Key News

Asian equities were higher across the board except for Japan, which was celebrating National Foundation Day, and Thailand, which was down. Hong Kong was the best regional performer as index heavyweights powered the index higher. The reality that the coronavirus epidemic is losing steam is resonating with investors. Overnight, several Chinese agencies were pushing for people to head back to work. MSCI’s pro forma for the month-end rebalance will be released tomorrow. Alibaba’s earnings will be released pre-market Thursday.

The big “news” overnight was a Bloomberg article arguing that Alibaba’s Hong Kong listing (9988 HK) would not become eligible for Southbound Connect. The stock plunged -2.54% on the news though quickly rebounded to close off -0.19% as the “news” was nothing new and there were doubts as to its credibility. The article referenced “unidentified sources” who didn’t want to be named. Alibaba was added to the Hang Seng Composite while similar companies Xiaomi and Meituan Dianping were added to Southbound Connect last year. An issue could be that Alibaba’s Hong Kong shares can be converted into US shares and vice versa.

What is likely happening is just the latest battle in the age-old fight amongst stock exchanges for listings. Based on the success of Xiaomi, Meituan and now Alibaba, more companies are apt to list in Hong Kong over the Shanghai and Shenzhen Stock Exchanges. The Mainland exchanges are likely throwing their weight around with the CSRC, China’s SEC, to prevent Alibaba HK’s listing from becoming eligible for Southbound Connect.

A similar issue is playing out with MSCI’s ongoing inclusion of Chinese A Shares. MSCI has listed several issues (a lack of calendar synchronization between Hong Kong and the Mainland, the fact that Mainland stocks settle on the day of trade versus two days, and the need for MSCI China A Index futures) and these need to addressed for inclusion to continue. One year ago, the Hong Kong Stock Exchange said MSCI China A Index futures were coming. Since then? Crickets. Mainland stock exchanges and futures exchanges don’t want to see MSCI China A Index futures in Hong Kong because they offer competing index futures and/or index options. Ultimately, these changes will happen. In my opinion, the sooner the better!

While coronavirus continues to exact a tragic toll, there is hope the tide is turning. Outside of Hubei province, the total number of coronavirus cases in China declined for the 7^th day in a row. As we wrote yesterday, this is a China issue and specifically a Hubei province issue. According to Johns Hopkins, there have been 43,138 confirmed cases of which 42,667 are in China. Hubei province accounts for 31,728 of the cases in China, approximately 74% of the China total. Furthermore, 978 of the 1,098 of global deaths have occurred in Hubei province. A Mainland media source noted that 95 out of 100 deaths recently were in Hubei province. CNN reported a week ago on a report from China’s National Health Commission saying that 80% of victims were over the age of 60 and 75% suffer from a pre-existing condition.

H-Share Update

The Hang Seng opened 1% higher and closed near the day’s high of +1.26%/+342 index points at 27,583. A broker noted that this is right at the 50-day moving average. Volume picked up 3% day over day while breadth was quite strong with 42 advancers and 7 decliners. Index heavyweights carried the index higher led by Tencent +2.1%/+68.3 index points, China Construction Bank +2.39%/+50.2 index points, and AIA +1.26%/+33.8 index points. Geely Auto was the day’s best performer thanks to news of a merger/relisting with Volvo +5.69%/+13.6 index points. Meanwhile, diaper maker Hengan International was off -2.26%/-3 index points. China-domiciled companies listed in Hong Kong +1.45% while Hong Kong-domiciled companies +0.79% using the HS China Enterprises and HS HK 35 Indexes as proxies. Southbound Connect volumes were elevated, led by China Construction Bank, which saw 10 to 1 buyers, Tencent 3 to 1 buyers and ICBC 12 to 1 buyers. The Chinese stocks listed in Hong Kong within the MSCI China All Shares Index gained +1.36% led by real estate +3.04%, discretionary 2.18%, communications +1.59%, financials +1.44%, industrials +1.35%, materials +1.02%, and utilities +0.63%. Tech was off -0.3%, staples -0.08% and healthcare -0.005%. Southbound Connect accounted for nearly 9% of Hong Kong’s volume led by Mainland investors buying $548mm of Hong Kong stocks.

A-Share Update

Shanghai and Shenzhen posted modest gains of +0.39% and +0.04%, respectively, as volume slumped by 11% since yesterday. Breadth was off with 879 advancers and 2,323 decliners as mega-caps and large caps vastly outperformed mid- and especially small caps, which found themselves largely in negative territory. The Mainland stocks within the MSCI China All Shares Index gained +0.8% led higher by staples 1.68%, real estate +1.34%, tech +1.18%, energy +1.1%, financials +0.84%, discretionary +0.7%, materials +0.68%, healthcare +0.6% and utilizes +0.11%. The only sector that was down was industrials, which lost -0.05%. Northbound Connect volumes were elevated in mixed trading as Shenzhen’s volume outpaced Shanghai’s yet again. Foreign investors bought a total of $149 million of Chinese stocks today. Meanwhile, Northbound Connect accounted for 4.5% of mainland turnover.

Last Night’s Prices & Yields

• CNY/USD 6.97 versus 6.98 yesterday
• CNY/EUR 7.61 versus 7.64 yesterday
• Yield on 1-Day Government Bond 1.44% versus 1.44% yesterday
• Yield on 10-Year Government Bond 2.83% versus 2.79% yesterday
• Yield on 10-Year China Development Bank Bond 3.26% versus 3.21% yesterday
• Commodities were largely higher on the Shanghai & Dalian Exchanges with Dr. Copper +0.29%