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BABA Earnings, Plenary Session & PMIs Lead to Party Time, Massive Foreign Buying in Mainland China

Key News

Asian markets were largely up as China, Hong Kong, Taiwan, Korea, Singapore and India all had equity market gains. Japan, Malaysia, Indonesia and Thailand were off while the Philippine markets were closed. China and Hong Kong had multiple catalysts the first being the Caixin PMI, discussed below. We also had the 4th Plenum press release which indicates that supportive policies will remain in place. Another catalyst was news that Henderson Land (12 HK) will be donating land to the Hong Kong government for public housing. We have written at length that an element of Hong Kong’s unrest is driven by wealth inequality and a lack of affordable housing. Addressing housing would go a long way to ending protests which are driven today by students on the weekend. One should expect more of real estate companies to follow Henderson’s lead.

US equity markets were off yesterday with US-listed Chinese stocks off as well on reports of a Bloomberg article on trade talks deteriorating from leaked China sources. I highly doubt this is true as a leak would be a major coup for the journalist. Bloomberg News is persona non-gratis in China after publishing a list of the richest Chinese including several government-linked figures. There is no chance they would use Bloomberg as a leak source. Over the weekend, China confirmed Phase One was a done deal. Concessions from both sides are required for the trade agreement to move past phase one.

Mainland China was weak this week as liquidity conditions have been tight in China. Tax payments are due at month end, which will pull money out of the system, while PBOC has not filled the gap.

Caixin Manufacturing PMI

Caixin Manufacturing PMI 51.7 versus estimate 51 and
August’s 51.4

Takeaway: Stimulus policies have been directed toward private companies versus state owned enterprises as private companies have historically had trouble accessing credit. The PBOC has cut the bank reserve requirement ratio over the last year while directing the banks to lend the freed-up cash to private companies. The Caixin PMI focuses on private companies versus the “official” National Bureau of Statistics PMI, which focuses large companies. The Caixin is a much smaller survey versus the NBS number, which disappointed on Wednesday. Today’s release provides evidence that policies directed toward supporting private companies are working.

Alibaba released strong results this morning before the market open though the stock appeared off at open following a strong YTD performance, but has recovered and is up so far.

  • Revenue +40% RMB 119B ($16.651 billion) versus estimate 116B
  • 785mm mobile users
  • Adjusted EBITDA +39% RMB 37.1B ($5.191B) versus estimate 34.3B
  • Adjusted EPS RMB 13.10 versus 10.66

H-Share Update

The Hang Seng opened lower but rallied all day to close +0.72%/+194 index points at 27,100 though volume was light -6.6% day over day and below the 1-year average. The index gained +1.63% on the week while the year to date +4.86%. Breadth was strong with 37 advancers and only 8 decliners as index heavyweights AIA +1.34%/+36.2 index points, Ping An Insurance +1.1%/+17.1 index points and CCB +0.79%/+16.5 index points. Apple supplier Sunny Optical was the day’s strongest mover gaining +2.05%/+5.75 index points while CSPC Pharma gave back some recent gains -1.64%/-4.62 index points. The HK stocks within the MSCI China All Shares gained +0.79% fled higher by real estate +2.22%, tech +1.52%, materials +1.52%, industrials +1.29%, financials +1.13%, staples +1.08% and energy +0.48%. Healthcare was off -1.16% while utilities lost -0.07%. Southbound Connect volumes were light with sellers outpacing buyers which is a deviation from the norm. Volume leader CCB had sellers outpace buyers by a small margin while Tencent had 3 to 1 selling while Wuxi Bio saw heavy buying.

A-Share Update

The Shanghai & Shenzhen opened lower but gained +0.99% and +1.29%, respectively, though volumes were off -3% day over day and below the 1-year average. For the week SH and SZ gained +0.11% and +0.28% (+18.6% and +29.11% YTD). Breadth was strong with 2,828 advancers and 762 decliners as large caps outperformed mid and small caps. The mainland stocks within the MSCI China All Shares gained +1.29% with discretionary +2.86%, financials +1.82%, real estate +1.67%, healthcare +1.33%, industrials +1.18%, tech +1.06%, materials +1.01% and communications +0.67% as all sectors gained on the day. Northbound Connect volumes were moderate though buyers were out in force as Shenzhen’s volume and buying exceeded Shanghai’s. Foreign investors purchased $1.058 billion of mainland stocks following yesterday’s $1.050 billion day. For the week, $3.262 billion of mainland stocks were purchased. An absolutely massive week!

ESR Cayman (1821 HK), a private equity-backed real estate logistics company, listed in Hong Kong today gaining +5.36%. CMGE Technology Group (302 HK), a mobile gaming company, also listed in Hong Kong today +20.42%.

The National Health Commission reported the average healthy life expectancy in China is 68.7 years.

Last Night’s Prices & Yields

  • RMB/USD 7.04 versus 7.04 yesterday
  • RMB/EUR 7.85 versus 7.84 yesterday
  • 1-Day Government Bond Yield 1.81% versus 1.91 yesterday
  • 10-Year Government Bond Yield 3.26% versus 3.29% yesterday
  • 10-Year China Development Bank Bond Yield 3.71% versus 3.72% yesterday
  • Commodities on the Shanghai & Dalian exchanges were lower with Dr. Copper off -0.76%.
Alibaba released strong results this morning before the market though the stock appears off following a strong YTD performance.