index moved up 4.7%. Hang Seng declined 0.5% while the Hang Seng China Enterprises Index dipped 0.9%. Disappointing earnings results from Chinese stocks trading in Hong Kong led to the losses. The Hang Seng China AH Premium Index increased 1.5%, recovering from its lowest level since Sep 22.

Stocks in the News

Baidu, Inc. posted third-quarter earnings per ADR of $1.79, exceeding the Zacks Consensus Estimate of $1.62. Total revenue increased 52% from the year-ago quarter to $2.2203 billion. Operating profit increased 17.4% from the year-ago quarter to $638.6 million. The increase in profit was lower due to higher expenses.

Online marketing revenue, which makes up almost all of Baidu’s income, increased by 51.8% from the year-ago period to $2.188 billion. The number of active online marketing customers for the third quarter increased 11.2% from the same quarter last year to 516,000. This was also 5.7% higher than second quarter figures for 2014.

About 36% of total revenue came from mobile revenue. Baidu said initiatives like Baidu Connect have been successful. This service helps companies reach targeted customers through mobile devices.

The company projects total revenue within $2.256-2.322 billion for 2014’s fourth quarter. This is a year-over-year improvement of 45.4% to 49.6%. However, Baidu did not provide any profit guidance.

PetroChina Co. Ltd. reported third-quarter earnings per ADR of $2.45, missing the Zacks Consensus Estimate of $3.09. The company’s third-quarter net profit declined 6.2% on a year-over-year basis to RMB 27.9 billion ($4.6 billion). This is the lowest figure reported in eight quarters.

The decline in profits was primarily due to a sharp drop in crude prices. Revenues increased by 3.2% to RMB 600.6 billion during the third quarter. However, operating profit fell 3% to RMB 42.5 billion.

During the first nine months of the year, PetroChina’s net profit moved up 0.8% to RMB 96 billion. Operating profit improved 1.2% to RMB 145.5 billion during this period.

The company’s refining segment reported operating profit of RMB 2.6 billion during the Jan-Sep period this year. This is an improvement from loss of RMB 5.3 billion in the year-ago period. Total oil and gas production increased 2.5% on a year-over year basis to 1.07 barrels of oil equivalent during the first nine months of the year.

The company’s chemical operations suffered operating loss of RMB 11.3 billion during the first nine months of the year. This is marginally lower than the loss of RMB 14.7 billion experienced in the year-ago period.

CNOOC Ltd.’s (CEO) third quarter revenues from oil and gas output came in at RMB 53.6 billion ($8.7 billion). This is 4.6% lower than the figure of RMB 56.1 billion recorded in the year-ago period. Profit figures for the third quarter were not released by CNOOC.

A slump in prices of crude was the primary reason for the decline in revenues.

Total net production of 103 million barrels of oil equivalent for the third quarter declined marginally from the year-ago period. The company has said that it remains confident about achieving its annual production target of 422 million to 435 million barrels. However, profit margin will depend on the movement of crude prices.

China Telecom Corp. Ltd.’s (CHA) net profit increased nearly 10% on a year-over-year basis during the Jan-Sep 2014 period to RMB 16.2 billion ($2.64 billion). The increase in profit was primarily due to a significant increase in fixed-line broadband and 3G-4G subscribers as well as substantial cost reductions.

Operating revenues increased by 2.2% on a year-over-year basis to RMB 244 billion ($39.8 billion). This was due to a jump in 3G service revenues as well as steady growth in the fixed broadband segment. China Telecom’s total 3G subscriber base increased to nearly 113 million by end September.

In contrast, the company added a significantly lower number of subscribers in the Jan-Sep 2014 period. This is indicated by a 17% decline in mobile terminal sales to RMB 23.3 billion ($3.8 billion).

China Unicom Hong Kong Ltd. (CHU) announced financial results for the third quarter of 2014 with net income of approximately $631.5 million, up 11.5% year over year on stringent cost control and higher adoption of 3G plans. Earnings per ADR (American Depository Receipt) also increased 25% year over year to 25 cents per share.

Total revenue (excluding deferred fixed-line upfront connection fee) fell 13.3% year over year to $10,711 million in the third quarter of 2014. Telecommunication service revenues, comprising roughly 81% of the total revenue, were around $9.758, up 5.3% year over year.

For the first nine months of 2014, total revenue from the mobile business was $19,413.3 million. Out of this, mobile broadband business revenues were $13,099 million, up 24.3% year over year. Total revenue from the fixed-line business was $10,908 million. Telecommunications service revenues from the broadband business were around $6,116 million, up 9.7% year over year.

China Life Insurance Co. Ltd.’s (LFC) third quarter profit increased 22% year over year to RMB 9.15 billion ($1.5 billion). Net profit in the year-ago period was RMB 7.5 billion. Higher profits were a result of an increase in premium income and impressive growth in investment income.

Investment income increased 26% to RMB 28.99 billion. Additionally, premium moved up 0.7% to RMB 73.68 billion. Net profit for the Jan to Sep 2014 period came in at RMB 27.55 billion. This was 16% higher than the year ago period.

Performance of Most Actively Traded US-Listed Chinese Stocks

The table given below shows the price movements of 10 Chinese companies with the highest three-month average trading volume on U.S. exchanges. Price movements over the last five days and during the last six months have been included.

Next Week’s Outlook:

Markets have had a largely positive week but for Monday, following indications that the government will take several steps to boost the economy. The establishment of new free-trade zones across the country, steps to decrease borrowing costs and increase consumption have resulted in significant gains for stocks.

Next week features a series of important economic reports. This includes data on manufacturing, services and trade. If most of these reports are on the positive side, stocks could witness further gains in the days ahead. Indications of any additional steps from the government to boost the economy will also go a long way in boosting investor sentiment.

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