Key News

Greetings from the bullet train as I am traveling at 189 mph from Shanghai to Beijing. Asian equities were broadly higher. However, Hong Kong and Mainland China were off today despite several positive developments. After the US close it was reported that China would be removed from the Treasury’s list of currency manipulators. I believe interest rates and economic conditions drive the majority of FX moves. The trade war hurts China’s economy and leads to the currency weakening. Trade war goes away and China’s economy picks up, the currency appreciates. Economics 101.

Reports confirmed that Chinese trade envoy Liu He has left China for Washington DC’s Phase One signing. At 10am China’s December trade data released, which, as discussed, was stronger than expected. Several brokers noted that a strong economy may mean less stimulus though such thinking seems premature. Tencent had a tough day following yesterday’s news that Alibaba HK (9988 HK), Xiaomi and Mietuan Dianping could be added to the Hang Seng index. In order to procure a long position in those names, one needs funding. Brokers speculated that funding for many traders came from selling Tencent. Last but not least, the Hang Seng approached 29,000 which may have triggered some selling/profit taking following the nice upswing starting in December. Ultimately, we experienced some profit taking, which is a good thing for a healthy market.

Day Two of the UBS conference was great! I very much enjoyed hearing from UBS’ research across economics, sectors and strategy. I couldn’t help but notice the recurring theme of China economic decoupling in several sessions. The consensus view is that the trade war may end or stall but the tech war is here to stay.

Graham Allison, who wrote a great book on Singapore leader Lee Kwan Yew, which I highly recommend, wrote a book more recently on Thucydides’ Trap. The idea is that a rising power and a great power are destined to go to war. I’ve not read the book, but the basic idea is that Sparta and Athens, Rome and Carthage, etc. inevitably went to war. I most respectfully disagree. It is 2020! Mobile phones, land lines, texts, instant messaging and airplanes make communication feasible today that didn’t exist 2,000 years ago or even 50 years ago. Got a problem? Pick up the phone or get on a plane and work it out. Second, I believe there is a generational issue occurring. Being in my 40s, I grew up with the Soviet Union as a threat to the US. Is China filling a role that we’ve always felt? I think for many in my age bracket that might be the case. Younger generations have adopted technology in such a way I don’t believe they hold the same preconceived notions that old folks such as myself might. Watching my kids and their cousins play with TikTok over the holiday reaffirms that we are now in a different world than the one I grew up in. Do they care it is owned by a Chinese company? No because it is cool and fun (their terms, not mine). I am optimistic that the US and China can come out of the trade war with a better relationship.

Bloomberg had an interesting note on China ETFs losing $10B outflows in 2019. According to HSBC, the culprit is the trade war. The article fails to mention that Chinese equities were one of the top performing markets last year, provided that you chose wisely! If your definition of China was Hong Kong stocks you had an okay year, but underperformed both EM and US equities. On the other hand, if your definition of China was Mainland stocks you beat both the S&P 500 and EM. The same can be said for US-listed Chinese companies.

December Trade Data Stronger Than Expected

CNY Year over Year (YoY)

Exports	9% versus estimate 2.9% and November’s 1.3%
Imports	17.7% versus estimate 8.6% and November’s 2.5%
Trade Balance	329B versus estimate 317B and November’s 274B

$ Year over Year (YoY)

Exports	7.6% versus estimate 2.9% and November’s -1.3%
Imports	16.3% versus estimate 9.6% and November’s 0.3%
Trade Balance	$46B versus estimate $45B and November’s $38B

Takeaway: An underappreciated consequence of the trade war has been its effect on purchases from both the US and China. If Boeing airplanes are taxed by China as retaliation for US tariffs, it doesn’t negate the necessity of Chinese airlines needing more commercial airplanes. Where are they going to go? Airbus of, course.

The same is true from a US perspective as US auto manufacturers will buy parts from Mexico if tariffs on Chinese auto parts make them too expensive. Trade still occurs but with different partners. In 2019, China’s trade with the US fell 11% while its trade with Europe and Asian countries increased, according to Bloomberg. As a result, the US is now China’s third largest trade partner. The December data is a nice rebound even as seasonal factors, i.e. holiday purchases, play a role as well. We could see a nice rebound as Phase 1 leads to Phase 2. More importantly, the uptick in China trade data is a very positive sign for the global economy. As the middle man in global trade, China’s trade data provides a “tell” much like in poker. Today was definitely an indicator of a potential uptick as we head into 2020.

H-Share Update

The Hang Seng gave up early gains to close -0.24%/-69 index points to close at 28,885. Breadth was balanced with 24 advancers and 25 decliners as volume picked up 6% to a level nearly a 1/3 higher than the 1-year average. Tencent was off -1.48%/-47.1 index points while AIA +0.75%/+21.8 and China Construction Bank off -0.74%/-16.2 index points. Macau casino operator Sands China was the day’s outperformer +3.14%/+11.9 as early January data looks promising for the space while Apple suppliers AAC Tech and Sunny Optical were the day’s worst performers off -4.44%/-5.7 index points and -2.33%/-7.1 index points.

Hong Kong-domiciled companies outperformed for the first time in recent/medium term memory +0.31% while China-domiciled companies underperformed off -0.36% using the HS HK 35 and HS China Enterprise Indexes as benchmarks. The Hong Kong-listed Chinese stocks within the MSCI China All Shares Index were off -0.5% as materials gained +1.22%, utilities +0.67%, discretionary +0.29% and industrials +0.02%. Tech was off -1.65%, energy -1.23%, communication -1.03%, financials -0.47%, staples -0.23%, healthcare -0.15% and real estate -0.08%. Southbound Connect volumes were elevated in mixed trading for the first time in recent memory as Mainland investors’ appetite for Hong Kong stocks waned. Volume leader Tencent saw 2 to 1 buying to selling while CCB had 4 to 1 buying to selling and Anta Sports 3 to 1 buying to selling. The day’s big loser was AAC Tech which 15 to 1 sellers to buyers.

I saw a report that Yum China is now looking at a Hong Kong listing.

A-Share Update

The Shanghai & Shenzhen traded in a narrow range but slipped into the close to end -0.28% and -0.23%. Breadth was off with 1,489 advancers and 2,064 decliners as volume picked up 4.6% day over day and well above the 1-year average. Large, mid and small caps were off by approximately the same amount. The Mainland stocks within the MSCI China All Shares Index were off -0.24% as communications managed a +1.34%, materials +1.21%, utilities +0.52% and energy +0.02%. Staples were off 1%, healthcare -0.72%, tech -0.57%, financials -0.35%, real estate -0.28%, discretionary -0.22% and industrials -0.09%. Foreign investors were active via Northbound Connect in what is becoming the new normal. Shenzhen Connect volumes exceeded Shanghai’s as we’ve seen in the last few months though Shanghai saw slightly more buying than Shenzhen. Foreign investors bought $497mm of Mainland stocks today.

Bloomberg had an interesting note on China ETFs losing $10B outflows in 2019. According to HSBC, the culprit is the trade war. The article fails to mention that Chinese equities were one of the top performing markets last year, provided that you chose wisely! If your definition of China were Hong Kong stocks you had an okay year, but underperformed both EM and US equities. If your definition of China was Mainland stocks, on the other hand, you beat both the S&P 500 and EM. The same can be said for US-listed Chinese companies.

China Literature cratered -8.9% following yesterday’s news of US PE firm Caryle selling shares via a 40.1mm block trade toady.

Last Night’s Prices & Yields

• USD/CNY 6.88 versus 6.89 yesterday
• CNY/EUR 7.65 versus 7.67 yesterday
• Yield on 1-Day Government Bond 1.80% versus 1.64% yesterday
• Yield on 10-Year Government Bond 3.10% versus 3.18% yesterday
• Yield on 10-Year China Development Bank Bond 3.53% versus 3.53% yesterday
• Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper +0.53%