Daily Posts

“Constructive” Phone Call, June CPI/PPI, McKinsey China White Paper, China Bond Inflows

Hope all is well!

  • CPI: 2.7% versus 2.7% and May’s 2.7%
  • PPI: 0.0% versus estimate 0.2% and May’s 0.6

Takeaway: CPI was driven higher by pork prices as the swine flu epidemic continues to take its toll while PPI was driven lower on raw material prices. PPI garnered a fair amount of attention as prices almost deflated in the month. In the strange world we now live in, brokers speculated that this bad news could be good news as it could lead to further stimulus from policymakers. 

Key News

  • It was a quiet night pre-Powell testimony as investors wait for indication on Fed policy this morning. Asia was mixed with tech leading a rebound on positive comments from Wilbur Ross on Huawei. Tech heavy Korea and Taiwan rebound on the news. Interesting that Larry Kudlow’s description of the trade phone call as “constructive” didn’t have more of an impact on the market though investors have likely become skeptical on jawboning and want to see something more definitive. Volumes were very light.

The Hang Seng gained +0.31%/+88.4 index points to close at 28,204 on light volume off 7% day over day and nearly 1/3 off the 1 year average accompanied by 30 advancers and 12 decliners. The index was pulled higher by Tencent +1.71%/+49.2 index points on news they will extract more revenue from their app games. AIA was off -0.66%/-19.7 index points while energy giant CNOOC was higher on Iran oil concerns +1.39%/+9.8 index points. The HK stocks within the MSCI China All Shares gained +0.78% led higher by defensively oriented healthcare +2.68%, staples +1.86% and tech +1.32% on the Huawei news and positive June YoY shipments from Apple supplier Sunny Optical. Materials was the only sector negative on the day -0.14%. Southbound Connect volumes were anemic though buyers did outpace sellers as volume leader Tencent gained 2 to 1. 


The Shanghai & Shenzhen eased -0.44% and -0.46% on very light volumes -5% day over day and 20% below the 1 year average accompanied by 1,014 advancers and 2,523 decliners. Mega caps slightly outperformed mid and small caps but not by a noteworthy margin. The mainland stocks within the MSCI China All Shares lost -0.13% as defensive plays gained led by healthcare +0.5%,  staples +0.41%, utilities +0.35% and tech +0.29%. Northbound Connect volumes were very low though sellers outpaced buyers as foreign investors sold $238mm of mainland stocks. Shenzhen Connect did see inflows as foreign investors were buyers of tech.   

Bloomberg reported that foreign investors bought $10.7 billion (RMB 74.7B) of Chinese bonds in the month of June. Government bonds accounted for 59.6% of total foreign bond holdings which rose $4B in June. Foreign investors now own 8.3% of total Chinese Treasuries. Considering this was at or near zero prior to the designation of the renminbi as a reserve currency in October 2016 and inclusion in the Bloomberg Barclays Global Aggregate which began earlier this year is quite impressive. China’s yields are beginning to look increasingly high relative to the US and Europe (both developed and EM). The highest 10 Year Treasury in developed markets is Iceland at 3.88% followed by Greece at 2.1%. In the EM bond space, China’s yield sits just below the median. But what about risk? Looking at the cost of credit default swaps (ie protection against default) for a 10 year time period China is at a slight premium to developed markets but below most of EM. 


The McKinsey report mentioned yesterday, the China and the World, focuses on China’s integration and opportunity for further integration in the global economy. While the world has become increasingly reliant on China due to global supply chains, China has become less reliant on the world due to the rise of domestic consumption as exports fall as a percentage of GDP. The comprehensive report, totaling 168 pages, focused on the following areas:


  • Trade  
  • Firms
  • Capital
  • Technology
  • Enivornment
  • People
  • Data
  • Culture

What jumped out to me? Not surprising the consumer. An element of China becoming less reliant on the global economy is due to the rise of domestic consumption while investment and trade take a back seat. The report noted US companies did $450 to $500 billion of revenue in China through exports and mainland-based subsidiaries (this is a major issue in trade talks that US companies operating factories in China aren’t included in trade numbers despite the revenues flow to the US companies; page 89). The most important chart was the below (page 90) on urban consumers disposable income.



  • Global Affluent +390k: 3 million in 2010 versus 8 million in 2018
  • Affluent 300-390k: 1mm versus 4mm
  • Mass affluent 200-300k: 4mm versus 26mm
  • Upper aspirant 140-200k: 13mm versus 135mm
  • Aspirant 80-140k: 144mm versus 98mm
  • Lower aspirant 50-80k: 44mm versus 29mm
  • Poor <50k: 23mm versus 19mm



Mass affluent is expected to grow from 12% today to 58% by 2030! Chinese consumption could match the US by 2030 (page 115). Outbound tourism is a major section (page 103-105). China’s stock market will benefit from increased foreign investment and supplement real estate as the primary investment vehicle. Interestingly Chinese households only have 38% of their savings in financial assets versus 62% in real estate while US households have 72% in financial assets and 28% in real estate. The report is a fantastic read that I highly recommend tracking down.


Apple’s China app store registered $2.8B in revenue in Q2. Wow! Game on!


Yirendi (YRD) kicks off US listed Chinese companies earnings season today. TAL Education is 7/25.


  • CNY 6.88 versus 6.88
  • Yield on 1 Day Chinese Gov’t Bond 1.8% versus 1.76%
  • Yield on 10 Year Chinese Gov’t Bond 3.20% versus 3.22%
  • Yield on 10 Year China Development Bank Bond 3.69% versus 3.69%
  • Commodities especially base metals were lower on the PPI news on the Shanghai & Dalian Exchanges with Dr. Copper -0.84%