Key News

Asian equities were a sea of green today. The main news was the 10 am release of Chinese economic data, which led to a morning pick up in trading. Hong Kong and Mainland China came back from the noon break seemingly in a food coma as markets slipped, but then rallied in the afternoon.

The other big story surrounded the conclusion of the latest drug procurement auction. China is buying generic drugs in bulk, which requires pharmaceutical companies to submit a price for a specific drug. The winner-takes-all auctions have created an overhang on the space. Our favorite analyst in the space believes that the worst is likely over and has become very bullish. Taiwan Semiconductors’ strong earnings led to a nice rally in tech across Asia and Hong Kong.

Reuters is reporting that Ant Financial sold shares recently based on a $200 billion valuation and that a 2020 IPO might be in the works.

US-listed Chinese companies’ Q4 earnings season kicks off next week.

Q4/December Economic Release

Q4 GDP	6% versus estimate 6% and Q4 2018’s 6%
Industrial Production	6.9% versus estimate 5.95% and November’s 6.2%
Retail Sales	8% versus estimate 7.9% and November’s 8%
Property Investment	9.9% versus November’s 10.2%
Fixed Asset Investment	5.4% versus estimate 5.2% and November’s 5.2%
Jobless Rate	5.2% versus November’s 5.1%

Takeaway: December data was resilient as trade war headwinds subsided in December. Strong demand for holiday gifts likely helped though domestic demand indicators were strong. China’s 2019 GDP reached $14.4 trillion while GDP per capita rose above $10,000 for the first time. The service sector grew by 6.9% compared to growth in the industrial sector at 5.7% and and growth in the agricultural sector at 3.1%. The services sector accounted for 53.9% of GDP in 2019.

The media continues to focus on percentage GDP growth leading to absurd headlines focused on the slowing percentage growth. China’s economy is much like Alphabet's revenue (GOOGL US). Compared to other tech companies, Alphabet is growing at a rate of 19%, which is low when compared to peers. For both Alphabet and China, it is the size of the growth that is key. Alphabet is expected to grow by a mind-boggling $156 billion in 2019. Similarly, the value of China’s Q4 GDP growth was the third largest quarterly change in 20 years. The value of GDP Q4 quarterly increase was more than 10X the value change in Q4 2001! That makes the WSJ’s lead article so laughable as they cherry-picked every conceivable negative they could find. I love the line “Trade, investment, consumer spending, and business confidence are all on retreat…” How could that be the case if retail sales grew 8% in December! 8%! Someone needs to tell the WSJ that their biggest clients, US asset managers, and broker-dealers, are clamoring to get into China. The UBS Global China Conference had 3,500 attendees, the best attendance ever over twenty years. Meanwhile, Morgan Stanley, JP Morgan, and Goldman Sachs are branching out of their joint ventures in order to do business in China independently. The article also insinuates that the numbers are all made up anyway. However, Apple, Nike, and other US consumer-oriented companies’ China revenues prove that all is well in China’s economy.

H-Share Update

The Hang Seng’s late-day rally led to a gain of +0.6%/+173 index points to close at 29,056 as volume picked up nearly 10% DoD and well above the 1-year average. It is always nice to see an upturn accompanied by strong volume as the index closed above the 29k level. Breadth was strong with 34 advancers and 13 decliners. Ping An Insurance +4.3%/+72.2 index points, China Construction Bank +1.2%/+26.5 index points while AIA -0.86%/-24.8 index points.

CSPC Pharma was the best performer +5.1%/+13.6 index points as investors hope the worst is over post drug procurement auction. China Overseas Land & Investment was the day’s worst performer -2.15%/-7.3 index points. Both Hong Kong and China-domiciled stocks had a good day as the HS China Enterprises Index +0.81% and the HS HK 35 Index +0.84%. The Hong Kong stocks within the MSCI China All Shares Index gained +0.74% led by tech +3.37%, materials +1.77% healthcare +1.69%, financials +1.45%, utilities +1.21%, industrials +1.13%, energy +0.59%, and discretionary +0.39%. Real estate was off -0.78%, staples -0.34% and communication -0.1%. Southbound Connect volume was strong in mixed trading, accounting for nearly 7% of Hong Kong turnover as Mainland investors bought $190mm worth of Hong Kong stocks. Volume leader Xiaomi had 2 to 1 buyers to sellers.

A-Share Update

Shanghai & Shenzhen diverged in choppy trading +0.1% and -0.3%, respectively, as volume dipped nearly 2% DoD though remained above the 1-year average. Breadth was off on the day with 1,216 advancers and 2,347 decliners as large caps outperformed small and mid-caps. The Mainland stocks within the MSCI China All Shares Index gained +0.41% led higher by healthcare +1.62%, discretionary +0.8%, financials +0.57%, materials +0.4%, energy +0.28%, tech +.24%, communication +0.21%, real estate +0.12%, industrials +0.05% and staples +0.02%. However, Utilities were off -0.59%.

Northbound Connect volumes were elevated in what has become the new normal. Shenzhen’s volume exceeded Shanghai’s, but foreign buying was strong on both exchanges. Foreign investors bought $513mm worth of Mainland stocks today as foreign trading accounted for 4.5% of Mainland turnover. For the week, foreign investors bought $2.837 billion worth of Mainland stocks. Since November 1, 2019, foreign investors have bought $26.781 billion of Mainland land stocks!

Beijing-Shanghai High-Speed Railway Co Ltd (601816 CH) went public on Thursday at a market valuation of $47B. High-speed rail is a great way to get around China. I just took it on Tuesday night from Shanghai to Beijing! With Chinese New Year’s and the travel that comes with it around the corner, it will fun to see the company’s first-quarter earnings release.

Last Night’s Prices & Yields

CNY rose as bond yields fell.

• CNY/USD 6.86 versus 6.88 yesterday
• CNY/EUR 7.61 versus 7.66 yesterday
• Yield on 1-Day Government Bond 1.76% versus 1.84% yesterday
• Yield on 10-Year Government Bond 3.08% versus 3.09% yesterday
• Yield on 10-Year China Development Bank Bond 3.53% versus 3.54%
• Commodities were higher on the Shanghai & Dalian Exchanges with Dr. Copper +0.23%