Daily Posts

GDP/Retail Sales/IP/FAI/oh my!, Talking Heads, Stock Collateral Addressed, Tax Cuts Coming, Tax Cuts Limit Tax Revenue Growth

TGIF! Our first frost this morning though markets were red hot overnight!

Q3 GDP YoY                                         6.5% versus estimate 6.6% and Q2’s 6.7%
YTD GDP YoY                                      6.7% versus estimate 6.7% and Jan to Sept 2017 6.8%
Sept Retail Sales YoY                         9.2% versus estimate 6.7% and Aug’s 9%
Sept Industrial Production                5.8% versus estimate 6% and Aug’s 6.1%
Sept Fixed Asset Investment             5.4% versus 5.3% and August’s 5.3%
Sept Jobless Rate                                4.9% versus Aug’s 5%

The Takeaway:  Opinions vary. I find US media has largely focused on the small year over year declines (one media report got the retail sales number wrong which led to a negative article on retail sales. Amazing. Create your own facts to fit the narrative.). Sell side reports are more balanced in noting green shoots of policies to support the economy are beginning to filter in. It is against the backdrop of investor sentiment that the release has to be considered a home run as the disconnect between the mainland market and the real economy is stark. Yes China’s economy is slowing on % basis but it has been slowing on a % basis for years! The trade war is a factor though China’s anti-pollution campaign and credit tightening are a factor. While Q4 is apt to a slight % decline, we may begin to see policy support help.

The heads of PBOC, CBIRC, CSRC and Vice Premier Liu He all spoke publicly in vocal support of the mainland stock market in separate announcements. Vice Premier Liu spoke to the compelling value of the mainland market. CSRC released six proposals that would support the economy in the short run such as faster M&A approval, allowing easier investment rules for domestic and foreign investors. PBOC Governor Yi Gang spoke about allowing private companies easier access to credit. He called the mainland market valuations at “historic low” especially in light of China’s “improving economic fundamentals”. The CBIRC said it would relax rules on insurance products investing in the stock market and particularly companies facing credit crunches. All in all this is unprecedented full court press. I don’t recall such a coordinated effort even in 2015. The stock market has little effect on the wealth of Chinese households though its poor performance is not a confidence builder. The main culprit has been mainland investor sentiment. Today’s actions will need to be followed by continued policy action announced today.

Hang Seng gained +0.42% on increased volume day over day slightly with 32 advancers and 16 decliners. China Construction Bank gained +1.97% worth 40 of the indice’s 106 point gain. Within the MSCI China All Shares HK companies, real estate companies rebounded 2.88% followed by Healthcare’s 2% gain. Energy companies were weaker falling 1.68% as WTI/oil fell. HK represents “China” for EM investors. Within global markets in meltdown mode the positive return is noteworthy as virtually every Asia Pacific equity market was lower. Southbound Connect volumes were skewed to buying in moderately higher volumes. Tencent saw 2 to 1 buying! HSBC stock was down again following the CDR announcement yesterday though mainland investors bought the stock 500 to 1 (not a typo). Maybe their CDR will be based off their HK listing and not LSE?

Shanghai & Shenzhen both gained +2.58% on volumes nearly 20% higher day over day in very strong breadth. Within the MSCI China All Shares mainland stocks, real estate gained 4.32% followed by financials 3.88%staples 3.79%, tech 3.3% and communications 3.05%. Real estate had a strong day in both HK and the mainland following the positive FAI release and potential increase in infrastructure spending. Northbound Connect volumes were well above average as buyers outpaced sellers. The volumes were as high as the MSCI inclusion days. While Ping An saw increased buying, Kweichow Moutai saw selling amongst the MSCI Inclusion names. Foreign investors appear to be cheered by the economic release and verbal support.

A new segment to China Overnight beginning today is what are Chinese investors saying in mainland social media. This color is provided by a colleague who is scouring Weibo, WeChat etc to get a sense of investor sentiment. Professional investor in China were positive in their comments on the verbal support. Individual investors were mixed which isn’t surprising since they have been bruised by the market’s decline. It appears professionals recognize the potential policy support can have. China equity ETFs flows in China were very strong this week registering US $2.1B of inflow.

As discussed yesterday many private entities have difficulty accessing credit/loans. This leads predominantly Shenzhen listed mid and small cap companies to pledge stock as collateral for loans. As mainland markets have fallen, this has led to a concern of margin calls. While $600B of potential stock at risk according to headlines, more realistically ~$50B is at risk. Regulators are pro-actively working with brokers to prevent such calls.

The Ministry of Finance held a press conference announcing further tax cuts as stimulus measure. Corporate and VAT reductions are on the table. This follows Premier Li stating that tax cuts are on the table.

The Ministry of Finance announced China’s previous tax cuts have led to a decline in tax revenue which rose 2% in Sept to $187B/RMB 1.3 trillion versus 4% in August.

Baidu joined the Partnership on AI, US founded entity.

The PGA Tour is playing in South Korea as I discovered staying up late to watch China/Asia markets open and the economic releases. LPGA is playing in Shanghai at the Buick Open.

  • CNY 6.92
  • Yield on 1 Day Chinese Gov’t Bond 1.88%
  • Yield on 10 Year Chinese Gov’t Bond 3.56%; a very slight reversal
  • Yield on 10 Year China Development Bank Bond 4.22%

Commodities were lower following global commodity prices.