Daily Posts

HK Extradition Bill Shelved/HSI Surges, Caixin Service PMI Increases in August, JP Morgan to Add Chinese Gov’t Bonds to their Indices

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Key News

Rumors that Hong Kong’s leader Carrie Lam would officially drop the extradition bill that led to mass demonstrations caused a massive afternoon rally beginning around 1:40pm local time in advance of her post market/4pm close telecast. Brokers were so aligned that a massive short squeeze took place. The thirteen weeks of demonstrations have also weighed heavily on investor sentiment as HK stocks struggled with poor sentiment while the local economy has been hit hard. The Hang Seng had been above 28,500 though it fell to 25,000 as demonstrations picked up. The big question will be: where do we go from here? Demonstrators had five demands (eliminate the extradition bill, Lam’s resignation, inquiry into police tactics, release of demonstrators previously arrested and more democracy). I would suspect that the announcement will take some wind out of the demonstration sails, but predicting the future is difficult. We have noted strong buying in HK stocks by mainland investors despite the market weakness as they extended their buying streak to 34 days. These mainland investors are savvy and worth watching!

JP Morgan is adding Chinese government bonds to their suite of fixed income indices including the widely followed JP Morgan EM Debt which has over $200B benchmarked to it according to the WSJ and Bloomberg. As stated in the reports, the IMF expects $450B will flow into China from equity and fixed indices over the last two to three years. Within the GBI-EM index, China’s weight would grow to 10% from its current allocation of 0% beginning on Feb 28, 2020. Bloomberg noted Goldman Sachs believes $3B will flow into China per month during the inclusion. The move follows Bloomberg Barclays Global Aggregate Index’s inclusion of Chinese government bonds earlier this year while FTSE Russell (ex Citi indices) are expected to announce their decision on adding China to its World Gov’t Bond Index this month. In fact, foreign holdings of Chinese bonds already exceed equity holdings driven by inclusion and the IMF’s designation of the renminbi as a reserve currency on October 1, 2016.

We received some clarity on reports that education companies using the VIE structure could see further regulation to confirm they are not using foreign educational materials. News yesterday on the article was vague, but led to a sell-off.  It turns out the report was from advisor Liu Wei of Renmin University and not a policy maker. HK listed education reversed course on the clarification while the sell side is calling the sell-off an overreaction.

US equity futures are up this morning though it is hard to know why. The Lam announcement has little bearing on US China trade negotiations that appear to be deadlocked at the moment as the September meeting has yet to be confirmed. Yesterday morning President Xi was quoted as saying China faces “concentrated risks” and must be prepared to face challenges to its sovereignty in a good Reuters article. Vice Premier and lead trade negotiator Liu He made positive remarks on China’s desire for talks, which might be interpreted as an olive branch. Policy makers appear to be loosening the amount of bonds local governments can issue. The move should have a meaningful impact on infrastructure, which has both upstream and downstream implications.

Services PMI Highlights Success of Targeted Stimulus

August Caixin China Services PMI              52.1 versus July’s 51.6

August Caixin China Composite PMI         51.6 versus July’s 50.9

Powell’s predicament is that cutting interest rates effects the entire US economy, indiscriminately. Does San Francisco real estate need an interest rate cut? Probably not, but it’s getting one just like everybody else. Just like the US, there are geographic areas in China that are booming, such as tech hub Shenzhen, and there are also areas struggling economically. However, Chinese policy makers have avoided a broad interest rate cut in favor of targeted stimulus to the parts of the economy that need help. Small to medium enterprises have been one group receiving attention as they have historically been burdened by red tape and struggled to gain access to credit. This month’s Services PMI is a validation, to some degree, of those efforts as new orders rose accompanied by lower input prices. A PMI above 50 indicates expansion. The number also highlights China’s domestic consumption story which largely goes unnoticed as evidenced by the lack of reporting on the Services PMI.

H-Share Update

The Hang Seng was trading sideways despite the strong Services PMI until the Lam news hit the tape, ripping +3.9%/+995 index points to close at 26,523 as volumes surged 82% day over day and well above the 1 year average. 47 stocks advanced with only 1 decliner as AIA +5.87%/+168 index points, Tencent +3.65%/+100.3 index points and HSBC +3.49%/+84.9 index points. Only CSPC Pharma declined on the day as Wharf Real Estate ripped +12.1%/+20.6 index points followed by New World Development +10%/+19.8 index points. The HK stocks within the MSCI China All Shares gained +2.54% as real estate ripped +4.27%, communications led by Tencent +3.4%, financials +2.89% and industrials +2.09%. Healthcare gained +0.24% while utilities +0.47% and tech +0.99%. Southbound Connect volumes were moderate with buyers outpacing sellers for the 34th straight day as favorite CCB had very strong buying again.

A-Share Update

The Shanghai & Shenzhen were also trading sideways though got a late-day lift gaining +0.93% and +0.67% on strong volumes above the 1 year average while breadth was positive with 1,929 advancers and 1,613 decliners. Large caps outperformed mid and small caps by ~40bps as brokers appear to favoring brokerage firms. The mainland stocks within the MSCI China All Shares gained +1.13% as real estate +3.46% on the potential for infra spending, materials +2.25% as constructions named rallied, financials +1.91%, industrials +1.82%, energy +1.43% and communications +1.13%. Staples was off -0.8% as liquor stocks were sold. Healthcare’s rally petered out +0.14%. Northbound Connect volumes were moderate but foreign investors were in a buying mood hoovering up $695mm of mainland stocks. Once again Shenzhen Connect volumes exceeded Shanghai Connect’s with stronger buying on the former. To recap we had $2.5mm of buying Tuesday after Monday’s $740mm of buying.  

Peer-to-peer lender Yirendai reported Q2 earnings after the close yesterday. As regulators tighten their scrutiny of the space, the company’s business has contracted dramatically as revenue declined 34% year over year. The company is the largest player in an increasingly small space. The key is to understand that policy makers are attuned to risks in the economy and will act.

Last Night’s Stats

  • CNY 7.15 versus 7.17, a 36bps appreciation versus the US $
  • Yield on 1 Day Chinese Gov’t Bond 2.10% versus 2.07%
  • Yield on 10 Year Chinese Gov’t Bond 3.0699% versus 3.0799%
  • Yield on 10 Year China Development Bank Bond 3.61% versus 3.61%
  • Commodities were mixed/larger higher on the Shanghai & Dalian Exchanges with Dr. Copper off -0.54%.