Daily Posts

Mainland Volumes Surge to 52 Week High, Securities Association of China’s Brokerage Fee Cut Proposal, PBOC Quarterly Report, Baidu (The Good), Netease (The Mediocre), VIPS (The Not So Good)

TGIF! Greetings from the west coast. Though on vacation this week, I wanted to get a report out today despite being at a time zone disadvantage.

Overnight Catalyst:

  • The Securities Association of China has reached out to its members on cutting fees and taxes which led to a significant rally in mainland/ A Shares listed brokerage firms.
  • The PBOC released their quarterly report indicates further bank reserve requirement ratio cuts will allow for targeted stimulus versus a broad interest rate cut.
  • Trade talks appear to be going well with Vice Premier and trade envoy Liu He meeting with President Trump. Reports of major Chinese agriculture purchases circulated overnight.


Hang Seng followed the US market lower at the open -0.53% but rallied off the lows to end +0.65% gaining 186 index points on above average volume and strong breadth of 38 advancers and 8 decliners. China Mobile gained +2.29%/36 index points followed by AIA’s +0.99%/27 index points though HSBC was off -0.77%/-19 index points. The big story of the day was Apple supplier AAC Technology’s +11.92%/15 index points on news it will become a supplier for Xiaomi while fellow Apple supplier Sunny Optical +4.77%/10 index points on news that it will supply Samsung. Interesting to see these companies diversify their business from Apple. Within the MSCI China A Inclusion’s HK stocks, tech rallied 5.63% with ZTE, semis, and AAC surging higher. ZTE announced 5G roll out this year. Tech trades as a trade war barometer. Healthcare gained +1.49% followed by real estate +1.48%, discretionary +1.43% and staples +1.35%. Southbound Connect volumes were 2X the normal in mixed trading with volume leader CCB was sold nearly 5 to 1.

Shanghai & Shenzhen also overcame early weakness to gain +1.91% and +2.28% on massive volume nearly 2X the 1 year average and strong breadth. Within the MSCI China All Shares’ mainland stocks, tech +3.74% led by ZTE, financials led by brokerages +3.54% and communications +2.7% on the above catalysts. Northbound Connect volumes were very strong with buyers outpacing sellers.  It is important to remember that mainland investors have left stocks leading to China’s bond market being the strongest performing globally. We might be seeing the beginning of a shift back as bond yields have started to rise.

Baidu, the Chinese search giant, reported stronger than expected results.

  • Q4 Revenue $3.9B versus estimate $3.89B
  • Revenues increased 22% Year over Year with the core business +14% YoY
  • Q4 EPS Adjusted $1.92 versus estimate $1.74
  • Q1 Revenue Forecast $3.42B to $3.6B versus estimate $3.57B


Netease, onlining gaming giant, announced mixed Q4 results

  • Q4 Revenue $2.89B versus estimate $2.94B
  • Q4 EPS Adjusted $2.66 versus estimate $2.43
  • Analysts had mixed views of the results and when the company would receive approval on potential blockbuster Diablo Immortal.


Vipshop, the Groupon of China, announced mixed Q4 results though the light forward looking outlook really weighed on the stock.

  • Q4 Revenue $3.8B versus estimate $3.9B
  • Q4 EPS Adjusted $0.19 versus estimate $0.18
  • Q1 revenue forecast RMB 19.9B to 20.9B versus estimate 21.33B


The institutional strategist of a major Wall Street firm wrote a report on Chinese A Shares Inclusion in advance of next week’s announcement from MSCI on the 2019 inclusion factor.

  • Forecast $70 – $125 billion of active and passive inflows in 2019
  • Equivalent to 3% to 5.4% of total free float market cap
  • Full inclusion to take 5 to 8 years based on South Korea and Taiwan experience
  • 2019 Inclusion factor likely to be 20% in 2019 versus 2018’s 5%
  • Foreign ownership to reach ~10% of A Shares versus ~2.5% today
  • Consumer & Healthcare are favored sectors
  • Forecast inflows at $100 billion to $220 billion annually during the inclusion period


In reading the report a few things jump out to me.

  • I believe using South Korea and Taiwan is not a good comparison as China’s A shares market is significantly larger. Additionally the Asian crisis in 1998 likely prolonged the inclusion.
  • The reports uses the free float market cap of the total China A shares of $2.3 trillion. That is not what MSCI is adding. MSCI is adding the constituents of the MSCI China A Inclusion Index which as a free float market cap of $745 billion.
  • The report likely significantly underestimates foreign ownership based on using MSCI China A Inclusion Index, the appropriate benchmark.


Hang Seng Indices announced changes to the Hang Seng (HSI) and Hang Seng China Enterprise (HSCEI) after the HK close though there were no significant changes. Announced last year and first implemented in March 2019, the HSCEI began adding 10 non SOEs including Tencent in March of this year. I would argue the Enterprise Index was less than enterprising if it is just get around to adding Tencent. Ultimately investors need to know and understand their indices and the exposures they hold (or don’t hold).

January New Home Prices increased 0.61% month over month.

CNY 6.71

Yields are rising.

  • Yield on 1 Day Chinese Gov’t Bond 1.98%
  • Yield on 10 Year Chinese Gov’t Bond 3.17%
  • Yield on 10 Year China Development Bank Bond 3.80%


Commodities were firmer on the Shanghai & Dalian commodity exchanges with Dr Copper up nearly 1%