Hope all is well! Apologies for the late note due to my time in Las Vegas. I am headed to SF later today so unfortunately tomorrow is apt to be a later delivery time.

The Hang Seng erased gains of +0.84% in the afternoon session as news of Pakistan shooting down two Indian fighter jets led to a loss of –0.05%/-14 index points on volumes 20% than the one year average though off 10% day over day. Breadth was mixed with 20 advancers and 28 decliners as several individual stock news weighed on the markets. AIA gained +1.65%/+46 index points on a broker upgrade while Tencent eased -0.82%/-23 index points and Bank of China –1.61%/-14 index points. AAC’s disappointing results yesterday led to several broker downgrades leading to a drop of -4.95%/-5 index points which also weighed on Sunny Optical -2.55%/-5 index points. Within the MSCI China All Shares’s HK stocks, tech was unsurprisingly off -2.12% on AAC’s news while discretionary was off -1.91% as suto and EV giant BYD issued a profit warning leading to a -4.5% loss. Real estate was off -1.75% as reports of a soft February HK real estate sales. Southbound Connect volumes were 2X the average as mainland investors continue to sell down their HK holdings as sale trades were 2X buy trades. It is feasible that this money is being redeployed in the mainland.

Shanghai & Shenzhen also gave up early gains on the India news to end the +0.42% and -0.57% on volumes 2X the 1 year average though off 18% day over day. Breadth was slightly negative as many brokers noted that the market is consolidating its gains. The Shanghai Comp has been testing the 30k level while RSI’s indicate the market might be overbought in the short term. Within the MSCI China All Shares’ mainland stocks, tech was off -2.49% while communications +4.39%. Materials was off -1.1% while real estate gained +1.19%. One broker noted that their institutional asset manager survey showed that many mainland investment professionals have missed this year’s rally. This is apt to provide the market support as they will be buying the dip in my opinion. Underperformance is not tolerated by investors. Northbound Connect had another monster day on volumes 2X the 1 year average for the third day in a row on very strong buying from foreign investors. This marks the 19^th day out of 20 that foreign investors have been buying mainland stocks. Maybe we have underestimated MSCI’s inclusion factor at 15%?

In addition to Thursday’s 5pm EST announcement on 2019 China A inclusion factor, there is something to watch Thursday at the 4pm close. The below securities will added to MSCI indices for the first time as MSCI adjusted their policy on dual share class companies. I am not predicting these companies will rise or fall though I do predict they will see significant trading at the close. Passive investment firms will purchase the stocks from institutional brokers who had bought them weeks ago and hedged the exposure. If you can, watch these securities beginning at 3:59 EST on Thursday. If you don’t believe passive investing has a consequence please watch.

• IQ
• PDD
• TME
• ZTO

(BILI has been announced for inclusion but subsequently MSCI reversed course saying its free float was too small.)

If you stay up late watch the following HK companies.

• 3690 HK Meituan Dianping
• 1810 HK Xioami
  
  

Bloomberg Economics’ leading China indicators have begun to pick up as stimulus measures trickle down into the economy according to a Bloomberg article. Richard Bernstein, former ML CIO and CEO of Richard Bernstein Advisors, spoke at the conference I am attending. He is overweight China as it is the only country globally stimulating its economy. The conference also had a hedge fund manager who spoke almost exclusively on Chinese AI, big data, internet of things, social media and mobile payments. While I agree with her thesis, I don’t believe an investor needs to pay 2 & 20 for their exposure.

CSRC new Chairman Yi Huiman spoke after the close on China’s new Shanghai technology board. While markets had viewed the board with some skepticism, Yi was firm in his commitment to making the board happen and address market concerns. Most importantly he noted foreign Chinese companies, ie US listed Chinese companies, would be able to return as Chinese investors have little to no access to the companies.

Global beverage giant Diageo increased its stake in Chinese liquor maker Sichuan Swellfun from 60% to 70%.

China’s official PMIs will be released tonight. They are apt to down month over month though it is important to remember these are lagging indicators!

CNY 6.68

CDB bonds had a big rally though gov’t bonds stable

• Yield on 1 Day Chinese Gov’t Bond 2.03%
• Yield on 10 Year Chinese Gov’t Bond 3.22%
• Yield on 10 Year China Development Bank Bond 3.66%

Commodities were mixed on the Shanghai & Dalian commodity exchanges as metals were firmer while softs were just that