Daily Posts

Mainland Plays Catch Up, RRR Cut, Caixin PMI Services Gains

Apologies for the late release as last week I had a time zone advantage while this week I have a time zone disadvantage. I have early meetings tomorrow and Wednesday though China Overnight will be back Thursday and Friday.

PBOC cut the bank’s Reserve Requirement Ratio for the third time this year by 1% to 14.5% for large banks and 12.5% for smaller banks beginning on October 15th which will inject RMB 1.2 trillion into the banking system. Due to the maturing of RMB 450 billion of MLF, the net injection is RMB 750B. The RRR cut is an easing signal as the PBOC is providing support for the economy.

September Caixin China PMI Services   53.1 versus estimate 51.4 and August’s 51.5
September Caixin China PMI Composite   52.1 versus August’s 52.0

Takeaway: The Caixin Services followed the Non-manufacturing PMI higher while the manufacturing PMIs declined. This divergence is noteworthy. While the headlines focus on the equity markets, there is a clear effort to support domestic consumption to offset export driven manufacturing. As investors we want to position ourselves toward where stimulus and economic strength is showing.

China foreign reserves for September were $3.087 trillion versus estimate $3.105 and August’s $3.109. China’s reserves were off slightly but not a significant move.

Bloomberg Businessweek released an article on Chinese hacking major US technology companies last week that several readers reached out to me about. Over the weekend Apple sent a letter to Congress denying the article. The Department of Homeland Security backed statements from Apple and Amazon that denied the report as did the UK’s National Cyber Security Centre. The article did not quote any individual by name involved which I found very unusual. I have been skeptical of the article as why would China jeopardize such a key role in global supply chains. Additionally the type of outgoing messaging would be incredibly easy to detect.

Hang Seng fell -1.39% on strong volumes and poor breadth with only 7 advancers and 43 decliners. Tencent’s -1.97% drop accounted for 48 of the indice’s 370 point drop. Within the HK companies of the MSCI China All Shares index, real estate was off -4.23% on reports of a price cut in a tier 3 city. It was a fairly broad based sell off candidly. Southbond Connect volumes were moderate in mixed trading though Tencent saw nearly 2 to 1 selling from mainland investors.

Shanghai & Shenzhen played catch up (or down) following the last week’s market holiday declining -3.72% and -3.83% on high volumes and very poor breadth. Tech was off -6.21% as it most exposed to the US from a revenue perspective. Small caps were off -4% for the same reason. Real estate declined -6.21% on the price cut rumor. Northbound Connect volumes were high as foreign investors sold mainland stocks for the first time in memory nearly 3 to 1. Do foreign investors mark capitulation? Maybe though European weakness and recent US equity weakness maybe a factor as well.

  • CNY 6.92 on PBOC easing
  • Chinese Gov’t Bond Yield 3.61%; big rally on equity weakness and RRR cut.

 


Commodities were stronger on both exchanges which is interesting. Is the commodity market waking up to China’s stimulus?