Key News

Asian equities had a strong start to the week led by Hong Kong’s outperformance, which came despite a rise in tensions on the street, while Mainland China, Japan, Taiwan, Singapore, Malaysia and Thailand all saw gains. However, Korea, India, Indonesia and Australia were down on the day. Positive catalysts began over the weekend with Reuters reporting that the US would extend Huawei’s reprieve on buying tech from US companies, which was set to expire tomorrow. We then had the Ministry of Commerce report that Vice Premier Liu He had spoken with USTR Robert Lighthizer and Treasury Secretary Steven Mnuchin in “constructive” talks over the weekend.

Alibaba’s impending Hong Kong IPO next week garnered a fair amount of positive press. We also heard that Tencent is in discussions to buy a 10% stake in Universal Music Group, which could be raised to 20% with the help of prestigious investors such as Hillhouse Capital and Singapore’s sovereign wealth fund GIC.

Premier Li’s not-so-subtle hints that China would pursue “counter cyclical measures” came to fruition as the PBOC injected $26B into the banking system and cut the reverse repo rate by 5bps to 2.5%. The latter is key as the market believes it will lead to a cut Wednesday on the Loan Prime Rate (LPR).

US markets are off a bit on CNBC reports that US-China trade talks are stalling. CNBC Beijing is not a source for Chinese policy makers as no one with any real decision making would ever use a foreign media source to leak information. However, CNBC is definitely a source for the Trump administration as ex-colleague Larry Kudlow uses the network to leak info.

The Hong Kong Exchange reported that STAR Board companies will be added to Shenzhen Connect in December for “institutional professional investors”. I will be in touch with the Exchange today/tonight to get more details. MSCI had mentioned that if STAR Board names were to be added to Connect the stocks could be added to MSCI indices. The CSRC announced that Chinese companies could expand their Hong Kong market caps by listing shares not previously issued. One broker noted that this could raise Hong Kong’s market cap by 5%, further raising China’s weight in MSCI indices. Conversely, I suppose the listing of new shares might represent increased supply and weigh on prices. I need to do more work on this development as well!

H-Share Update

The Hang Seng gained +1.35%/+354 index points to close at 26,681 as volumes surged 13.5% from Friday though off from the 1-year average. Breadth was strong with 44 advancers and 4 decliners as Tencent gained +3.13%/+80.4 index points, AIA +1.95%/+52.1 index points and China Construction Bank +1.61%/+33.4 index points. Geely Auto was the best performer +4.47%/+11.4 index points with Apple supplier AAC Tech on its heels  +4%/+4.3 index points. China Mengniu Dairy was the worst performer -1.35%/-3.3 index points while pork giant WH Group was off -1.29%/-2.91 index points. The Hong Kong stocks within the MSCI China All Shares +1.37% led by Tencent driving communication +2.56%, real estate +1.72%, discretionary +1.45%, industrials +1.22%, financials +1.19% and materials -0.81%. Healthcare and staples eased -0.48% and -0.41%. CSPC Pharma was off -1.2% after reporting strong earnings on profit taking. Southbound Connect volume was moderate/light though buyers were active with volume leaders CCB 2 to 1 buy, Tencent 3 to 1 buy and Kingsoft seeing slight buying activity. Southbound Connect volumes are 8.9% of Hong Kong volume month to date.

A-Share Update

The Shanghai & Shenzhen gained +0.62% and +0.72%, respectively, though it is interesting that volume fell -10% from Friday. Breadth was strong with 2,562 advancers and 975 decliners as large caps slightly outpaced mid and small caps. The Mainland stocks within the MSCI China All Shares Index gained +0.69% with all sectors in the green and led higher by energy +1.36%, financials +1.14%, communications +0.86%, materials +0.84%, industrials +0.75%, real state +0.7%, utilities +0.6%, healthcare +0.5%, discretionary +0.34%, staples +0.26% and tech +0.21%. Northbound Connect volumes were moderate/light and foreign investors were active buyers of mainland stocks. Once again, Shenzhen Connect volumes and buying were greater than on the Shanghai Connect as foreign investors’ preference for mid and small caps continues. Foreign investors bought $207mm of mainland stocks today. Month-to-date, foreign investors account for 4.4% of Mainland volume.

October FDI Jump

October Foreign Direct Investment in China: 7.4% versus Sept’s 3.8%

Takeaway: Aren’t multi-nationals fleeing China for Vietnam? This consensus narrative completely misses the fact that China’s manufacturing work force is larger than Vietnam’s entire population. The WSJ had a lengthy essay on bringing manufacturing back to the US. But, that thesis is equally vulnerable to the scale objection. The labor force of the US is 130mm versus China’s labor force of 100mm in manufacturing alone! According to the WSJ, we should all quit our jobs to assemble low-end goods. No, thank you! Over the weekend it was reported that Samsung will move mobile phone production to China…

Last Night’s Prices & Yields

Yields drop slightly across the board following rate cut.

• CNY/USD 7.026 versus 7.009 Friday
• CNY/EUR 7.77 versus 7.75 Friday
• Yield on 1-Day Government Bond 1.96% versus 2.13% Friday
• Yield on 10-Year Government Bond 3.12% versus 3.24% Friday
• Yield on 10-Year China Development Bank Bond 3.57% versus 3.63% Friday
• Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper +0.06%