Daily Posts

Hukou Reform, March Auto Sales Down/Auto Stocks Up

Hope all is well!



Key News Overnight

  • Real estate stocks had a very strong day after National Development Reform Commission announced hukou reforms. What’s is hukou? To buy an apartment in a Chinese city you need official residency called a hukou for that city. Think of it as a passport for that city. If you don’t have official residency you can still live and work in the city though you can’t buy an apartment and you can’t utilize many city services like education and healthcare notably. Many migrant workers will leave their families in rural areas in order to work in the big eastern cities as they can’t bring the families along due to hukou restrictions. The announcement eliminates hukou for “small” cities of 1 to 3 million while easing restrictions in medium cities of 3 to 5 million. China’s 13 cities with population of more than 5mm are expected to see hukou restrictions eased over time though policy makers would rather see the mega cities not increase further to due to congestion issues. (Yes China has 13 cities with more than 5mm).  The move will raise China’s urbanization rate by 1% as an expected 100mm people will officially move into cities. Urbanization has been a critical driver of China’s urban middle class which consumes online. Our investment thesis was in a small way validated overnight.
  • The China Passenger Car Association reported that auto sales fell 12% in March year over year to 1.78 million vehicles sold. Auto stocks were higher as the number was better than expected after February’s 18% YoY fall and a several analyst upgrades of Geely Auto which reported better than expected results after the market’s close. Autos led the discretionary sector higher in both HK and the mainland. While many point to China’s lagging auto sales as an indication of a slowing economy, the reality is China had cut the auto sales tax in 2016 & 2017 causing several years worth of auto sales being front loaded. Almost 2mm cars in one months feels like a lot to me. 


Hang Seng overcame a morning pullback to close +0.27%/+80 index points above 30k at 30,157 on volumes above the 1 year average though off 6% day over day. There were 27 advancers and 18 decliners with Tencent gaining +0.89%/27 index points followed by real estate company Country Garden +5.73%/17 index points and HSBC +0.45%/13 index points. The HK companies with in the MSCI China All Shares’ gained +0.65% led by healthcare +2.52%, real estate +2.23%, tech +2%, staple +1.33% and discretionary 1.11%. Utilities lagged -0.44% on reports higher demand for electricity is driving up coal prices which hurts the margins. China is expected to ramp up production 100 million tons which should help utilities though less so for the environment. Southbound Connect volumes were moderate with sellers outpacing buyers with volume leaders Geely Auto sold 6 to 1, Sunac sold 1.5 to 1 and Tencent bought slightly.

Shanghai & Shenzhen swung between gains and losses to end -0.16% and +0.72% on volumes 2X the 1 year average but off 21% day over day. Breadth was strong with 1,921 advancers and 1,626 decliners. In addition to real estate, the big story in the mainland market was an announcement from air conditioning giant Gree Electric Appliances that a its parent would sell down its stake 15% to just 3% in the company. Why did the stock surge 10%? The parent first sold a stake to management in 2006 providing a strong incentive for the management. There is speculation that Foxconn may be taking a stake though sell side analysts cheered the move. The mainland stocks within the MSCI China All Shares gained +0.41% led by real estate +4.1%, discretionary +2.04% led by Gree, healthcare +1.93% and staples 1.75%. Materials significantly underperformed -2.5% as traders locked in recent profits while financials were off -0.46%. Northbound Connect volumes were high with foreigner buyers outpacing sellers slightly. Volume leader Kweichow Moutai saw buyers slightly outpace sellers as Inner Mongolia Yili Industrial experienced 3 to 2 buyers and Ping An 3 to 2 buyers to sellers.

I am often asked about liquidity in mainland markets. Amongst companies with a market cap +$50mm in the US, GE traded 176mm shares yesterday. Last night the most heavily traded stock in China, BOE Tech, traded 985mm shares. In fact the most heavily traded stock in the US, GE would have been the 78th most heavily traded stock in China. But Brendan that is in shares you say. What about the value of stock traded as AMZN traded $6.9B yesterday? China had 4 stocks that traded above RMB 7B with Zhejiang Longsheng Group’s trading valued at $1.7B. So yes on value traded the US maintains an edge but not even close on shares traded.

Alibaba announced it would raise the pay for its delivery force after JD announced it would be cutting salaries yesterday. An institutional broker noted yesterday that rumors abound of a major middle management shake up at JD is coming as founder and CEO Richard Liu has become dissatisfied with results.

China banned crypto mining. I missed the whole Bitcoin move up and then down for what it is worth.

CNY 6.71

  • Yield on 1 Day Chinese Gov’t Bond 1.57%
  • Yield on 10 Year Chinese Gov’t Bond 3.26%
  • Yield on 10 Year China Development Bank Bond 3.80%


Commodities were higher on the Shanghai & Dalian Exchanges with Dr. Copper off +0.55%