Key News

Talk about a 180! Yesterday’s doom & gloom reversed into a choir of singing angels as investors cheered reports that the US and China trade talks are ongoing. This was confirmed by the Ministry of Commerce spokesperson Gao Feng who confirmed the rumors, which were leaked after most of Asia had closed yesterday, were indeed true. He did reiterate that China wants to see current tariffs rolled back, though the good news lifted markets other than Korea and India.

Every sector in both Mainland China and HK was up which is a rarity. Mainland investors also cheered news that Southbound Connect’s capital gains waiver would be extended through 2022. HK investors also had the new stimulus released yesterday to put them in good spirits. Tech stocks had a strong day on the positive news though Germany stated that they would allow Huawei in their telecommunications network if certain conditions are met. Huawei also announced it is suing the FCC for banning their equipment. It would be great to know what Huawei does that scares the US politicians so much. Aren’t you curious? I am. Regardless Huawei should still spin-off its mobile phone unit which is incredibly popular outside of the US.

There is a little broker chatter that maybe HK is a buy having lagged Mainland and US-listed Chinese companies significantly. I don’t think HK is going out of business due to protests, though HK’s sector weight is heavily geared to low/no growth sectors (financials, energy, industrials, materials and utilities).

Last week foreign investors bought $4.534 billion of Mainland stocks driven by MSCI’s Semi Annual Index Review last Tuesday, which accounted for $3.047 billion of the week’s inflow. This week is on track to be another MASSIVE inflow week, as week to date foreign investors have purchased $2.296 billion of Mainland stocks. I am a bit surprised at this myself. In speaking with a trading counter party they believe alternative asset managers, i.e. hedge funds, are going into China with their quant strategies. We have no way of knowing, of course, as many firms only disclose their holdings semi-annually or quarterly. It could also be a year-end window dressing as Mainland China is one of the best performing markets year-to-date.

H-Share Update

The Hang Seng gained +0.59%/+154 index points to close at 26, 217 though volumes were off -6.85% day over day and well off the 1-year average. It would have been nice to see today’s rebound on higher volume as the rally lacked conviction. Breadth was very strong with 45 advancers and 3 decliners as Apple supplier Sunny Optical ripped +5.3%/+15 index points on the positive trade comments, Ping An +0.73%/+11.1 index points and Tencent +0.43%/+10.9 index points. Fellow Apple supplier AAC Tech was the day’s strongest gainer, +6.76%/+7.77 index points. The HK Exchange was the day’s worst performer, only off -0.41%/-3.62 with energy company China Shenhua Energy -0.4%/-0.62 index points and AIA -0.13%/-3.41 index points. The 207 HK stocks within the MSCI China All Shares gained +0.82% led by tech’s strong rebound +3.03%, health care +1.84%, discretionary +1.55%, staples +1.32%, industrials +0.88%, materials +0.82%, energy +0.77%, financials +0.76%, communication +0.39% and real estate +0.08%. Remember that HKeX and AIA are not Chinese domiciled therefore are not included in China indices. Alibaba HK (9988) gained +1.8% but it isn’t part of any index as of yet, though two side sell analysts initiated coverage. Southbound Connect volume was moderate with buyers outpacing sellers though volume leader CCB had another outsized buying frenzy of over 20 to 1. I’ve asked one of my favorite trading/research contacts about CCB (939 HK). It could be just as simple that the P/E of 5.33 is actually less than the dividend yield of 5.6%. Tencent had a strong day of 3 to 1 buying and Semiconductor Manufacturing had 2 to 1 buying. Southbound Connect accounted for 7% of HK turnover today.

A-Share Update

The Shanghai & Shenzhen gained +0.74% and +1.15% as volume gained +19.6% day over day, though this is below the 1-year average. A nice pick up in Mainland volume as SH almost punched above the 2,900 level while the SZ bounce off of 1,600 support level continues. Breadth was very strong with 2,990 advancers and only 568 decliners as small caps gained nearly ~2%, mid-caps ~1.5% and large caps a little less than 1%. The 501 Mainland stocks in the MSCI China All Shares index gained +1.24% led higher by tech +2.48%, healthcare +1.58%, industrials +1.42%, financials +1.31%, communication +1.09%, materials +0.93%, discretionary +0.83%, staples +0.73%, energy +0.65%, real estate +0.35% and utilities +0.32%. Northbound Connect volumes were moderate/lighter but foreign investors were very active buyers. The reoccurring theme of Shenzhen Connect volume and buying activity outpacing Shanghai was in play once again. Both SH and SZ had strong buying days as investors bought $861mm of Mainland stocks today! Wow! Week to date foreign investors have purchased $2.296 billion of Mainland stocks. That is on top of last week’s MSCI rebalance inflow of a record $3.047 billion on the rebalance trade date for a weekly record of $4.534 billion. Northbound Connect accounted for 4% of Mainland turnover today.

FTSE announced the FTSE China 50 index will rebalance on December 20^th. The index is dropping auto makers BYD and Guangzhou Auto for medical product provider Wuxi AppTec and nuclear power company CGN Power. Time will tell how the change will play out.

Last Night’s Prices & Yields

• USD/CNY 7.0404 versus 7.0525 Wednesday
• CNY/EUR 7.8108 versus 7.818 Wednesday
• Yield on 1-Day Government Bond 1.60% versus 1.66% Wednesday
• Yield on 10-Year Government Bond 3.16% versus 3.20% Wednesday
• Yield on 10-Year China Development Bank Bond 3.57% versus 3.58% Wednesday
• Commodities were mixed/higher on the Shanghai & Dalian Exchanges with Dr. Copper +0.38% .