Hope all is well! I am back overseas this week so today’s note is shorter than usual. I should be able to get the note out every day other than Friday.  

• MSCI’s Semi-Annual Index Rebalance is taking place today which required MSCI benchmarked passive vehicles to buy Chinese A shares at the close. Northbound Connect volumes were very high running nearly 2X the 1-year average as investors bought a net (buys minus sells) $805mm of mainland stocks. To fund the trade investors had to sell stocks to fund their buys. Taiwan declined on the day as its weight will drop while Tencent had a massive 8.8mm share trade at the close.  A media source quoted UBS predicting $70B will flow into mainland equities this year due to the MSCI inclusion.
• Bloomberg reported that Alibaba is considering a second listing in Hong Kong that could raise $20B. Alibaba chose to list in the US in order to garner global flows back in September 2014 but also because the HK Stock Exchange didn’t allow dual share class popular with tech companies (ie FB, GOOGL, etc). Stock Connect launched after Alibaba’s IPO though Southbound Connect would allow mainland investors access to the company. The company may believe that the US listing doesn’t properly value the company as it has traded in the last year on trade war news rather the company’s fundamentals (P/E 32 Forward P/E 23). This is despite the company having no US revenue. Semiconductor Manufacturing International Corp (SMIC), a large domestic maker of semis, announced it would delist its NYSE ADR (ticker SMI) due to low volumes (1-year average is just 200k shares versus the HK listing’s 30mm 1-year average volume) and the regulatory cost. It is an unusual move though some may speculate if it is trade war-related. As a friend likes to say, capital goes where it is treated best.
• Monday trading was quiet on anemic volumes due to the US and UK holidays. Industrial profits declined -3.7% in April versus a gain of 13.9% in May though seasonality around Chinese New Year’s may have goosed May’s number. One broker noted that many companies likely ramped up production in advance of the April 1 VAT tax cut. The bank and insurance regulator head stated that China’s economy was largely unaffected by the trade war. Northbound Connect saw -$276mm of outflows on Monday despite the MSCI Rebalance on Tuesday. The HK had a small loss -0.28% while Shanghai and Shenzhen gained +1.41% and +2.54%
• China’s April PMIs are due out after the market close on Thursday. 

The Hang Seng gained +0.38%/+102 index points led by 28 advancers and 19 decliners on very high volumes nearly 2X yesterday’s volume and nearly 50% higher than 1-year average. The index was led higher by AIA 2.31%/65 index points and Ping An Insurance 1.54%/22 index points though China Mobile -1.54%/-20 index points. The HK Stock Exchange gained 2.17%/19.7 index points on the Alibaba news story while Tencent +0.56%/14.5 index points despite having to be sold down due to the MSCI inclusion. HK stocks within the MSCI China All Shares gained +0.67% led higher by discretionary +2.64%, materials +2.37%, healthcare +1.93%, real estate +1.82% and tech +1.62%. Southbound Connect volumes were light though volume leaders ICBC, Tencent and CCB all saw very high buyer to seller ratios. 

The Shanghai and Shenzhen gained +0.61% and +0.58% on moderate volume above the 1 year average and mixed breadth with 1,719 advancers and 1,762 decliners. The mainland stocks within the MSCI China All Shares gained +0.71% led higher by discretionary 1.58%, communications 1.56%, real estate 1.45% and staples 1.4%. Northbound Connect volumes were very high/50% above average as foreign investors bought $805mm of mainland stocks. 

One broker had an interesting take on the recent pullback/correction following a strong Q1. While market sentiment has been hurt by the trade war the move is fairly significant from a historical perspective.

• Chinese mutual funds outside of China experienced $1.5B of outflow last week following $2.3B the week before. This is the largest outflow since the summer of 2015.
• May will be the largest month of Northbound (foreign) Connect selling in the history of the program at RMB 47B. This is despite mainland investors still buying HK stocks via Southbound Connect. According to
• HK short seller ratio is now 16% which is the highest level YTD.
• May could be the worst monthly performance for MSCI China since September 2011.
• In looking at Bloomberg data, US-listed Chinese equity ETFs had -$488mm of outflow last week while China listed Chinese equity ETFs had $595mm of inflows.

Profits at SOEs gained 12.6% in the first four months of this year.

• CNY 6.91 versus 6.90 yesterday
• Yield on 1 Day Chinese Gov’t Bond 2.19% versus 2.17% yesterday
• Yield on 10 Year Chinese Gov’t Bond 3.34% versus 3.36% yesterday
• Yield on 10 Year China Development Bank Bond 3.77% versus 3.8% yesterday
• Commodities were largely lower on the Shanghai & Dalian Exchanges with Dr. Copper +0.17%