Key News

Asian equities were largely lower as US politics weighed on regional sentiment while Japanese stocks went ex-dividend and mainland Chinese stocks were up following yesterday’s drop. Regional semis and particularly Taiwan were surprisingly resilient after chip maker Micron Technology’s earning miss and weak forecast. China’s August Industrial Profits declined -2% year over year and from July’s +2.6% though it wasn’t a significant market driver. US politics are taking center stage, but China’s Foreign Minister Wang had positive comments on trade talks.

FTSE Russell announced they will not include mainland Chinese bonds in their World Government Bond Index (WGBI). The decision bucks the inclusion trend as Bloomberg Barclays is adding Chinese government bonds to their Global Aggregate and JP Morgan announced they will begin adding Chinese government bonds to their EM government bond index in February 2020. FTSE cited settlement and market liquidity issues for refraining from including the market. The decision is quite a head scratcher considering that China is the second largest bond market in the world. Over $200B of foreign assets have been invested in the last five years in China’s mainland bond market. The issue is likely that foreign investors desire to hedge their positions but onshore futures for bond investors are limited and FX hedging can be expensive and volatile.

The Hong Kong protests contain elements of a larger issue: social and wealth inequality driven by artificially inflated real estate prices. As an offshore tax haven there is great wealth in Hong Kong. However, life can be difficult for the average resident. Due to the large number of people in a small geographic area, competition for jobs is fierce and the average apartment can be small and potentially far from the city center. While the media fawns over mansion and apartment sales on Victoria Peak, it gives scant attention to the plight of the average resident due to the difficulty of buying an apartment. This issue is beginning to bubble up and garner local media attention. The South China Morning Post is running an excellent series on the issue. Property developers are sitting on vast tracts of land that have gone undeveloped as they seek to limit or stagger development to keep prices up. The Hong Kong government plays a role as it generates considerable revenue by selling the land and taxing its development, not to mention the fact that many local leaders own valuable real estate. Beijing has voiced the need for more public housing and land development in Hong Kong, but they are getting push back from both the Hong Kong government and developers. Developers have started donating land for public housing though that effort won’t solve the issue. We should keep an eye on this story as it unfolds. Hopefully, Hong Kong can address this issue for the good of the people.

H-Share Update

The Hang Seng opened lower but managed to claw back to a loss of “only” -0.33%/-87 index points to close at 25,954 as volumes fell -24.5% day over day and nearly half the 1-year average as Southbound Connect is closed due to next week’s China holiday. Breadth was weak with 14 advancers and 33 decliners as Tencent eased -0.9%/-23.1 index points, ICBC -1.14%/-13.3 index points and CCB -0.67%/-13 index points. Geely Auto had a strong day +3.62%/+7.9 index points as the best performer while energy giant CNOOC -1.97%/-12.7 index points. The HK stocks within the MSCI China All Shares lost -0.64% as energy fell -1.29%, healthcare -1.06%, materials -0.98%, real estate -0.9% and communications -0.82%. Discretionary and staples managed gains of +0.495 and +0.38%. Southbound Connect will closed for the next week.

A-Share Update

The Shanghai and Shenzhen gained +0.11% and +0.91%, respectively, as bargain hunters scooped shares of TMT stocks sold yesterday by local investors raising cash for their holiday next week. Volumes fell -25% day over day and below the 1-year average as 2,717 stocks advanced and 835 declined. Small caps and mid-caps rebounded 1.5% while mega caps managed a small gain. The mainland stocks within the MSCI China All Shares gained +0.37% led higher by tech +1.79%, communications +0.91%, staples +0.84% and healthcare +0.3% while utilities -1.03% and real estate -0.57%. Northbound Connect volumes were moderate as Shenzhen Connect volumes exceeded Shanghai Connect volumes. Foreign investors’ activity on the Shanghai Connect was mixed with more sell trades though there was a slight amount of net buying. Foreign buyers were more active on the Shenzhen Connect. Foreign investors bought a total of $44mm of mainland stocks net selling activity. This week foreign investors bought a total of $634mm of mainland stocks less sales.

The WSJ published an editorial yesterday from author Gordon Chang who wrote “The Coming Collapse of China”. The WSJ failed to note Mr. Chang wrote the book in 2001.

Tencent (700 HK) bought another 110k shares back on Friday.

Last Night’s Stats

• CNY 7.12  versus 7.13 yesterday
• Yield on 1 Day Chinese Gov’t Bond 1.75% versus 1.65% yesterday
• Yield on 10 Year Chinese Gov’t Bond 3.15% versus 3.14% yesterday
• Yield on 10 Year China Development Bank Bond 3.60% versus 3.61% yesterday
• Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper -0.62% .