Hope all is well!

Hang Seng returned from holiday opening +0.83%, swung to an intra-day low of -0.79% before rallying to close -0.03%. Volume was 15% higher day over day though still below the 52 week average with 27 advancers and 21 decliners. The Hang Seng was pulled lower by energy heavyweights China Petro & CNOOC which declined -4.27% and -2.01% worth -21 and -16 index points on Saudi/US relations. Within the MSCI China All Shares HK companies, Utilities rose 1.06% as tech and communications had a positive day. Real estate was off -1.13% on news that lucrative land sales on HK’s Peak were cancelled after bids failed to exceed the reserve amount of US $6.2 billion/$15,000 square foot. Southbound Connect volumes were moderate in mixed trading as insurance company PICC and HSBC saw significant buying while Tencent was sold 6 to 1.

Shanghai & Shenzhen fell -2.94% and -2.73% on continued trade war overhang, rising US interest rates and stock collateral loans being called. Let’s take a deeper at dive:

• While the US did not name China a currency manipulator, the State Department announced plans to pull out of the Universal Postal Union. For the last 144 years and including 192 countries today, small packages and mail can be sent overseas and delivered by the local country’s mail. Mail and packages under 4.4 pounds from China for instance receive a discount as it is an emerging market while the US is a developed market. The State Department is claiming a loss of $300mm to deliver such packages. I had never heard of the UPU until yesterday. One to grow on…
• While the trajectory of US interest rates is higher, take a look at US Libor rates (hint: up up up). CNY declined after not being named a currency manipulator ironically leading some to believe China will let it slide if the dollar strengthens. China’s decline in FX reserves shows a willingness to support CNY as a weaker currency creates far more issues.
• Private companies have trouble getting loans from banks in China. While the situation is slowly improving, it continues to be a factor as to why would a banker take risk when it can lend to a state owned enterprise (ie gov’t backed)? The Shenzhen Stock Exchange is comprised of private companies and mainly mid/small cap companies. Companies will borrow from lenders with their company stock as collateral. As China’s market falls there is increased worry that such loans will trigger margin calls. While several measures have been implemented to mitigate an occurrence the market is worried about it. While a recent headline put $600B of stock at risk, that is a gross overstatement. In speaking with a mainland connection this morning, the number at risk is more like $50B. Companies will look to avoid such sales which regulators will help with. At the same time it is another issue facing the mainland market.

Breadth in the mainland market was poor overnight. Within the MSCI China All Shares Indice’s mainland stocks, energy declined -5.44% with materials and healthcare off -3.59% and -3.37%. Northbound Connect volumes were very heavy following the 2 day closure due to HK’s market holiday. Volume was slightly skewed to the sale but not by a lot. MSCI inclusion names saw foreign sellers outpace buyers. Interesting to see such an active day from foreign investors.

HSBC stock in HK declined -0.82% despite announcing a potential CDR listing in mainland China in advance of the proposed Shanghai London Stock Connect program. Details are not yet available but I would assume HSBC’s CDR would look like a US ADR. If this becomes a template for other CDRs it would be a good thing as custody banks would buy the underlying stocks locally and issue CDRs in China. Too early to get excited without seeing the details but worth watching.

Reuters had an interesting article on Exxon Mobile’s plans to establish a LNG import and storage facility in China. The LNG would come from Southeast Asia and Africa which would avoid tariffs. China’s demand for LNG is growing rapidly in an effort to limit high polluting coal.

Defense Secretary Mathis will meet with his Chinese counterpart in a slight relationship thaw. At the same time the US sent two B-52 bombers into the South China Sea yesterday as a not so subtle reminder.

• CNY 6.93
• Yield on Chinese 1 Day Gov’t Bond Yield 1.88%
• Yield on Chinese 10 Year Gov’t Bond Yield 3.56%
• Yield on China Development Bond 10 Year Bond Yield 4.22%

Commodities were largely weaker on both the Shanghai & Dalian. Copper was up slightly.