Daily Posts

NDRC Attacks the Walking Dead, Huawei 1H Results (Apple problem?), Unexpected FX Reserve Transparency

Hope all is well!

Key News
Asian equities had a modest bounce today as investors await the FOMC decision tomorrow as US China trade talks begin. While trade expectations are exceedingly low, my optimism is driven by the location of the talks: Shanghai. If the talks can focus on business interests as opposed to political rhetoric, there are areas of mutual benefit. HK protests continue as protesters disrupted the evening commute.
While largely overlooked there was an important release from the National Development and Reform Commission (NDRC) promoting debt to equity swaps for private companies. The swaps are one tool to address high corporate debt levels though historically they have been applied on SOEs. The expansion to private companies is recognition of debt concerns and part of a the plan to reduce it. This is one reason China would like to put the trade war in the rearview mirror so it can focus on its domestic agenda. We are apt to see further bankruptcies as “zombie” companies are no longer propped up.
Huawei reported strong 1H 2019 revenues though there is a fairly significant storm cloud on the horizon. The company was China’s largest smart phone manufacturer after selling 37.3mm in 1H which is up 31% (Apple’s shipments slid 14% YoY to 5.7mm phones placing it in 5th place in China). Revenues jumped 23.2% YoY to $58.3B (CNY 401B). The problem going forward is Google has not received permission from the US to provide the Android operating system going forward. The company is private so detailed financials are not provided.
The State Administration of Foreign Exchange (SAFE) completely unexpected provided previously undisclosed transparency on its FX reserves. It isn’t clear what prompted the disclosure though maybe someone picked up a copy of the Art of the Deal. US $ holdings declined from 79% in 2005 to 58% in 2014 though the today’s composition was not disclosed. Today’s WSJ had an article that the US will issue $1 trillion of Treasuries in 2H 2019 to fund deficit spending.

The Hang Seng traded in a tight range gaining +0.14%/+40 index points to close 28,146 on exceedingly weak volumes off -10% day over day and well below the 1 year average. Breadth was positive with 25 advancers and 16 decliners as index heavyweights stabilized the index with Tencent +0.27%/+8 index points, China Life +1.49%/+6.8 index points (post yesterday’s earnings), and CCB +0.33%/+6.5 index points. Wharf Real Estate was the best performed +2.48%/+4.5 while New World Development -1.24%/-2.5 index points. The HK stocks within the MSCI China All Shares gained +0.23% led by interest rate sensitive utilities +0.4%, financials +0.37%, and discretionary +0.33% while materials -0.23%, staples -0.16% and industrials -0.14%. Southbound Connect volumes were light though buyers outpaced sellers nearly 2 to 1 as CCB saw massive buying and Tencent 2 to 1 buying.

The Shanghai & Shenzhen gained +0.39% and +0.45% on stronger volumes +11% day over day though off the 1 year average considerably though breadth was strong with 2,368 advancers and 1,073 decliners. Small caps outperformed large and mid caps on the day. The mainland stocks within the MSCI China All Shares gained +0.55% as communications +1.54%, materials led by gold stocks +1.02%, and real estate +0.93%. The sector in the red was tech -0.4%. Northbound Connect volumes were light with Shanghai Connect seeing sellers slightly outpacing buyers in mixed trading while Shenzhen Connect volumes exceeded Shanghai (again) with buyers outpacing sellers. A total of $356mm flowed into mainland stocks overnight though it was geared to Shenzhen stocks. Are foreign investors pivoting to MSCI’s mid cap inclusion stocks? Or are foreign investors moving to growth names? Likely both but this is an interesting trend!

Alibaba share split goes effective today.

JD.com is taking a stake in Beijing Digital Telecom (6188 HK).

Tencent and Qualcomm will partner on implementing chips to power virtual reality and augmented reality games.

China’s “official” PMIs will be released tomorrow by the National Bureau of Statistics.

CNY 6.88 versus 6.89

Yield on 1 Day Chinese Gov’t Bond 2.11% versus 2.12%
Yield on 10 Year Chinese Gov’t Bond 3.2% versus 3.18%
Yield on 10 Year China Development Bank Bond 3.68% versus 3.68%

Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper -0.68%.