Live From The NYSE: The Fallacy of US-China Economic Decoupling
Asian markets were largely higher with Japan, Hong Kong, Taiwan, Korea, Australia, Singapore, Malaysia and Thailand higher while mainland China, India and Indonesia were off. Mainland China was hit with a heavy dose of profit taking in favored stocks and sectors, which are often called White Stocks. The white horses, which have had a great YTD performance, were shown the glue factory by local investors though it is worth noting that foreign investors were active buyers of mainland stocks today and this week with over $800mm this week alone (details below).
What spooked local investors? Concern on trade dialogue is one while Premier Li stated that the “shock and awe” stimulus of 2009 is not coming, which isn’t shocking. One broker noted that local investors took profits in many of the MSCI China A Inclusion stocks in advance of next Tuesday’s rebalance and inclusion. President Xi’s comments on wanting to get a deal done were not reported until after the market close unfortunately. Overall policy makers voice their desire to get a deal done while “counter cyclical measures”, i.e. stimulus, continue. Overall, we shouldn’t read too much into one day’s market action.
We will be publishing a research piece that dives into the fallacy of US China economic decoupling. The idea that our labor force of 130mm can assume the responsibility and role of what a 100mm Chinese manufacturer workers produce is incompatible with reality. With the US economy at full employment today, who would fill those jobs? Moving to Vietnam is equally humorous as Vietnam’s population of 95mm is less than China’s 100mm manufacturing workers. Low end manufacturing will leave China as it has been& for years because China has grown wealth. Besides the wage advantage China has due to its enormous population, China’s infrastructure allows it to move goods via highways, railways and ports. For investors, the idea that the US and China can decouple economically should terrify you. In 2018 the China revenue of Walmart, Apple, Chevron, Intel, Micron, Qualcomm, Boeing and Qualcomm was $227 billion. Where is the S&P 500 if that number went to zero? US listed companies did nearly $600 billion in revenue in China last year. This is up from nearly zero in 2001! Today China represents 4% of US listed companies profits. Because not all of these goods are put on a boat in the US and shipped to China, they aren’t included in Trump’s definition of trade. Today’s WSJ contains an article quoting new European Central Bank chief Christine Lagarde. She stated “Ongoing trade tensions and geopolitical uncertainties are contributing to a slowdown in world trade growth which has more than halved since last year, this has in turn depressed global growth to its lowest level since the great financial crisis.” Ultimately I believe a deal will get done, otherwise those Bridgewater hedges are going to be in the money!
Meituan Dinaping (3690 HK) gained +6.69% as investors rewarded the strong results reported after the close yesterday in Hong Kong. Like Pinduoduo, Meituan exhibited very strong top line growth, but also had strong net income growth while Pinduoduo lacked the latter. While Pinduoduo’s top line results were very strong as expenses blew out leading to large losses. Market conditions have evolved as investors are no longer solely interested in hypergrowth but want net income as well. Hopefully PDD can balance funding its growth and shareholders.
The Financial Times has an article on Japan’s efforts to attract financial firms currently based in Hong Kong. If demonstrations continue in a violent way in the business district, corporations will pull out either to Singapore or, for the more ambitious, to Shanghai. Companies could be exposed to legal recourse if they don’t take action to protect their employees. Who wants their spouse or loved one exposed to potential violence? Expats love Hong Kong, but the good life can be replicated in Singapore. My concern is that once one firms goes it could spiral. I believe this is low probability, but if the violence continues it could occur. I suspect President Trump will sign the Hong Kong bill tonight so the media doesn’t report on it and everybody forgets about it by Monday.
The Hang Seng gained +0.48%/+128 index points to close at 26,595 as volume slumped -10.9% day over day. If the index breaks this level of support it could drop back to its YTD lows in the 25,500 level. Breadth was positive with 30 advancers and 15 decliners as index heavyweights Tencent +1.28%/+33.1 index points, AIA +0.78%/+20.6 and China Construction Bank +0.96%/+19.9 index points. Diaper maker Want Want had another off day -1.37%/-1.5 index points with Hong Kong subway operator MTR off -1.04%/-2.1 index points. The 204 Hong Kong stocks within the MSCI China All Shares Index +0.55% led by Tencent pulling communication +1.05%, discretionary +0.95%, energy +0.77%, real estate +0.45%, staples +0.42%, industrials +0.39%, financials +0.36%, materials +0.28% and tech +0.01%. Healthcare and utilities were the only down sectors -0.33% and -0.01%, respectively. Southbound Connect volumes were moderate/light though mainland investors were active buyers today. Volume leader CCB saw very active buying while Tencent and Ping An were sold. Southbound Connect volume is 9.2% of HK turnover month to date.
The Shanghai & Shenzhen were off -0.63% and -1.45%, respectively, as volume jumped 31.5% day over day. Today was the first day we’ve had a selloff on strong volume in the Mainland market in recent memory. Breadth was poor with 972 advancers and 2,561 decliners as small mid caps underperformed large caps by nearly -1%. The 466 stocks within the MSCI China All Shares were off -1.04% led lower by healthcare -3.17%, tech -2.51%, staples -2.38%, discretionary -0.73%, communication -0.66%, financials -0.56%, real estate -0.07%, and utilities -0.04%. Materials, energy and industrials managed to gain +0.73%, +0.37% and +0.14%, respectively. Mainland investors may have been taking profits, but foreign investors were active buyers on Stock Connect. Once again, Shenzhen volume and buying exceeded Shanghai. Foreign investors bought $134mm of Mainland stocks bringing the weekly total up to $815mm! Northbound Connect volume is 4.4% of mainland turnover month to date.
Last Night’s Prices & Yields
Bond rally continues.
- USD/CNY 7.04 versus 7.03 Yesterday
- CNY/EUR 7.77 versus 7.78 Yesterdays
- Yield on 1-Day Government Bond 1.83% versus 1.73% Yesterday
- Yield on 10-Year Government Bond 3.17% versus 3.17% Yesterday
- Yield on 10-Year China Development Bank Bond 3.55% versus 3.55% Yesterday
- Commodities were largely lower on the Shanghai & Dalian Exchanges with Dr. Copper -0.42%