Alibaba Fine Explained

Alibaba’s Hong Kong share class gained +6.52% after Saturday’s announcement from the State Administration of Market Regulation fined Alibaba $2.78B fine (RMB 18.2B) for its anti-competitive practices aimed at hindering competitors at the expense of vendors. While the fine is a big number, the reality is that Alibaba had $47.8 billion in cash plus $22.1 billion in short-term investments and generated $14.7 billion of free cash flow in the quarter ended 12/31/2020. The fine could have been up to 10% of 2019 revenues versus the 4%. The company’s press release appears to put the issue behind the company, which is the most important thing for investors. Analysts are opining that the fine is immaterial for the company. With Alibaba’s fine taken care of, we can assume that Tencent, JD.com, and Meituan are now on deck for regulatory action. However, as Alibaba’s fine shows, regulatory actions will not likely be the end of the world for these companies.

After the market’s close, PBOC Vice President Pan Gongsheng answered reporters’ questions on Ant Group and the company’s “rectification” as the fintech becomes a financial holding company. If the company can address the regulator’s concerns, which it appears to be doing, an IPO might be feasible down the road, which should help Alibaba. During the press conference, the PBOC official commented on the rise of internet regulation globally. Wall Street has historically been the cookie jar for US regulators, though I suspect that baton will now be handed to the US tech giants. 

In our latest report, we discuss the implications of new regulations for financial technology platforms in China with James Zheng, CFO of online lender Lufax.

March Economic Data Release

Money supply is expressed as year-over-year change

Takeaway: The market is apt to focus on new loans as the consensus view is that credit is being reined in and today’s release begs to differ. Credit growth is being watched carefully by policymakers though the PBOC has said it should grow in line with economic growth. China will run a fiscal deficit this year of just over 3% while the PBOC has said “no sharp turns” i.e. policy support is not going to pulled ad hoc. Remember this release came after the market’s close.

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Key News

Asian equities must have missed Jerome Powell’s Vince Lombardi pep talk on 60 Minutes last night as equity markets had a poor start to the week. India fell more than 3% on increased COVID cases while even Hideki Matsuyama’s Masters win could not lift Japanese equities. Meanwhile, Taiwan and South Korea managed small gains.

Premier Li noted that high commodity prices and chatter that auto companies could see regulation weighed on sentiment along with general US-China political rhetoric malaise. As many brokers noted, there were no positive catalysts overnight to shake the recent funk in China equities.

It is rumored that Didi Chuxing’s US IPO will occur as soon as June.

There has been a fair amount of discussion about the White House’s CEO Summit on Semiconductor and Supply Chain Resilience. GM and Ford have idled plants due to chip shortages driven by increased demand due to work from home. Considering Taiwan Semiconductor ON supplies more than 50% of the world’s chips and South Korea’s Hynix supplies nearly 20%, this is a demand issue as work from home simply creates demand for products that need chips. On the supply chain issue, Los Angeles/Long Beach port has seen a strong increase in imports, which has led to long delays for container ships. I doubt this will be raised in today’s meeting, though it is the reality. Fix the port issue and you may not completely fix the problem, but help alleviate it.

H-Share Update

Hong Kong’s opening gains quickly evaporated as the Hang Seng fell -0.86% as volumes picked up +13% from Friday, which is just above the 1-year average. The 200 Chinese companies listed in Hong Kong and within the MSCI MSCI China All Shares Index were off -1.42% as materials fell -3.91% with metals/mining off, discretionary -3.36%, tech -2.44%, industrials -1.46%, staples -1.31%, healthcare -1.15% on talk vaccines might be mixed to improve efficacy though this was later denied, and communication -1.14%. Hong Kong’s most heavily traded stocks by value were Alibaba, which gained +6.51%, Tencent, which fell -1.13%, Meituan, which fell -5.03%, Xiaomi, which fell -2.92%, SMIC, which fell -3.82%, Geely Auto, which fell -7.05%, AAC Tech, which gained +12.67% on earnings, Ping An Insurance, which fell -0.33%, JD.com HK, which fell -2.15% and China Mobile, which fell -0.2%. Southbound Stock Connect volumes were light as Mainland investors sold $325 million worth of Hong Kong stocks and Southbound trading accounted for 10.8% of Hong Kong turnover.

A-Share Update

Shanghai, Shenzhen, and the STAR Board are back at the low end of their recent range after falling -1.09%, -2.13%, and -2.2%, respectively, as volume rose +12% from Friday though remains only 88% of the 1-year average. Breadth was off with 1,024 advancers and 2,839 decliners. The 517 Mainland stocks within the MSCI China All Shares Index ended -1.54% lower as utilities gained +1.7% led by hydro and electricity stocks and real estate +0.43% while materials -3.16% as mining/metals/rare earth hit, healthcare -2.72%, industrials -2.42%, communication -2.26%, tech -1.89%, discretionary -1.81% and staples -0.82%. The Mainland’s most heavily traded stocks by value were delivery company SF Holding, which fell -9.38% on analyst cuts after announcing a 1st quarter loss forecast last week, BOE Tech, which fell -2.72%, Sany Heavy, which fell -6.56% despite very strong excavator sales in the first quarter, Kweichow Moutai, which fell -0.55%, and TCL Tech, which fell -4.6% as its Q1 net income forecast came in light. Northbound Connect volumes were moderate as foreign investors bought $657 million worth of Mainland stocks today as Northbound trading accounted for 6.8% of Mainland turnover.

Last Night’s Exchange Rates, Prices, & Yields

  • CNY/USD 6.55 versus 6.55 Friday
  • CNY/EUR 7.80 versus 7.79 Friday
  • Yield on 1-Day Government Bond 1.54% versus 1.44% Friday
  • Yield on 10-Year Government Bond 3.19% versus 3.21% Friday
  • Yield on 10-Year China Development Bank Bond 3.57% versus 3.59% Friday
  • China’s Copper Price -1.21% overnight

About KraneShares

Krane Funds Advisors, LLC is the investment manager for KraneShares ETFs. Our suite of China focused ETFs provides investors with solutions to capture China’s importance as an essential element of a well-designed investment portfolio. We strive to provide innovative, first-to-market strategies that have been developed based on our strong partnerships and our deep knowledge of investing. We help investors stay up to date on global market trends and aim to provide meaningful diversification. Krane Funds Advisors, LLC is majority owned by China International Capital Corporation (CICC).