Recap of what we missed while enjoying Labor Day with family & friends. Good luck to all of our friends in Florida, Georgia and the Carolinas over the next several days.

With all the trade news swirling, we are hosting a webinar with CICC strategist Kevin Liu for an update on China’s economy and markets next Thursday morning. I invite you to tune in. Sign up HERE.

Key News

Despite new US tariffs going into effect on September 1st followed by China’s filing of a grievance at the WTO, there appears to be little tangible evidence of serious talks other than chatter of a China visit in September. China is apt to focus on the coming 70^th anniversary of the country in October which may make serious discussions more difficult in the short run. Asian markets were mixed though India and Malaysia both declined a little more than 2% on Monday. Mainland markets have been surprisingly resilient over the last three weeks as the need for more stimulus grows louder. HK remains in a funk though the Hang Seng has held the 25k level thus far. One would suspect that these markets have baked in a lot of the bad news while the US market is just off its all time high. The big news overnight was the rally in Apple suppliers as investors are excited for the coming release which helped the tech sector and lifted 5G related stocks as well.  

PMI Implications

“Official” National Bureau of Statistics August release

Manufacturing PMI                         49.5 versus estimate 49.6 and July’s 49.7

Non-Manufacturing PMI               53.8 versus estimate 53.7 and July’s 53.7

“Private” IHS Markit Caixin August release

Caixin China PMI Manufacturing                50.4 versus estimate 49.8

Takeaway: For newer CLN followers the “official” number is a broad survey of predominantly larger companies while the “private” Caixin is a smaller survey, i.e. more volatile, of predominantly mid and small companies. The manufacturing number was slightly weaker across categories, which the market believes will require policy makers to step on the stimulus gas as the trickle down effect isn’t transmitting quickly enough into the real economy. The bad news is good news led to a market rally on Monday as Shanghai & Shenzhen gained +1.31% & +2.26% as the State Council provided comments that we may not have to wait long for the stimulus on Saturday. Tariff front running may have led to a pick up in activity, while infrastructure spending helped the non-manufacturing release. Globally, PMIs were broadly weaker as the trade war’s effect goes well beyond the US and China. The narrative that Vietnam is benefitting from companies moving can be broadly dismissed as fiction as evidenced by the country’s July PMI declined month over month along with most of Asia. Global bell weather South Korea’s exports declined by more than anticipated: -13.3% quarter over quarter. Europe’s PMI’s were broadly weaker, but there are signs of a bottoming process occurring. Reuters had an interesting article noting that the Chicago Fed’s Midwest Economic Index declined in July following June’s decline. The relevance is due to the survey covering important swing states Michigan, Wisconsin, Iowa, Indiana and Illinois.

H-Share Update

The Hang Seng declined 0.38%/98.1 index points despite Tencent rallying 1.97%/52 index points on Monday as demonstrations continue to weigh on investor sentiment. ‘Demonstrations’ is likely an understated description as a small subset of the protests are taking a violent turn. While not widely reported, an off-duty Hong Kong police officer was stabbed over the weekend. HK leader Carrie Lam’s position appears tenuous at best. She could be become a sacrificial lamb as the current HK leadership has failed both to address demonstrators’ concerns and to provide the business community confidence that a resolution is in the works.  

The Hang Seng bounced around to close -0.39%/-98.7 index points on light volumes and weak breadth of just 13 advancers and 35 decliners on Tuesday. Index heavyweight CCB declined by 1.2%/22.6 index points, Tencent -0.6%/-16 index points and ICBC -0.61%/-6.67 index points. CSPC Pharma gained 1.5%/3.4 index points as healthcare continues, while Geely Auto  -2.81%/-5.4 index points following a competitor’s poor earnings. The HK stocks within the MSCI China All Shares declined 0.31% as tech gained 0.84% as Apple suppliers rallied in advance of their new launch next week. Discretionary -1.73% as autos were weak post earnings while education names were off on potential new policies concerning the VIE structure due to the use of foreign education materials, staples -1.23% on weak liquor names, industrials -1.17%, utilities -1.05% and healthcare -1.01%. Southbound Connect volumes were moderate with mainland investors extending their buying to 33 days. Volume leader CCB had outsized buying (again) while Tencent had 2 to 1 sellers.

A-Share Update

The Shanghai & Shenzhen gained 0.21% and 0.66%, respectively, on strong volumes above the 1 year average on Tuesday. Breadth was mixed with 1,802 advancers and 1,660 decliners as small and mid caps outperformed large caps. The mainland stocks within the MSCI China All Shares gained 0.16% led by the tech sector on Apple’s release +2.59%, communications +0.95%, utilities +0.55% while healthcare             -1.09%, real estate -0.68% and discretionary -0.27%. Northbound Connect volumes were moderate with foreign investors favoring Shenzhen names over Shanghai from both a volume and buying perspective. Shanghai traded mixed while Shenzhen experienced more pronounced buying. In aggregate, foreign investors bought $2.5mm of mainland stocks following Monday’s $740mm of buying.

Xiaomi (1810 HK) gained +4.19% after the company announced a $1.5 billion stock buyback. The stock hit a high of HK $21.55 post IPO in July 2018 though is currently sitting just above the all time low at HK $8.70.

In a sign of further opening of China’s capital markets, BNP and Deutsche Bank were given licenses to underwrite bonds. One has to wonder about the conspicuous absence of US financial firms.

Momo’s Zao app, which allows a user to face swap with celebrities, has become very popular in China. The app’s success could be a catalyst for the stock.

HK and mainland education stocks were off on news the VIE structure could be limited for K-5 providers. The concern is driven by the potential dissemination of foreign educational materials. One would expect potential weakness in TAL and EDU on the vague release that lacks clarity. One would assume the companies will adhere to the policy if it comes to fruition by submitting materials to regulators.

Alibaba announced that its investor day will occur September 23^rd and 24^th in Hangzhou.

Last Night’s Stats

• CNY 7.17 versus 7.149
• Yield on 1 Day Chinese Gov’t Bond 2.07% versus 2.13%
• Yield on 10 Year Chinese Gov’t Bond 3.0799% versus 3.0487%
• Yield on 10 Year China Development Bank Bond 3.61% versus 3.59%
• Commodities were mixed/larger higher on the Shanghai & Dalian Exchanges with Dr. Copper flat -0.56%.