TGIF! Apologies for the late delivery as I had a late night arrival from the west coast.

MSCI China A Inclusion Announcement Yesterday. Why should we care? MSCI dictates $14.8 trillion of active and passive assets. MSCI adds all stocks but adds % of market cap incrementally. So an inclusion factor of 10% means there is 90% to go.

• Expectations for the inclusion factor to rise from 2018’s 5% to 20% in 2019 were expected.
• Surprise was there will be three inclusions in May, August and November versus two in 2018
• Additionally 27 stocks from the Chinext (a growth board) will be added in May at 10%, raised to 15% Aug and 20% in Nov
• Additionally 168 Mid Cap stocks will added at 20% in November.

Why add mid and small caps so quick?

• Mid and Small caps are not financials. The addition will provide a more balanced sector exposure.
• Adding 168 mid cap stocks and 27 Chinext stocks differentiates the MSCI China A Index from the CSI 300. One can no longer utilize the CSI 300 as an implementation tool.
  

The MSCI China A Inclusion Index will rise from 235 to 253 large cap stocks. Within the MSCI Emerging Markets Index, China A Inclusion will account for 16.3% upon full inclusion which would raise China to 42% of the index. A major global investment bank believes the inclusion will lead to $67 billion of active and passive flows while another US based global investment bank reported $14B of passive and potentially $71B of active flows.

March 1^st is MSCI’s quarterly rebalance date which requires passive managers to trade at the close on February 28^th. Four US listed Chinese companies were added to MSCI indices at the close yesterday. Did their addition have an effect on their trading? You decide!

Shares Traded Yesterday versus Wednesday
IQ           24mm versus 10mm; there was a single trade of 10mm shares
TME       15mm versus 6.6mm; there was a single trade of 6.7mm shares
PDD       27MM versus 5.9mm; there was a single trade of 17.5mm shares
ZTO        38mm versus 4.2mm; there was a single trade of 24.8mm shares

Caixin China PMI Manufacturing                49.9 versus estimate 48.5 and Jan’s 48.3

Takeaway: Caixin PMI surprised to the upside though we need to temper our enthusiasm due to the seasonal effect of Chinese New Year’s. New orders and the output sub indices rose above the 50 (expansion) level while exports unsurprisingly fell. The Caixin PMI is supplied by IHS Markit though the survey size is smaller and geared to private, non SOE, companies. Stimulus policies have been geared toward private companies. If we see this trend continue to could be an indication of stimulus’ trickle down effect.

The Hang Seng rose on a late day rally gaining +0.63%/178 index points on volume above the 1 year average though off -10% day over day as investors overlooked the Trump Kim Summit and cheered the MSCI decision and positive comments on trade from Larry Kudlow. Breadth was strong with 36 gainers and 14 decliners with China Life Insurance +5.56%/28 index points, Ping An Insurance +1.94%/+27 index points. Followed by China Mobile +1.57%/24 index points. Within the MSCI China All Shares’ discretionary stocks gained +2.89%, real estate +2.27%, tech +1.89%, staples +1.78% etc. Autos had a strong day which helped discretionary while tech was led by former telecom plays on further 5G chatter. Southbound Connect saw another day of selling HK stocks from mainland investors in elevated volumes 3X the average. Hang Seng is right at the 29k level which is just a number but some traders place importance on it.

Shanghai & Shenzhen gained +1.8% and 1.2% on volumes nearly 2X the 1 year average and up slightly day over day. Breadth was positive but more mixed than I would have thought. Within the MSCI China All Shares’ mainland stocks, discretionary gained 3.3% led by food and beverage names including MSCI China A Inclusion’s top holding Kweichow Moutai, financials +2.94% as mainland investors brokerage firms to be a beneficiary of increased trading. Utilities were the only sector down -0.07%. Northbound Connect volumes were very strong again with inflows again raising the streak to 22 of 23 days. Ping An and Kweichow Moutai saw nearly 2 to 1 buyers.

CNY 6.70

Big rally in the short end of the curve while the long sells off.

• Yield on 1 Day Chinese Gov’t Bond 1.66%
• Yield on 10 Year Chinese Gov’t Bond 3.25%
• Yield on 10 Year China Development Bank Bond 3.71%

Commodities were much firmer on the Shanghai & Dalian commodity exchanges