Key News Overnight

Asia was broadly up on small gains as Japan reopened after missing yesterday’s downdraft due to a holiday. The Hang Seng finally made a small gain while the mainland rose despite being off its highs as investors raised vacation cash pre-Golden Week in the afternoon session. 

There were positive trade developments as well. China is purchasing 10 boatloads holding 600,000 to 900,000 tons of US soybeans and China tariff waivers are expected to bring 2mm to 3mm tons of additional purchases. Treasury Secretary Mnuchin confirmed that the US asked China’s trade delegation to hold off on visiting US farms, which President Trump questioned. Mnuchin did confirm China’s senior trade delegation including Vice Premier Liu He will visit DC in two weeks. 

Healthcare had a strong day in HK and the mainland as China’s national drug procurement bidding was held today. The bidding was on twenty five generic drugs. The market expects bids to lower costs by 50% to 70%, which hurts the margins and profits of the winning bidder. We don’t know the auction’s outcome, but a sell side upgrade of CSPC Pharma lifted the sector and the market should be anticipating the results.  

PBOC Governor Yi Gang gave a press conference touching on a variety of topics. The PBOC will not cut broad interest rates or implement QE as China’s economy is stabilizing, marking the central bank's enduring independence of the ECB and the Fed. The PBOC is keeping its powder dry in case trade talks falter, favoring targeted stimulus such as bank reserve requirement ratio cuts over broad interest rate cuts. Reforms such as further opening financial markets to foreign investors and supporting private companies were reiterated. He denied that China will issue a digital currency in the near term, though it sounds like it could happen at some point. There was chatter that infrastructure development will be pushed as next year’s bond issuance quota should be planned in 2019. Many of China’s housing developments, referred to as shantytowns, are showing their years. Replacing these older buildings with modern ones looks like an easy area for policy focus. Many industries would benefit from such a policy including construction companies, producers of raw materials, and home appliance makers. However, the central bank will likely refrain from supporting mortgage lending or other broad-based real estate financing.

Alibaba’s investor day concluded today by announcing that the company is buying one-third of Jack Ma’s stake in mobile payment and financial services giant Ant Financial. The company reported having 730mm Chinese users and 130mm non-Chinese users while Ant’s mobile payment provider Alipay has 900mm Chinese users. The stock is up slightly pre-market on the news. The sell-side hasn’t chimed in yet but their reaction should be interesting.

H-Share Update

The Hang Seng gained +0.22%/+58.6 index points to close at 26,281 as volumes picked up 15% day over day though below the 1-year average. Breadth was poor with 19 advancers and 26 decliners as AIA gained +1.54%/+39.8 index points, HSBC +0.76%/+20.3, CSPC Pharma +8.54%/+19.7 and China Mobile +0.93%/+11.3 index points. Macau casino Sands China was down -1.5%/-4.6 index as the worst HSI performer due to low expectations for Chinese tourists in Golden Week. The Hong Kong stocks within the MSCI China All Shares were off -0.16% despite healthcare gaining +1.57, discretionary +0.73% as industrials fell -1.04%, real estate -0.94% and financials -0.55%. Southbound Connect volumes were high as mainland investors sold HK stocks in advance of Golden Week. Volume leaders CCB and Sino Biopharma did have net buyers while CM Bank and Tencent had net sellers.

A-Share Update

The Shanghai & Shenzhen gained +0.28% and +0.33%, respectively, on volumes higher 7% day over day and above the 1-year average. The Shanghai surpassing 3k, but eased in the afternoon to close at 2,985. Breadth was positive with 1,956 advancers and 1,503 decliners as small caps outperformed large and mid-caps by a small margin. The mainland stocks within the MSCI China All Shares gained +0.67% as Kweichow Moutai hit an all-time high which helped staples +1.46%, healthcare +1.43%, utilities +1.16%, tech +1.15% and communication +1.11%. All sectors were in the green with energy the laggard +0.07%. Northbound Connect volumes were moderately higher as buyers were active on both boards though Shenzhen Connect volumes and buying outpaced Shanghai Connect. In Shanghai, Kweichow Moutai was the volume leader with buyers slightly outpacing sellers while Ping An had sellers slightly outpace buyers. Foreign investors bought a total of $387mm of mainland stocks net of sells. Today’s buying follows yesterday’s selling of $215mm.

Pinduoduo (PDD) announced it will issue $875mm convertible bonds to institutional investors. Based on demand another $125mm of notes can be issued.

Meituan Dianping (3690 HK) gained 2.89% after a sell side upgrade. The stock had faltered after its IPO on September 19, 2018 though is now up 78% YTD having bottomed at HK $41.50 on January 3rd. The stock closed today at HK $78.25. Investors appear to have favored e-commerce names over the last few months.

Last Night’s Stats

• CNY 7.10  versus 7.12 yesterday, picking up 19bps versus the Us $
• Yield on 1-Day Chinese Gov’t Bond 1.72% versus 1.97% yesterday
• Yield on 10-year Chinese Gov't Bond 3.12% versus 3.10% yesterday
• Yield on 10-year China Development Bank Bond 3.59% versus 3.57% yesterday
• Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper +0.17% Friday.