- The stock exchanges of Shanghai, Shenzhen, and Hong Kong plummeted from June 12 to July 8 after months of growth.
- Among the 51 Chinese agricultural enterprises that were analyzed, meat, animal feed, and crop seed stocks suffered the worst losses while retail (e.g. supermarket, hypermarket) stocks performed the best during the crisis.
- Starting on August 11, China devalued its currency in order to shore up the economy and bolster export-oriented industries. China is the world’s largest importer of agricultural goods, meaning the devaluation could hurt food processors who rely on cheap agricultural imports.
The weather over Beijing, typically smog-ridden and hazy, was anything but on Friday June 12, 2015. It was an unusually clear day, thanks in part to thunderstorms that swept through the capital earlier in the week. Beijingers were gearing up for a pleasant and sunny weekend with the added good news that Chinese stocks topped US$10 trillion of market capitalization for the first time, second only to the USA. Both the weather and the financial markets were in healthy harmony, albeit briefly. When the markets opened on the following Monday, the winds had changed, Chinese stocks plummeted and continued to do so for three and a half weeks. The freefall, which finally bottomed out on July 8, saw US$3.2 trillion evaporate into losses. From June 12 to July 8, Shanghai’s SSE Composite Index dropped -32.1%, while Shenzhen’s SZSE Composite Index declined by -40% due in part to substantial losses in Shenzhen’s NASDAQ type ChiNext board. Hong Kong’s Hang Seng Index, which is more open to foreign investors than its mainland counterparts, declined by only -13.8%. Lastly, the CSI 300 Index, an economic bellwether and China’s answer to the USA’s Standard & Poor’s 500, notched a -31.3% drop. The sunny days were over.
China’s descent into a bear market must be interpreted within the backdrop of its economic slowdown. Since 2010, the country has recorded progressively declining GDP growth and is currently (as of 2015) threatening to dip below 7% for the first time since 1990. In order to kick-start its economy, the People’s Bank of China (PBC) devalued the yuan (CNY) by approximately -1.86% on Tuesday August 11. The devaluation continued on for two more days, dropping a total of nearly -4.6% (USD/CNY) by the end of August 13. By August 14, the currency bleeding had been staunched with the Chinese yuan actually rebounding slightly by the end of the week. From August 11 to August 13, Shenzhen’s exchange seemingly benefited the most from the devaluation, as the SZSE Composite Index grew 1.05%. At the same time, Shanghai’s SSE Composite Index recorded a 0.67% bump while Hong Kong’s Hang Seng Index dropped -2.05%.
In theory, the devaluation would help export-oriented industries by making their goods cheaper to sell overseas. Conversely, industries that relied on imports for raw materials had just seen a rise in the cost of business. In this light, it’s understandable why Shenzhen recorded a gain (as home to China’s “new economy”) while Hong Kong recorded a loss owing to its status as an import hub. However, China as a whole is the largest importer of agricultural goods in the world, meaning the devaluation could hurt Chinese food processors who rely on cheap agricultural imports. Additionally, stock market losses wreaked havoc on the underlying equities that help finance publicly traded agribusiness companies. This brief will examine the dual economic shocks of stock losses and devaluation have had on China’s agricultural enterprises.
ChinaAg analyzed 51 Chinese food and agricultural enterprises that were publicly traded in Shanghai (8 listings), Shenzhen (14 listings), Hong Kong (24 listings), New York (4 listings), and Singapore (1 listing). Out of the 51 enterprises, ten temporarily suspended their shares sometime during the recent crisis in order to prevent further losses, with eight of the ten being listed in Shenzhen. As a benchmark, on July 8, 1,300 companies (~US$2.4 trillion of market cap) had temporarily suspended shares. Agricultural enterprises that suspended trading included three frozen food companies, two animal feed companies, as well as a wine, meat, tomato processor, liquor distillery, and dairy company.
The poorest performing agricultural enterprises during the stock market decline were those engaged in meat (-47%) and animal feed (-42.4%) production. As links along the same supply chain, it’s understandable that both industries shared similar market descents. The reason behind the steep decline is varied. In total, five out of the six meat and animal feed companies analyzed were traded in Shenzhen, the exchange most affected by the crisis. Additionally, at the same time as the stock market decline, news broke that more than 100,000 MTs of smuggled and expired meat were seized across 14 provinces/regions, damaging consumer confidence in the sector. Shenzhen’s stock market decline, along with the expired meat scandal, likely combined to push both industries deep into the red. The devaluation shock elicited mixed results, with the majority of companies suffering slight losses. However, one animal feed company recorded the second worse losses (Jiangxi Zhengbang Technology at-10%), while a meat company posted the highest gain of all companies analyzed (Shandong Delisi Food at 23.6%). The reasons behind these large losses and gains have yet to be fully understood.
The next worse performing enterprises were seed companies whose losses during the stock market decline averaged nearly -40%, though losses would approach -50% if not for one well-performing NYSE-traded seed company (i.e. Agria Corporation at -8.3%). Losses were likely due to the speculative nature of China’s seed and biotechnology industry as investors await governmental approval of GM grain seed commercialization. Similar to effects experienced by meat, and animal feed producers, the devaluation resulted in divergent gains and losses for seed companies. For instance, the NASDAQ-listed Origin Agritech recorded a -5.6 loss while the Shenzhen-listed Long Ping High-Tech Agriculture recorded a positive gain of 7.9% despite both companies recording at least a -43% loss during the stock market decline. In this instance, the location of their respective listings (USA vs. mainland China) likely impacted the effect the devaluation had on their businesses.
The best performing enterprises during the stock market decline were those in the retail industry (e.g. supermarkets, hypermarkets, etc.) and averaged only a -21% loss. One reason for the relative minimal losses was the fact that all retail companies analyzed were listed in Hong Kong, a free-market oriented exchange which uses the Hong Kong dollar (as opposed to the Chinese yuan). Additionally, one of the companies, Sun Art Retail Group, a Taiwanese-French hypermarket chain, helped mitigate losses by being one of only two companies to post a net gain (2%) during the bear market. The devaluation had a marginal effect on the retail industry which decreased only -0.46%. Curiously, out of the 51 companies analyzed, Shenzhen-traded Xinjiang Chalkis (tomato processing) was the best preforming company, recording a net gain of 8.8% before suspending its shares at the end of June. The company has yet to lift its suspension as of August 18, perhaps with good reason.
COFCO: China’s Food Titan
COFCO Group, China’s largest agribusiness enterprise, bears special consideration due to its size and direct government support. The company, though state-owned, has seven separate companies listed on stock exchanges (four in Hong Kong and three in Shenzhen). Considering the six directly involved in food processing and sales (i.e. excluding its commercial residential business), COFCO losses averaged -27.2% over the stock market decline. COFCO’s Shenzhen-traded agricultural company, COFCO Biochemical Anhui, recorded a -50% loss, the worse decline among COFCO companies analyzed.
China’s agricultural enterprises are currently struggling to cope with a faltering stock market and weakening currency. The steep decline that defined the June 12 to July 8 stock market freefall has yet to fully stabilize. On August 18 alone, both Shanghai’s SSE Composite Index and Shenzhen’s SZSE Composite Index each dropped over -6% in value. Meanwhile, the devaluation, a boon for export-based businesses, has conversely made imports more expensive. Popular imported agricultural goods such as soybeans, corn, wheat, milk, coffee, fresh fruit, wine, and liquor will now face a currency headwind before entering any Chinese port. Enterprises that rely on cheap grain and soybean imports for raw materials, such as animal feed companies, will likely continue to struggle, which in turn will negatively impact meat companies. For producers of luxury commodities such as wine and liquor, the stock market decline has eroded consumer confidence and will likely curtail spending on these high priced goods. This will be particularly true for imported wine and liquor whose prices have increased overnight owing to the devaluation. Overall, it is unlikely that China’s agricultural enterprises will rebound quickly. The uncertainty over the country’s stock market stability and volatile currency will continue to cast a shadow over any potential short term and medium term gains.