TGIF!

The Main Takeaway:

Mainland & HK financial stocks had a strong day as the PBOC announced a new program called the Central Bank Bills Swap (CBS). The program will allow 48 banks to swap perpetual bonds for Central Bank bills. Bank will likely issue more perpetual bonds in response to the measure. The CIBRC, China’s insurance regulator, approved perpetual bonds issuance from insurance companies. Is the PBOC telling us that interest rates have bottomed in China?

Hang Seng ended the week on a strong note as Tencent’s game approval took the spotlight as investors dismissed Wilbur Ross’ trade comments gaining +1.65%/448 index points on elevated/above average volume and strong breadth with 43 advancers and 5 decliners. Volumes were above the 1 year average on the strongest volume day since October 31^st. It is important to remember that Hong Kong represents emerging market investors’ definition of China. Tencent ripped +4.12%/177 index point following the first approval of the gaming/social media giant. While the two Tencent games are insignificant from a revenue perspective, there is hope that mega hits Fortnight and PUBG will approved for monetization. Today’s move was more than just Tencent as AIA gained +1.76%/44 index points, China Construction Bank +1.79%/40 index points and ICBC +2.23%/29 index points. Within the MSCI China All Shares’ HK stocks, Tencent accounted for all of the Communication sector’s +2.8% gain followed by real estate companies +2.02% following the land sales at HK’s old airport. It was a very broad based rally with all sectors positive as financials gained +2.01%, discretionary +1.98%, tech +1.93% and energy +1.61%. SouthBound Connect volumes elevated in strong volumes though mixed trading. Tencent experienced huge volumes on 6 to 1 buying. Real estate firm Sunac also experienced very strong volumes with sellers outpacing buyers.

Shanghai & Shenzhen faded into the close to end the day +0.39% and -0.18% on light volumes and poor breadth as mainland investors didn’t embrace the enthusiasm of HK. SH & SZ are predominantly owned by individual investors versus HK’s dominance of professional investors. One issue maybe the coming Chinese New Year holiday the week after next which includes a week long vacation. Within the MSCI China All Shares mainland stocks, real estate and financial gained +2.23% and +1.79% while discretionary names +1.71% and industrials +1.49%. Northbound Connect volumes were elevated with buyers outpacing sellers though MSCI Inclusion heavyweights Ping An saw mixed trading while Kwichow Moutai had 5 to 1 buyers to sellers.

Starbucks reported China sales increased 1% which is very problematic for the nattering nabobs of negativity who have proclaimed the China consumer dead despite a multitude of contrary data.

Energy giant Sinopec announced it lost $684 million/CNY 4.65 billion trading crude oil futures after its Unipec trading arm “misjudged the trend of international oil prices during its purchase and import of crude oil”. I would assume that makes for a difficult annual review for the employees involved. “my bad?”

Hainan island in southern China is being developed as a free trade zone. It was released that horse racing would be allowed though no gambling as part of the efforts to raise tourism. I don’t gamble but does anyone watch horse racing without gambling?

The Week That Was

• Hang Seng           +1.77%
• Shanghai              +0.22%
• Shenzhen            -0.16%

The Week Ahead

• Vice Premier Liu He in Washington DC for trade talks
• Industrial Profits Sunday China/Saturday Night NYC (observation: China’s government is working Sunday while we are in shutdown.)
• Manufacturing and Non-Manufacturing PMI Wednesday China/Tuesday Night NYC (this is official release from the National Bureau of Statistics, data set is large companies)
• Alibaba Earnings Thursday morning NYC
• Caixin Manufacturing PMI Friday China/Thursday night NYC (Caixin release is provided in partnership with IHS Markit, data set is small companies)

CNY 6.75; wow! Big appreciation versus the US $ as 44bps is a healthy move

Yields rose again as  possible indication that mainland investors are shifting from bonds to stocks. After staring at this for several years, yields can be very volatile. I don’t think we say definitely this is the “bottom” but a trend could be developing. (fingers crossed, knocking on wood, etc)

• Yield on 1 Day Chinese Gov’t Bond 1.91%
• Yield on 10 Year Chinese Gov’t Bond 3.18%
• Yield on 10 Year China Development Bank Bond 3.76%

Commodities were lower on both the Dalian and Shanghai