Key News

Asian equity markets were mixed with lackluster trading as investors await further clarification on when and where a Phase One deal may be signed. The interesting chatter overnight from a good source is that the US and China will announce a major drug operation tomorrow. Fentanyl is manufactured in China though in their defense it is a big country and a small amount of the drug goes a long way. We often view China as a single entity, but the reality is it is a massive country and finding the “bad” guys can be difficult. Regardless, fentanyl has had a devasting effect as we all know. It is great to hear that China is doing more to address this epidemic. Act surprised on Thursday if this news is true. I also heard that the Hong Kong government may grant amnesty to protesters as an olive branch. If true, and combined with talk of more affordable housing, a solution to the ongoing violence in Hong Kong maybe possible. As I mentioned last week, Henderson Land has agreed to donate land for affordable housing.

MSCI will announce their pro-forma for the November 26^th Semi-Annual Index Review tomorrow. My prediction: There will be significantly more Chinese companies in MSCI indices such as MSCI Emerging Markets. Clairvoyant? Hardly (unfortunately) as MSCI has previously announced 175 Chinese A shares mid-caps will be added for the first time. The 175 will likely go up due to the increase in market cap of these companies. China is already 500 of the 1,202 stocks in MSCI Emerging Markets. The 175 mid-cap stocks should make China more than 50% of the EM index by number of stocks. There will be more Chinese mid-caps than all South Korean stocks (113) which is the second largest position in EM. China’s percent weight will increase over time. After November, Chinese A-Shares (268 large caps and 175 mid caps) will only have 20% of their market cap added with another 80% to go.

Ant Financial announced that foreign visitors will be able to utilize Alipay while in China. This would be a huge help as it is often very difficult to find retailers who will accept cash or credit cards. I am looking forward to trying it out!

H-Share Update

The Hang Seng overcame morning losses to close +0.02%/+5.2 index points to close at 27,688 on light volumes off -20% day over day and well off the 1-year average. Breadth was positive with 26 advancers and 24 decliners as China Construction Bank -0.77%/-16.3 index points, China Mengniu Dairy Co -5.86%/-14.9 index points was the worst performer after milk prices will remain firm, likely hurting the company’s margins and AIA +0.49%/+13.7 index points. Like AIA, HSBC is a Hong Kong domicile/not China domicile which gained +0.42%/+11.2 index points. The Hang Seng outperformed the pure China domicile Hang Seng China Enterprise Index (HSCEI), which was off -0.15% as it lacks AIA and HSBC. New World Development +1.22%/+2.6 index was the top performer as real estate names had a good day. The HSCEI only has 50 stocks, like the Hang Seng, which is why I prefer to look at the 204 Chinese companies listed in Hong Kong within the MSCI China All Shares Index. The Hong Kong names were off -0.069% with real estate outperforming +0.62%, Tencent pulled communication +0.19% as investors bought materials +0.16% and healthcare +0.13% pre-earnings. China Mengniu Dairy crushed staples -1.85%, tech -0.49%, utilities -0.45%, industrials -0.36%, discretionary -0.27% and energy -0.12%. Southbound Connect was moderate/light with mixed trading. Volume leader CCB was sold 5 to 3, Tencent was flat, and Meituan Dianping was bought very heavily.

A-Share Update

The Shanghai and Shenzhen were off -0.43% and -0.87% on light volume -6% day over day and below the 1-year average. Both indices are hitting resistance levels at 3k for the SH and 1650 for the SZ. Breadth was poor with 861 advancers and 2,750 decliners as large caps outperformed/fell less than mid and small caps by ~50 basis points. The 466 mainland stocks within the MSCI China All Shares Index lost -0.58% with all sectors in the red. The staples sector was off -1.23%, tech -1.22% communication -1.11%, real estate -0.93%, energy -0.72%, -0.51%, discretionary -0.39%, industrials -0.34%, materials -0.3% financials -0.17% and utilities -0.12%. Uncle! Foreign investors were active via the Northbound Connect trading platform. Volumes were moderate as Shenzhen Connect volumes exceeded Shanghai Connect volumes though foreign buyers were more active in Shanghai than Shenzhen, once again bucking the trend. Foreign investors bought a total of $113 million of mainland stocks today.

Ctrip.com is now officially Trip.com with the ticker changing from CTRP to TCOM.

Baidu & IQ will report earnings after today’s US close.

Autohome Inc (ATHM), an online Chinese auto dealer, plunged -13.49% after announcing revenue growth of 14.9% to $303 million (RMB 2.170B) though the Q4 revenue forecast missed analyst expectations. It has been a difficult environment for auto companies globally though I believe a bottom may have been reached in China.

Last Night’s Prices & Yields

• RMB/USD 6.99 versus 6.99 Yesterday
• RMB/EUR 7.76 versus 7.76 Yesterday
• 1-Day Government Bond Yield 1.71% versus 1.71% Yesterday
• 10-Year Government Bond Yield 3.26% versus 3.25% Yesterday
• 10-Year China Development Bank Bond Yield 3.67% versus 3.69% Yesterday
• Commodities on the Shanghai & Dalian exchanges were mixed with Dr. Copper off +0.45%.