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Traders Take Profits as Volumes & Northbound Connect Surge, Bank NPL’s fell in Q4, CSRC Eyeing Margin

Hope all is well! Apologies for the late email as I am in Las Vegas for a conference and then headed to SF. I am taking the red eye Thursday night but will ensure a note goes out post MSCI’s decision.

The Hang Seng slipped -0.65%/-187 index points on volumes above the 1 year average though off 20% day over day following Monday’s surge. Market breadth was off with 14 advancers and 35 decliners. Around mid-day reports of an Indian air strike on a terrorist camp in Pakistan weighed on Asian markets. Insurance giant AIA fell -1.11%/-30 index points while ICBC was off -1.62%/-22 index points followed by CCB -0.7%/-16 index points. The biggest single stock news was Apple supplier AAC’s profit warning leading to the stock plunging -14.04%/-15 index points. Within the MSCI China All Shares’ HK stocks, healthcare was the leading sector +2.31% though tech was pulled lower -2.3% by AAC while real estate was off -1.48%, financials -1.37% and staples -1.07%. There was news that banks are pushed to lend to private companies which has previously led to concerns that such activity could weigh on profitability. We can’t read too much on one day. Southbound Connect volumes were very strong at 4X the average as sellers dominated trading nearly 2 to 1. Interesting to see mainland investors pull money from HK. Is that money being redeployed in the mainland?

Shanghai & Shenzhen gave up slight gains as traders took profits in the last hour of trading to fall -0.67% and -0.49% on volumes 3X the 1 year average and 5% higher from Monday’s surge. Breadth was slightly negative as many brokers felt quick profit taking led to the fall at the close though clearly more money is coming into the market. Within the MSCI China All Shares’ mainland stocks, materials +0.88% and healthcare +0.76% while recent winners experienced profit taking led by financials -2.54%, discretionary -1.99%, staples -1.71% and real estate -1.44%. Most brokers were calling today a breather or consolidation following Monday’s massive move. The most interesting item was Northbound Connect which saw very high volumes matching yesterday’s levels. Foreign investors reversed from yesterday’s selling as they were net buyers. Monday and Tuesday Northbound Connect volumes were 50% higher than during MSCI’s 2018 inclusion trading days. Clearly I am not the only one aware of MSCI’s decision Thursday on China A Inclusion.

One source noted that bank’s non performing loans fell 0.4% in Q4 to $303 billion according to the CBIRC. The NPL ratio fell to 1.83% which is the lowest level in six years.

The CSRC announced it would be monitoring margin debt levels which have increased though off a very low level. Margin debt fueled the massive 2014/2015 market rally and subsequent decline. I am surprised by how much attention the uptick in margin debt garnered as it is still at a fairly low level. Individual investors account for 80% of daily trading volumes though only 1/3 of stock ownership. I suspect that the institutionalization of the mainland markets will see individuals taking a back seat to professional investors in the years to come.

CNY 6.69

Yield curve shifted up slightly

  • Yield on 1 Day Chinese Gov’t Bond 2.02%
  • Yield on 10 Year Chinese Gov’t Bond 3.21%
  • Yield on 10 Year China Development Bank Bond 3.88%


Commodities were mixed on the Shanghai & Dalian commodity exchanges