Hope you had a great weekend!

• GDP : 6.2% versus estimate 6.2% and May’s 6.4%
• Fixed Asset Investment: 5.8% versus estimate 5.5% and May’s 5.6%
• Industrial Production: 6.3% versus estimate 5.2% and May’s 5%
• Retail Sales:  9.8% versus estimate 8.5% and May’s 8.6%

Takeaway: Headlines are dominated by the GDP % which overlooks the strength of the full release. Markets had opened down despite a strong US equity market Friday but rallied on the release as it indicates China’s economy picked up in late Q2 while the moderate GDP print provides the hope that supportive policies will continue. It does appear that the VAT cut and payroll tax reduction is having a positive effect on the consumer. Despite the headwind of the trade war, select industries pushed the IP higher. Real estate activity pushed the FAI higher though the reliability of the data reduces its significance. Ultimately Chinese equities, despite compelling historic and relative valuations, are being driven by one issues: the trade war. Post Argentina G-20 we had a strong Q1 rally which was derailed by the April 5^th Huawei tweet. The escalation of a tech war led to a decline in April and May. Optimism around the Japan G-20 drove a rebound in June. The lack of real progress stalled this rally. Chinese equities are beginning to report earnings while the release provides more “green shoots” . Could earnings provide the catalyst for investors to look beyond the trade war?
 

Key News

• The economic release was the major news though the National Development and Reform Commission (NDRC) published an important release on supporting private companies. The report outlines several recommendations that would support private and small medium enterprises such as reducing red tape and ease in winning government contracts. The release helped support small caps overnight.
• Kweichow Moutai (6005199 CH) released is 1^st half preliminary revenue estimate of +26.2% year over year. The release appears to be slightly under analyst expectations as the stock declined 1.03% on the news though is up 65% YTD. Chinese crane maker Zoomlion (000157 CH, 157 HK) had a strong day on its preliminary release that 1^st half revenue growth is estimated to be +172% to +212%.
• Chinese healthcare stocks rebounded on news/rumors that the aggregated drug procurement process will be expanded nationwide. While the mass drug buying has been a headwind for the space, the uncertainty overhang going away and potentially a less debilitating version led to a strong rally.
• Budweiser Brewing Co APAC postponed its HK IPO on “market conditions” but the lack of demand from buy and hold institutions was the real culprit.

The Hang Seng opened lower and traded down -1.41% but rebounded on the economic release to gain +0.29%/+83.2 index points to close at 28,554 on higher volume +14% day over day but still below the 1 year average. Breadth was positive with 28 advancers and 16 decliners as Tencent gained +1.63%/+47.5 index points, CSPC Pharma +7%/+13.3 index points and HK Exchange -1.16%/-11.4 index points. The HK stocks within the MSCI China All Shares gained +0.66% led by healthcare +2.92%, tech +1.62%, staples +1.36% and communications +1.29%. Utilities was the only negative sector losing -0.64%. Real estate was fairly weak on news that issuance of US $ bonds in HK would be limited going forward. Southbound Connect volumes were light though buyers outpaced sellers as volume leader Ping An saw outsized buying. 

The Shanghai and Shenzhen opened lower and were off -1.5% and -1.59% but rallied on the economic release to close +0.4% and +1% as volumes surged +28% day over day but slightly below the 1 year average. Breadth was strong with 2,464 and 1,026 decliners. Small caps had a strong day gaining nearly 2% while mid caps were up 1% though mega caps were up only slightly. The divergence was driven by sector orientation and the NDRC news. The mainland stocks in the MSCI China All Shares gained +0.63% led by tech +2.27%, industrials +1.01% and communications +0.72%. Staples was the lagging sector +0.04% as liquor names were soft but beer names were strong (does anyone else think alcohol names being considered a staple and not discretionary interesting?). An interesting divergence in Connect flows as Shanghai Connect had outflows while Shenzhen Connect had inflows. Both Kweichow and Ping An had more selling than buying with overall Connect volumes moderate. In aggregate there was -$209mm of outflows. 

One of institutional brokers noted strong call buying in Alibaba Friday. They speculated that Alibaba may have provided its last update to the street on Friday prior to entering its quiet period in advance of its August earnings release. Did Alibaba give upside guidance? We’ll find out in a month’s time! BABA’s P/E of 35 is well below its 5 year average while the forward P/E of 24.8 is slightly below the 5 year average.

• CNY 6.86 versus 6.87
• Yield on 1 Day Chinese Gov’t Bond 2.24% versus 1.86%
• Yield on 10 Year Chinese Gov’t Bond 3.19% versus 3.19%
• Yield on 10 Year China Development Bank Bond 3.69% versus 3.67%
• Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper +0.26%