Key News

Asian equity markets had a strong day as Japan played catch up following holiday yesterday though India was off. There were multiple positive catalysts which led to Hong Kong and China’s rally with certain sectors especially benefitting. There was media chatter that the US and China could pull back not only an expected tariff increase in December, but also previously implemented tariffs. Obviously, this would be a major positive not only for Chinese manufacturers, but also for US consumers. Industrials and materials had positive moves on this news. Wilbur Ross mentioned in speaking to reporters during his Asia trip that LNG could be part of the Phase One deal as we had written a week ago. China can’t buy $50B of US agricultural goods, but if you include LNG and oil the number becomes feasible. Energy stocks in Hong Kong and Mainland China had a great day as President Xi’s keynote speech was very pro-trade and pro-opening up. Another positive factor was that the PBOC finally lowered a short-term lending rate to address China’s recent bond rout. Liquidity conditions had been tight due to tax payments due at the end of the month, but the PBOC didn’t offset the tax payment drain, which led to a strong sell off in bonds. (We highlight bonds daily at the bottom of China Last Night.). Finally, yesterday the PBOC injected liquidity into the banking system and cut the one-year lending rate by 5 basis points to 3.25%. The Caixin Services PMI was released, but received virtually no attention as it met analyst expectations at 51.1. Amazing at how little attention it received considering how important consumption is to China’s economy.

President Xi gave a very pro-trade keynote speech in the morning at the 2^nd China International Import Expo, which was attended by several world leaders including President Macron of France and Prime Ministers of Greece and Jamaica. The speech emphasized the benefits of global trade and the problems of “protectionism and unilateralism”. He cited new policies arising out of China’s recent 4^th Plenary meetings aimed at further opening China to foreigners. Specifically, he said “China will continue to foster an enabling business environment that is based on market principles, governed by law, and up to international standards.” And “With regard to IP protection, we will cultivate an environment that appreciates the value of knowledge, improve the legal framework, step up law enforcement, and enhance protection through both civil and criminal justice systems.” He also mentioned the new Foreign Investment Law that goes into effect on January 1, 2020. This was a very important speech.

Despite China’s strong performance year-to-date, I couldn’t help but notice that US listed China equity ETFs have lost $721mm in AUM year to date. Besides the headlines that would imply the four horsemen of the apocalypse are saddling up, the Hong Kong market has lagged both US-listed Chinese companies and the Mainland China markets by a large margin. That is problematic for shareholders of the largest China ETF, which only has Hong Kong-listed companies. ETF due diligence is very important as you need to understand your exposures from both an exchange and sector perspective. Inflows into Shenzhen Connect over the last three months have exceeded Shanghai Connect. Why is this a big deal? Because the Shenzhen Stock Exchange is much smaller than the Shanghai (75% smaller by market cap). Why would foreign investors be buying these companies? Because at month-end MSCI will add mid cap stocks to their indices. These are predominantly listed on the Shenzhen Stock Exchange. Does your definition of mainland China include mid-caps? It might be worth the time to look.

H-Share Update

The Hang Seng rallied +0.49%/+136 index points to close at 27,683 as volume picked up +3.7% day over day and above the 1-year average. Traders love to see moves on stronger volume as a potential confirmation of a trend. Breadth was good with 32 advancers and 15 decliners as Tencent +165%/+42.7 index points, energy giant CNOOC +2.12%/+14.4% on an analyst upgrade and exposure to LNG, while today’s best performer was China Overseas Land +4.03%/+12.7 index points. Worth noting index heavyweights Ping An +0.7%/+11.1 index points and AIA +0.3%/+8.5 index points. Healthcare was the worst performer with both Sino Biopharma -2.8%/-6.96 index points and CSPC Pharma -1.93%/-5.58 index points on profit taking. Hong Kong-focused real estate companies made up the bulk of declining stocks as demonstrations weigh on retailers. Furthermore, China’s interest rate cut doesn’t apply to them. The Hong Kong stocks in the MSCI China All Shares Index +0.81% led higher by energy stocks +2.1%, materials +1.38%, communication +1.32% (driven by Tencent), industrials +1.22%, real estate +1.13% which is mainland China focused, tech +1.06% and financials +0.61%. Healthcare was off -1.45% and utilities -0.43%. Southbound Connect flows were moderately higher with sellers outpacing buyers by a small margin. Volume leaders CCB and Tencent were sold 2 to 1 and 3 to 1 respectively, though ICBC was bought 2 to 1. Mainland investors could be reallocating from Hong Kong to the better-performing Mainland market.

A-Share Update

The Shanghai & Shenzhen both gained +0.54% as volume increased +1.7% day over day though below the 1-year average. Breadth was mixed with 1,796 advancers and 1,702 decliners as mid- and small caps outperformed large caps by a small margin. The Mainland stocks in the MSCI China All Shares Index gained +1.12% as financials had a very good day +1.47%, tech +1.41%, industrials +1.1%, real estate +1.1%, energy +1.06%, staples +1.05% and utilities +0.99%. All sectors were positive on the day. Foreign investors were active as Northbound Connect volumes were moderately high with buyers active on both Shanghai and Shenzhen. Shanghai managed better volume and buying in a deviation from the recent trend. $743 million of mainland stocks were bought today. Suffice it to say that a whole lot of money is going into mainland China!

Last Night’s Prices & Yields

Yields lower on rate cut and currency strengthens to below psychologically important 7 level.

• RMB/USD 6.99 versus 7.03 yesterday
• RMB/EUR 7.77 versus 7.84 yesterday
• 1-Day Government Bond Yield 1.71% versus 1.76% yesterday
• 10-Year Government Bond Yield 3.25% versus 3.29% yesterday
• 10-Year China Development Bank Bond Yield 3.69% versus 3.74% yesterday
• Commodities on the Shanghai & Dalian exchanges were largely higher with Dr. Copper +0.30%.