Daily Posts

Former China Official Expresses Optimism Ahead of Trade Talks, Visa Restrictions are Another Pre-Negotiation Tactic

Key News

China expressed willingness to accept a partial deal should Trump agree to cancel imposing further tariffs on Chinese goods. This morning, Huo Jianguo, a former Chinese commerce ministry official, told Bloomberg News that: “There might be a big breakthrough in the coming trade talks as both sides have expressed good gestures and positive signals.”

Of the 28 Chinese entities that the US has blacklisted due to surveillance activities, only 8 are companies and the rest are the security arms of municipalities. Of the 8 companies included, only four are public: Hikvision, iFlytek, Dahua Tech, and Meiya Pico. Furthermore, these companies make up less than 1% of the MSCI China All Shares Index. While sentiment might be negative short-term, reports suggest that the impact on Hikvision and Dahua should be limited due to the fact that both have already built up sufficient inventories in anticipation of such risk, which has been expected since May, neither company relies significantly on US components, and US revenues for both are less than 5% of total revenues. Technology companies, especially internet companies, took a hit following the news, driving valuations to another multi-year low (see chart below).

The US announced visa restrictions on Chinese Communist Party officials, citing concerns over the political situation in Xinjiang. Coming less than two days before talks commence this is likely another negotiation tactic, as the Trump administration has historically refrained from commenting on the issue. China responded with visa restrictions on certain US citizens. Additionally, China announced restrictions on broadcasting preseason NBA games due to comments by the general manager of the Houston Rockets in support of the Hong Kong demonstrators. We believe that that this is just further posturing ahead of talks as China is unlikely to abandon its love of basketball, and the NBA specifically, so quickly.

Golden Week tourism strength is best demonstrated by tourism numbers from Hainan, a beach destination in China’s south, near the border with Vietnam. Sales from offshore duty-free stores rose more than 50% in the first five days of October and tourist revenue in Sanya, the region’s largest city, rose by 46%.

H-Share Update

The Hang Seng was down by -0.81% on sentiment over visa restrictions for Chinese officials. The market rallied at the beginning of the day before trending lower to the close. Northbound Connect net sold HKD 2.216B and Southbound Connect net bought HKD 2.409B. Hong Kong banks declined and tech declined on pessimism over trade talks. Tencent declined, but revenue from mobile game PUBG  topped mobile game revenue across the sector in September. China Resources Land Ltd. (1109 HK) stood out by gaining 2.4% despite broad market declines. The company is a property developer mostly active on the Mainland and is probably expected to benefit from strong demand resulting from stimulus in the Mainland. Unfortunately, the same cannot be said for Hong Kong real estate.

A-Share Update

Shanghai and Shenzhen gained 0.39% and 0.65%, respectively, shrugging off the visa restrictions tit-for-tat. Mainland markets were under pressure in the morning following a slump in US markets, but rallied in the afternoon session. Banking stocks such as Industrial Bank CO (601166 CH), up by 1.89% on the day, stood out as gainers. This is likely due to stimulus and the relaxing of RRR requirements taking effect.

King’s Luck Brewery (603369 CH) was highlighted as a stock to watch by CICC. The brewing company as recently invested in upgrading its storage facilities to handle the storage of more high-quality baijiu and for longer. The company is also involved in the higher-end of China’s vibrant beverage sector, the performance of which highlights the strength of the Chinese consumer.

Last Night’s Stats

  • RMB/USD 7.13 versus 7.14 yesterday
  • Yield on 1-Day Government Bond 1.81% versus 1.93% yesterday
  • Yield on 10-Year Government Bond 3.11% versus 3.12% yesterday
  • Yield on 10-Year China Development Bank Bond 3.52% versus 3.52% yesterday