Daily Posts

US Trade Team’s Shanghai Visit/China Soybeans Purchases, China Fixed Income PM Positive CNY Outlook

Hope all is well! 

Key News Overnight

  • Midday news that US Trade Representative Robert Lighthizer will visit Shanghai next Monday through Wednesday sent US equity markets higher. This would be the first face to face meeting between the trade teams since talks broke down in May. Larry Kudlow chimed in with positive comments while Wilbur Ross said 35 US companies would be given exemptions to sell to Huawei. Bloomberg is reporting that China will buy 3mm tons of soybeans tariff free. Alibaba announced that US businesses will be allowed to sell to Chinese buyers via their B2B e-commerce website Alibaba.com. Many Western brands sell B2C via the Tmall e-commerce website currently. The olive branches have been extended so lets hope something can get done! The necessity for a deal is the effect the US China trade war is having on global growth which the IMF revised down from 3.3% to 3.2% in 2019.
  • Asia markets cheered the news with mainland China a positive outlier as investors largely overlooked the DOJ’s tech anti-trust inquiry other than Korea and Taiwan which have significant exposure to US tech. Korea and Japanese diplomatic relations appear to be fraying which may have been a factor in the Kospi’s -0.91% decline. If I was a hedge fund, I would be long China internet and short US internet just on the valuation disparity. The DOJ inquiry and coming China earnings maybe provides the catalyst for a price reversion.
  • Premier Li visited Shanghai visiting several private companies and reiterating his calls for financial opening up.

The Hang Seng gained +0.2%/+57.5 index points to close at 28,524 though eased off the afternoon high of +1.05% as HK demonstrations and the DOJ’s tech antitrust suit weighed on sentiment. Volumes increased 16% day over day though were still below the 1 year average (recurring theme of late) while breadth was mixed with 19 advancers and 27 decliners. The index was pulled higher as Tencent +1.95%/+57.5 move as investors cheered its Nintendo partnership while AIA eased -0.4%/-12.5 index points and Ping An gained +0.74%/+11.94 index points. Several companies stood out as China Resources Land +3.53%/+10.4 index points, Sunny Optical +3.49%/+7 index points, Geely Auto +3.31%/+6.8 index points while healthcare Sino Biopharma was off -1.49%/-2.8 ip and China Unicom -1.37%/-2 ip. The HK stocks within the MSCI China All Shares gained +0.6% led higher by discretionary +1.64% as autos were very strong, Tencent pulled communication +1.35% and tech gained 1.1%. Materials, energy and healthcare underperformed -0.46%, -0.43% and -0.2%. Southbound Connect volumes were light with buyers outpacing sellers though Tencent had very strong volumes with 10 to 1 buying. 

Shanghai & Shenzhen gained +0.8% and +1.11% as volumes surged 25% day over day though still below the 1 year average while breadth was incredible with 3,048 advancers and only 508 decliners. Small and mid outperformed large caps by a small margin. The mainland stocks within the MSCI China All Shares gained +0.81% led higher by trade sensitive tech +1.96%, communications +1.39%, discretionary +1.31% and financials +0.94% while staples lagged on liquor names -0.14%. One broker noted the Shenzhen stayed above the 50 day moving average while the Shanghai couldn’t quite punch above it. Northbound Connect volumes were light/moderate as Shenzhen Connect volumes outpaced Shanghai volumes though buyers outpaced sellers as $298mm was purchased by foreign investors. Kweichow Moutai did experience foreign selling .

The Ministry of Finance reported SOE profits grew 7.2% year over year for the first half of 2019 to $264 billion (RMB 1.82 trillion) while revenues grew 7.8% to RMB 29.5 trillion in the time period. SOE asset growth outpaced liabilities growth 8.9% versus 8.8% for a debt to asset ratio of 65% as assets climbed to 195 trillion versus liabilities’ 125.8 trillion. 

Bloomberg’s Li Keqiang Index grew 6.85% in June versus the official GDP growth of 6.2%. The index was developed based on Premier Li’s statements on the best way to track GDP was looking at the growth rates of bank loans (weighted 40%), electricity production (40%) and rail freight volume (20%). The index, in my opinion, is very geared to “old” or as I get older what I like to call traditional economic drivers. What about services that account for 50% of GDP? Domestic consumption? Zero weight. Maybe we should develop a New China Economic Index that looks at retail sales, non-Manufacturing PMI, the Service PMI, and consumer confidence? 

We’ve had the pleasure of hosting our HK based fixed income portfolio manager in NYC this week. His trip was driven by his opinion that CNY offers an attractive entry point in light of coming Fed cuts and the PBOC’s reiteration they will not cut interest rates. He believes CNY at the 6.90 level offers an attractive entry point for exposure based its proximity to the “line in the sand” level. He believes a Fed cut could lead CNY to rally to the 6.50 level. Having known the PM for six years he rarely bangs the table but he is today. 

STAR board names gained overnight as the twenty five names now average a 144% gain since Monday’s IPO. 

Tian Ge Interactive (1980 HK) announced a buyback of 241k shares.

  • CNY 6.87 versus 6.87
  • Yield on 1 Day Chinese Gov’t Bond 2.02% versus 2.1%
  • Yield on 10 Year Chinese Gov’t Bond 3.17% versus 3.15%
  • Yield on 10 Year China Development Bank Bond 3.67% versus 3.66%
  • Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper -0.74%