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Trade Talks & RRR Cuts Fuel Mainland Rally while Foreign Investors Plow Into Mainland Stocks via Connect

We hosted a webinar this morning at 9AM EST titled “Deal or No Deal – Trade War Scenario Analysis and Economic Outlook” with CICC’s Kevin Liu. He shares several great insights regarding China’s economic response and implications. Watch the replay here.

Key News

Trade talks are back on! The Ministry of Commerce announced the news following a phone call between Vice Premier Liu He and USTR Lighthizer and Sec of Treasury Mnuchin. No word if the US will implement October 1st step up in tariffs. The news hit the tape at the open, lifting Asian equities. Pre-market Premier Li give a not so subtle indication that China’s bank reserve requirement ratio will be cut soon following a State Council meeting yesterday. The Hong Kong Exchange had “connectivity” issues that limited derivatives trading over the course of the day leading to a halt in such trading at 2pm. The issue weighed on HK as the market turned lower giving up intra-day gains. The downturn occurred after HK leader Carrie Lam’s 11:15am press conference promising further dialogue. It is likely that traders took profits after yesterday’s big move while sentiment remains poor. Shanghai Comp exceeded the 3,000 level intraday for the first time since early July though came off the intra-day highs as the HK derivative announcement spooked the market. The Shenzhen Comp managed to close above the 1,650 for the first time since April.

I had mentioned briefly yesterday that local governments would be allowed to issue bonds. As the sell side analyzed the news it became clear that there is more meat on this bone than I had provided coverage of yesterday. The bond issuance quota is reserved for 2020 will be approved in 2019 allowing for immediate implementation in the new year. The stimulus measure is meant to support the real economy via infrastructure development.

H-Share Update

The Hang Seng opened lower but was up +0.66% until reversing to -0.03%/-7.7 index point following the HK derivatives market closing at 2pm. Volumes shrank 28% day over day following yesterday’s surge as activity dipped below the 1 year average. Breadth was mixed with 23 advancers and 26 decliners as CCB +1.7%/+33.3 index points, AIA reversed -1.07%/-30.3 index points and Ping An +1.14%/+1.7.9 index points. Real estate names Wharf and Henderson were off -3.13% and -3.1%. The HK stocks within the MSCI China All Shares gained +0.99% as Chinese domiciled companies fared much better than HK domiciled companies. Tech led the way on the trade talk news +3.8% while infrastructure spending boosted materials +2.8% and industrials 1.8%. Financials had a strong day +1.54% while discretionary gained +1.04%. Communications was off -0.04% and Staples -0.01%. Apple suppliers AAC and Sunny gained +12.03% and +2.35%. Southbound Connect volumes were light though buyers were active with CCB seeing yet another massive buying day. Tencent had another day of 2 to 1 selling.

A-Share Update

The Shanghai & Shenzhen gained +0.96% and +0.93% as volumes surged 32% on the trade news though off the intra-day highs of +1.98% and +2.06%. Breadth was immense with 3,006 advancers and just 593 decliners! Large caps moderately outperformed mid and small caps. The mainland stocks within the MSCI China All Shares gained +1.07% led by financials +1.89%, tech +1.52%, staples +1.03% and materials +0.82%. Utilities lagged +0.08%. Northbound Connect volumes were very strong with buyers out in force as Shanghai volumes outpaced Shenzhen volumes. Foreign investors bought $1.285B of mainland stocks. This is shaping up to be a massive inflow week as investors have bought $1.438B. MSCI inclusion stocks Ping An and Kweichow Moutai had strong buying activity.

Naspers will spin off a portion of its Tencent holdings in a listing to be titled Prosus (ticker PRX) on Sept 11 on the Amsterdam Stock Exchange. The listing could have a market cap of $100B at the time of listing which is being led by JP Morgan and Morgan Stanley. The company’s inclusion in European indices could be a strong catalyst for the company by month’s end while potentially closing Naspers’ discount to the value of its total value. There has been increased chatter that Alibaba’s acquisition of NetEase’s Kaola e-commerce unit will close soon.

Trade War Schedule of Events

Originally September, but now October- the China trade envoy is visiting the US –> kicked to October though lower level phone calls to set the stage; we heard from one firm in our research ecosystem that a visit was in the works though I hadn’t seen it confirmed elsewhere. Will the US delay the October tariff increase? No word yet though should be taken as a positive.

September – China’s unreliable entity list release – TBD; In response to the addition of Huawei on the US’ unreliable entity list, which would bar US companies from doing business with company, including Google via the Android operating system used by Huawei mobile phones, the Ministry of Commerce proposed creating a list of US importers who boycott or cut trade with China. These companies would, for all intents and purposes, be barred from doing business in China. With Huawei receiving a stay on implementation of the entity list by the US, one would hope China’s list is also not released, but actual implementation would be a new date. According to the Bureau of Industry and Security’s website, the US’ entity list was originally created to prevent the proliferation of weapons of mass destruction in 1997. Quite the evolution from WMDs to mobile phones.

October 1st – US tariffs would rise from 25% to 30% on $250B of imported goods

October 18th – Chinese officials are expected to attend the IMF and World Bank meetings in Washington DC; not trade related but senior economic attendees would could lead to trade dialogue

November 16th – APEC Economic Leaders Meeting in Santiago Chile; we don’t know if President Trump and President Xi will attend though it is feasible.

November 19 – Expiration of Huawei’s reprieve on the US entity list

December 1st – US would tariff the remaining $200B of imported goods at 15%;

December 15th – China retaliatory tariffs to the US Sept 1st tariffs go into effect

*Shout out to JP Morgan’s Adam Crisafulli who is leaving the firm week’s end to start An element of the above was derived by Adam’s work.

Last Night’s Stats

  • CNY 7.14 versus 7.15
  • Big rally in Chinese bonds post JP Morgan inclusion announcement
  • Yield on 1 Day Chinese Gov’t Bond 2.16% versus 2.10%
  • Yield on 10 Year Chinese Gov’t Bond 3.0424% versus 3.0699%
  • Yield on 10 Year China Development Bank Bond 3.56% versus 3.61%
  • Commodities were higher on the Shanghai & Dalian Exchanges with Dr. Copper off +1.69%