Key News

Asian equities were mixed as Japan, Korea, Malaysia, Thailand and Indonesia managed small gains while China, HK and India were off. Positive news that a China trade delegation is headed to DC was overshadowed overnight. Mainland investors locked in profits after the PBOC didn’t roll over or increase the amount of maturing Medium-term Loan Facility (MLF), and they didn’t cut the interest rate on the newly issued MLF. $80B of Open Market Operations (OMO) were allowed to mature without any reissuance.

The PBOC disappointed investors, shocked might be a better term, who anticipated a more accommodative PBOC in light of the recent weak economic releases. $265 billion in MLF matured while the PBOC issued $200B of new MLF. Along with the maturing OMO not being reissued, this is a net drain of intra bank liquidity. The economic consequence is fairly inconsequential though the symbolism is far more important as the PBOC might be the only central bank globally not racing toward zero interest rates.

It is feasible that the PBOC is simply waiting to reissue OMO and MLF following a Fed rate cut tomorrow. To their credit, the PBOC did recently cut banks’ reserve requirement ratio. With a China trade delegation headed to DC this week, maybe a trade truce doesn’t require the PBOC to act as aggressively. Regardless, the move is disappointing especially in light of the upcoming 70th anniversary of the founding of the People’s Republic of China on October 1st.

I would suspect the PBOC will get an earful from policy makers after today’s market action which could lead to lower interest rates on OMO and MLF. Small caps took the brunt of the selling though all sectors were off while Northbound Connect flows were negative, commodities sold off, bonds were bought, and CNY depreciated slightly versus the US $.

HK was off after Moody’s cut its credit outlook from stable to negative as the PBOC’s inaction also weighed on market sentiment. HK’s subway operator MTR (66 HK) was off -1.8% after its first train derailment in its history. No foul play is suspected as the company’s stations have taken a beating during demonstrations. I’ll be taking the Airport Express into HK in a few weeks so I can report back on my experience. One recent traveler to HK mentioned they had no issues.

One broker noted August home prices were solid while another noted real estate investment also picked up. I’ll do some digging as August real estate hasn’t been widely reported on in the media or by other brokers.

E-commerce

A mainland media source had an interesting article reporting that 50.7B packages were delivered in China in 2018 which would be more than the US, EU and Japan combined. The figure does show how China’s urban middle class has adopted e-commerce in a very significant fashion.

H-Share Update

The Hang Seng declined -1.23%/-334 index points. The 27k level is an important level to watch though volumes were off -16% day over day and well off the 1-year average. Breadth was poor with only 6 advancers and 43 decliners. Index heavyweights were off with AIA down -1.63%/-43.6 index points, HSBC down -1.4%/-37.5 index points, CCB down -1.63%/-32.3 and Tencent down -0.87%/-23.1 index points. Several casino and real estate companies managed gains while China Petroleum was off -3.57%. The HK stocks within the MSCI China All Shares were down -1.26% overall with only Utilities managing a gain of just +0.15%. Materials was off -2.12%, Tech -2.2%, Real Estate -1.17%, Consumer Discretionary -1.6%, Consumer Staples -1.1% and Communications -1.07%.  Southbound Connect volumes were moderate as mainland investors were sellers for the third day in a row of HK stocks.

A-Share Update

The Shanghai & Shenzhen were off -1.74% and -2%, respectively, as volumes were up slightly and above the 1-year average. Breadth was atrocious with only 314 gainers and 3,385 decliners as small and mid caps underperformed by ~50bps though mega caps were off -1.5%. The mainland stocks within the MSCI China All Shares were off -2.12% overall. Many sectors were hit hard with Tech at -3.19%, Communications -2.81%, Utilities -2.6%, Materials -2.37%, Industrials -2.36%, Financials -2.24%, Consumer Discretionary -2.06%, and Real Estate -1.8%. Northbound Connect volumes were moderate with sellers slightly outpacing buyers. Sellers were more active on the Shenzhen Connect versus the Shanghai Connect as foreign investors sold -$73mm of mainland stocks.

Last Night’s Stats

• CNY 7.09 versus 7.06; backs up 46bps
• Yield on 1 Day Chinese Gov’t Bond 2.06% versus 1.96% yesterday
• Yield on 10 Year Chinese Gov’t Bond 3.06% versus 3.06% yesterday
• Yield on 10 Year China Development Bank Bond 3.65% versus 3.64% yesterday
• Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper -0.65% yesterday.