Key News

Asian equities were mixed with Japan, Taiwan and South Korea gaining on increased enthusiasm for Apple’s latest iPhone 11 leading to a tech rally while India, Thailand and Indonesia were off. Mainland China and Hong Kong were closed for China’s 70th anniversary. It was a fairly quiet night as expected due to the China holiday.

The Wall Street Journal had a very good opinion piece yesterday on Friday’s leaks on restricting China investments, which they term bilateral capital flows. The WSJ notes that US companies have invested $276B in China from 1990 to June 2019. At the same time, US companies have benefitted from China’s rising consumer economy. The US’s leading role in global capital markets is jeopardized by even floating the idea. Peter Navarro’s interview on CNBC denied the reports though he referenced a long running issue from the Public Company Accounting Oversight Board (PCAOB). The auditors of US listed Chinese companies, which are the big four US accounting firms operating in China, audit the companies in Hong Kong and not in China. The Chinese equivalent to the PCAOB has resisted allowing onsite audits by these firms due to national security issues. The pushback could be driven by the eleven state owned enterprises listed in the US while it is hard to imagine it being an issue for the other one hundred fifty plus Chinese companies listed here. It is 2019 so where the books and records are looked at seems trivial. However, on-site audits might be an easy concession to a wary PCAOB in the US. After all, China has already made great strides in reforming and internationalizing its capital markets. As Henry Kissinger stated in our interview with him earlier this year, China would benefit from taking steps such as this to adhere to global standards. Allowing onsite audits would be another great step forward and make the Marco Rubio proposal, which the consensus believes has no chance of passing, dead on arrival.

One of our institutional brokers noted that Chinese online education company Youdao, Inc. filed their F-1 form with the SEC yesterday in advance of a US listing under ticker DAO. NetEase is a controlling shareholder who should benefit from a listing. According to the F-1, the company is growing rapidly, but losing money. For the six months ended June 30, 2019 the firm generated CNY 548mm of revenue ($79mm) but lost CNY 189mm ($27mm). The company provides not only online educational classes, but also a number of “technology learning products”.  There were no details on the size of the offering though Chinese online education companies have historically been strong performers. However, the timing is interesting to be sure. Like Budweiser and alcohol stocks, Youdao may be tapping into an apparent investor preference.

Hong Kong – Market Closed Today

Shanghai & Shenzhen – Market Closed Until Next Tuesday

Local Hong Kong news is increasingly focusing on housing as critical local issue. While the US media has focused attention on HK demonstrations, there has been little attention to what could be a bigger underlying culprit. As we’ve previously mentioned wealth inequality and housing are real problems in Hong Kong. There appears to be a growing chorus that the HK government needs to do more in providing affordable housing. Addressing the issue could be the olive branch needed to quell demonstrations and their effect on the local economy.

Monday’s Prices

• CNY 7.14  versus 7.12 Friday
• Yield on 1 Day Chinese Gov’t Bond 1.83% versus 1.73% Friday
• Yield on 10 Year Chinese Gov't Bond 3.14% versus 3.14% Friday
• Yield on 10 Year China Development Bank Bond 3.69% versus 3.68% Friday
• Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper +0.60%