Why Mainland Investors Are Buying Stocks
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Japan was closed due to a market holiday celebrating the emperor’s birthday. Korea was crushed by nearly 4% as coronavirus cases increased while Australia, India, Malaysia and Singapore were off more than 2%. Indonesia and Hong Kong were off by more than 1%. Mainland China outperformed the region as the number of coronavirus cases appears to have plateaued while the policy bazooka is being loaded.
Why are Mainland investors buying stocks in Shanghai, Shenzhen and Hong Kong? Coronavirus cases in China have plateaued. Meanwhile, China is going back to work in a significant way. Add fiscal and monetary policy support to the mix and the market seems an attractive buy to many. However, the IMF lowered China’s 2020 GDP to 5.4% due to Q1 weakness aligned with the foreign consensus view. Nonetheless, Chinese investors believe that Q2, Q3 and Q4 will make up for weakness in Q1. How do they know? President Xi said it would. Policymakers are aligning in order to make it happen.
79,524 cases of which 77,150 are in Mainland China, of which 64,287 are in Hubei Province. Of the 2,626 deaths, 2,495 are in China. Have you noticed there are no doctors ever interviewed on TV or quoted in news articles? Coronavirus is disproportionately affecting the elderly and those with pre-existing health conditions. I believe that China’s high smoking rate is a contributing factor as well. The vast majority of provinces reported no new cases as it appears that cases may have plateaued in China. The increase outside of China surprised many though air traffic within Asia hasn’t been curtailed like it has been here for US-China flights.
Hubei is still in lockdown mode. As a large supplier of fish/shrimp/crab, auto parts, textiles, and cement, the quarantine of the province will affect certain supply chains though its relative economic importance is low. Hubei accounts for 5.5% of China’s agriculture, 4.8% of industrial/manufacturing and 4.3% of the service sector.
High frequency data is showing that coal, property sales and steel are ticking-up off a very low base extended from Chinese New Year’s. Transportation has been slow though road travel is just starting to tick up.
Fiscal & Monetary Policies: The policy bazooka!
Monetary: The PBOC lowered both the Loan Prime Rate and Medium Loan Facility, providing ample liquidity to the banking system.
Fiscal: The Ministry of Finance lowered medical insurance payments, tax cuts, cancelled road tolls, and cut social security contributions for companies.
Stimulus: Infrastructure projects were reiterated by Ministry of Transportation. Total Social Financing (i.e. loans) increased in January due to corporate and gov’t bond issuance, Auto manufacturing push due to downstream beneficiaries (i.e. inputs, parts, etc.), cuts to electricity/natural gas taxes, and support for property developers.
Negatives: PMIs to be released Friday and are unlikely to paint a pretty picture.
The Hang Seng opened down in what turned out to be the high of the day as it grinded from upper left to lower right throughout the trading day. The index fell -1.79%/-487 index points to close at 26,820 as volume surged +23% from Friday with only 2 advancers and 47 decliners. Index heavyweights led the index lower as 11 stocks dropped more than -10 index points led by Tencent -2.64%/-82.2 index points, AIA Group -2.21%/-57.1 index points, and Ping An Insurance -2.58%/-38 index points. Utility company Power Assets gained +1.68% while PetroChina was the worst performer off -4.73%/-9.7 index points. Macau’s Galaxy Entertainment -3.75%/-13.2 index points after comments from a casino executive that it will take a long time for business to return to normal. Hong Kong domiciled companies “outperformed” Chinese domiciled companies -1.34% versus -2.16% using the HS China Enterprises and HS HK 35 indices as proxies. The Chinese companies listed in Hong Kong within the MSCI China All Shares Index lost -2.16%. Energy was clobbered -3.31%, discretionary -2.68%, industrials -2.29%, health care -2.28%, financials -2.23%, real estate -1.91%, materials -1.75%, utilities -1.59%, staples -1.56% and tech -0.85% (Uncle! No mas!). Southbound Connect volumes were elevated as Mainland investors continue to buy the dip in Hong Kong stocks with China Construction Bank seeing 20 to 1 buying (not a typo), Tencent seeing buyers just edging out sellers and Xiaomi experiencing 5 to 3 selling. Mainland investors bought $213mm of Chinese companies listed in HK while Southbound Connect accounted for nearly 9% of HK turnover.
The Shanghai & Shenzhen had a choppy morning followed by an afternoon rally closing -0.28% and +1.36%. Shanghai closed above the 3k level at 3,031. Volume increased nearly 5% from Friday while breadth was positive with 2,104 advancers and 1,576 decliners. Large caps were off nearly -1% while mid and small caps gained 1%. Sector dispersion was the driver of market cap divergence. The mainland stocks within the MSCI China All Shares were off -0.03% as tech gained +4.44%, communication +1.68% and healthcare +0.49% while real estate -1.68%, energy -1.45%, staples -1.39%, industrials -1.26%, financials -1%, utilities -0.94%, discretionary -0.67%, and materials -0.37%. Northbound Connect volumes were elevated as foreign investors were sellers of mainland stocks today. Foreign investors sold $1.237 billion of mainland stocks. Foreign trading via Northbound Connect accounted for nearly 4% of mainland turnover.
Last Night’s Prices & Yields
- CNY/USD 7.04 versus 7.03 Friday
- CNY/EUR 7.63 versus 7.63 Friday
- Yield on 1-Day Government Bond 1.22% versus 1.23% Friday
- Yield on 10-Year Government Bond 2.85% versus 2.81% Friday
- Yield on 10-Year China Development Bank Bond 3.24% versus 3.27% Friday