Key News

Asian equity markets kicked off the week in the green with only Malaysia and Thailand down on the day. Vice Premier Li and chief trade envoy Liu He made positive comments concerning US China trade talks. The sound byte pulled by the media is “substantial progress” has been made. The full quote as reported by Reuters is “The two sides have made substantial progress in many fields, laying an important foundation for the signing of a phased agreement. Stopping the escalation of the trade war benefits China, the US and whole world. It’s what producers and consumers alike are hoping for.” He also stated “Growth in Sino-US economic and trade cooperation is connected to the peace, stability and prosperity of the world.” As the father of small children, I fully agree. Investors should watch Vice President Mike Pence’s speech on China, which is scheduled for October 24th. Pence’s speech will likely be written by Michael Pillsbury of the Hudson Institute, a right wing think tank that appears to view China as a military threat to the US, which I find laughable. Pence’s speech, which has been delayed several times, could upset the good momentum in trade talks.

Just after the market’s open, the PBOC announced the 1 and 5 year Loan Prime Rate (LPR). Both were left unchanged, which was somewhat surprising as recent September data indicates China’s economy has softened due to the trade war. The 1-Year LPR is the reference rate for mortgage rates, though banks rallied on the news as LPR cuts could crimp their margins.

Meituan Dianping (3690 HK) and Xiaomi (1810 HK) jumped +4.31% and +5.03% on news they will be added to the list of Southbound Connect eligible stocks. The companies’ dual share class structure had previously prevented their eligibility. The significance of this, beyond the potential inflows for the companies, is that it could speed Alibaba’s Hong Kong IPO.

Chan Tong-kai is not a name you are likely familiar with. He is accused of murdering his pregnant girlfriend while on vacation in Taiwan and then returned to Hong Kong, where he was arrested on separate money laundering charges.  With his Hong Kong prison term ending, his case was behind the proposed extradition law that led to mass demonstrations. Despite the extradition law being shelved, demonstrations are smaller but far more violent as students take to the streets on the weekend. The real issue is the wealth inequality and lack of affordable housing in Hong Kong. Protests in both Chile and Lebanon are driven by very similar issues.

H-Share Update

The Hang Seng managed a small gain of +0.02%/+6 index points to close at 26,725 on light volumes off -17% from Friday and well below the 1-year average. Breadth was positive with 31 advancers and 18 decliners as index heavyweights Tencent -1.87%/-47.4 index points, China Life +5.01%/+22.3 index points after providing positive earnings guidance and Hong Kong Exchange +1.85%/+16.2 index points. China Life was the best performer while Techtronic Industrial was the worst performer -2.75%/6.9 index points with Apple Supplier Sunny Optical -2.53%/-6.3 index points. The Hong Kong stocks within the MSCI China All Shares were off -0.12% as real estate +0.6%, tech +0.52%, staples +0.5% and financials +0.49%. Tencent weighed on communications -1.4%, materials -0.46% and healthcare -0.21%. Southbound Connect volumes were light/moderate in mixed trading as CCB was bought while CM Bank and Tencent were sold by mainland investors.

A-Share Update

The Shanghai & Shenzhen’s late-day rally led to +0.05% and -0.11%, respectively, in index moves on light volumes off -11% from Friday and well below the 1 year average. Breadth tilted lower with 1,219 advancers and 2,346 decliners as large caps outperformed mid- and small caps by ~50bps, driven by financials’ outperformance. The mainland stocks within the MSCI China All Shares +0.33% as real estate gained +2.31%, financials +0.73%, staples +0.67% and tech +0.38% while healthcare -1.19% and utilities -0.5%. Northbound Connect volumes were moderate/light though foreign investors were net buyers as Shenzhen Connect volumes exceeded Shanghai Connect volumes. Foreign investors bought $412 million of mainland stocks.

Chatter around Alibaba’s November 11^th Singles Day event are starting to pick up.

The World Internet Conference kicked off in China with speeches from numerous executives including Robin Li of Baidu, Lei Jun of Xiaomi, Daniel Zhang of Alibaba, Harry Shun of Microsoft, William Ding of Netease and Yang Yuanqing of Lenovo.

Last Night’s Prices/Yields

• USD/CNY 7.07 versus 7.08 Friday
• Yield on 1-Day Government Bond 1.91% versus 1.76% Friday
• Yield on 10-Year Government Bond 3.22% versus 3.19% Friday
• Yield on 10-Year China Development Bank Bond 3.62% versus 3.58% Friday
• Commodities were higher on the Shanghai & Dalian Exchanges with Dr. Copper +0.77% .