Key News

President Trump reciprocated China’s one-year exemption of 16 US goods from Chinese tariffs by delaying the October 1^st tariff increase from 25% to 40% on $250B of Chinese imports to October 15^th. The decision, according to the President’s Tweet, was a “goodwill gesture” in light of China’s 70^th anniversary on October 1^st. It also buys time for the two sides to meet in early October.

Asia was broadly higher with Japan, China, Taiwan and Korea higher though Hong Kong, India, Malaysia and Indonesia underperformed. Remember China’s loan data was released after yesterday’s close though the buzz was all about the recent thawing in trade talks. There is increased chatter that China will ramp up US farm purchases. I’ve updated our trade timeline tomorrow as an early October meeting could lead to a Trump/Xi meeting and/or a truce/deal in November. Plenty of unknowns between now and then, but there is a case for some optimism. Hong Kong, China, South Korea and Taiwan are closed tomorrow.

An interesting divergence materialized between the Hang Seng, which includes HK-listed and domiciled companies such as AIA and HKEX, and the Hang Seng China Enterprise Index (HSCEI), which is comprised of HK listed but China domiciled companies like Tencent and Ping An. The Hang Seng lost -0.26% as AIA and HKEX were down on the day though the HSCEI gained +0.11% while Tencent and Ping An gained on the day. As my friend and fellow index nerd Dan Weiskopf has always advocated, structure matters in ETF decision making.

There has been an increase in chatter that Budweiser Brewing Company APAC, AB InBev’s Asia unit, will reattempt its IPO in Hong Kong after cancelling it two months ago. Still no word on Alibaba’s Hong Kong listing unfortunately. Bloomberg noted that Tencent-backed online video streamer Kuaishou is working on an IPO in the US that could raise $1B. This could be an indication they are trying to get ahead of their unicorn competitor ByteDance, which provides the popular TikTok app. ByteDance has become problematic as it is the rare Chinese internet company that is neither aligned with Alibaba nor with Tencent. Their popularity is drawing increasing amounts of advertising money to TikTok and away from others.

A mainland media source noted that regulators are considering raising the amount of stock exposure pension funds and insurance companies are allowed. At the end of 2018, Chinese pension funds and insurance companies owned 8.4% and 2.7% of the mainland’s free-float market cap. According to Goldman Sachs data cited from the blog A Wealth of Common Sense, US pensions account for 12% of the US stock market. US mutual funds own 23% of the US versus just 10.4% of China’s market. The media source noted mutual fund investments could see a tax change to promote ownership. This follows the abolishment of QFII/RQFII quota limits earlier this week.

The sell side appears skeptical of HKEX’s $36B bid for the London Stock Exchange due to the historical difficulty in buying the exchange. This is evidenced by the 7% rise in LSE’s share price versus the 50% premium bid. Factors that lower the probability of the deal going through include Brexit and LSE’s purchase of data company Refinitiv.

H-Share Update

The Hang Seng eased -0.26%/-71.4 index points though managed to close above 27k at 27,087 as volumes declined 14% day over day and back below the 1 year average. Breadth was mixed with 24 advancers and 23 decliners. AIA and HKEX lost -1.43%/-38.6 index points and -3.5%/-30.1 index points, though Tencent and Ping An gained +0.98%/+26.7 index points and +1.45%/+23.2 index points. Tool maker Techtronic gained +3.99%/+10.1 index points on positive trade news while HKEX was the worst performer. The HK stocks within the MSCI China All Shares gained +0.75% led by tech +1.84%, healthcare finally had a strong day +1.32%, and discretionary +1.02% as liquor stocks finally had a good day. Energy was the only down sector off -0.69%. Southbound Connect volumes were moderate in mixed trading as volume leader CCB had sellers outpace buyers.

A-Share Update

The Shanghai and Shenzhen gained 0.75% and 0.58%, respectively, with Shanghai closing above 3k at 3,031 though volume was off 16% day over day but still above the 1 year average. Retail participation is picking up! Bond yields have risen recently potentially indicating investors are selling bonds to buy stocks. Breadth was mixed with 1,298 advancers and 1,205 decliners. Large caps outperformed mid and small caps by nearly 1%/100 bps. The mainland stocks within the MSCI China All Shares gained 1.34% led by real estate 3.06%, staples 2%, financials 1.5%, tech 1.23% and discretionary 1.05% as all sectors gained on the day. Northbound Connect volumes were fairly high as foreign buyers were active again. While Shenzhen Connect volume exceeded Shanghai Connect volume, buyers were more active in Shanghai. Foreign investors bought $464mm of mainland stocks today bringing the week total to $1.53 billion.

Bloomberg reported that 75% of the 333 US companies that do business in China according the American Chamber of Commerce in Shanghai are opposed to tariffs.

Bernstein upgraded iQIYI (IQ US) leading to a +7% gain yesterday, despite chatter that the company has been talking down Q3 guidance,

Trade War Schedule of Events

September October- China trade envoy 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 didn’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’ 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 that the unreliable entity list is also not released though 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 15^th - US tariffs would rise from 25% to 30% on $250B of imported goods

October 18^th – Chinese officials are expected to attend the IMF and World Bank meetings in Washington DC, where trade dialogue may occur on the sidelines.

November 16^th – 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 1^st - US would tariff the remaining $200B of imported goods at 15%;

December 15^th - China retaliatory tariffs on the US go into effect

Last Night’s Stats

• CNY 7.08 versus 7.11 yesterday
• Yield on 1 Day Chinese Gov’t Bond 1.99% versus 1.99% yesterday
• Yield on 10 Year Chinese Gov’t Bond 3.09% versus 3.0449% yesterday
• Yield on 10 Year China Development Bank Bond 3.62% versus 3.59% yesterday
• Commodities were higher on the Shanghai & Dalian Exchanges with Dr. Copper off 0.04% yesterday.