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Baidu Is Not Delisting, But Likely To Do a Secondary Hong Kong Listing. China Investors Should Welcome Scrutiny.

Key News

Asian equities were mixed as Hong Kong and mainland China gave up small gains following a series of anti-China Tweets by President Trump around 9:30pm EST. Unfortunately, the cycle of raised political rhetoric usually comes when US equity markets are performing well. Tech was weak on the news in both Hong Kong and Mainland China on the increasing political rhetoric aimed at cutting off Huawei from its US suppliers. Though Hong Kong health care was weak, Mainland investors bid up health care stocks in advance of the Two Sessions policy meetings. New policies aimed toward raising the standard of medical care will likely be released. Fusan’s CEO had mentioned that he believed a vaccine would be developed in China. Personally, I don’t care where it comes from.

We released a note last night on the US Senate bill that was passed. There have been many rumors that Senators didn’t believe the bill would pass when proposed yesterday, but, because no one objected, it passed. The bill will likely be taken up by the House and passed next week. It will take at least one year for the details to be worked out. After that, US-listed Chinese companies have three years to have their audited financial statements reviewed by auditors from the PCAOB. This is despite the fact that 90% of US-listed Chinese companies currently have their audit work done by the US Big Four accounting firms. 

As China investors, we know that there is real value in the market. Regulatory cooperation between the US and China to weed out the bad apples, which has been lingering for the past decade, is in every investor’s best interest. The gains in these stocks from US investors far overshadow bad apples such as Luckin Coffee. Non-state-owned Chinese companies listed in the US with nothing to hide, of which there are a great many, should welcome scrutiny as well to the benefit of their valuations.

The ultimate irony is that the US auditor uncovered Luckin Coffee’s fraud! There will be considerable effort after the law passes for details to be worked out to allow the stocks to remain. Why? Because US investors own $1 trillion worth of Chinese shares listed here so the idea that this punishes China is misguided. Does hurting US savers make any sense to you?

There is time for the regulators in the US and China to work on this issue. Regardless, companies may be prone to follow Alibaba and pursue secondary listings in Hong Kong as an insurance policy. We know, NetEase and TCOM are rumored to be working on it. Overnight Baidu CEO Robin Li said, “there are many choices of destinations for listing” and that Hong Kong is an option because the US listing doesn’t properly value the company.

However, headlines on delisting in the US are patently false. The irony is that a massive ecosystem of US exchanges, investment bankers, accountants, and lawyers have benefited from the US listings, and they will fight to keep them here. The Hong Kong Exchanges (388 HK) was up +1.98% today on expectations of secondary listings. Ultimately, because the US-listed stocks trade on trade headlines and not fundamentals, they may increasingly consider going to Hong Kong where they can be appropriately valued. Finally, secondary listings in a market that places a more attractive value on a stock could be beneficial to investors. As an institutional investor, we’ll benefit from that, but not everyone can follow them there. 

H-Share Update

The Hang Seng opened higher but slid in the second half of the trading day to close -0.49%/-119 index points at 24,280. Volumes jumped 22% from yesterday while breadth was poor with 6 advancers and 38 decliners. Tencent was off -1.5%/-43 index points while today’s best performer China Mobile +3.22%/+34 index points and Hong Kong Exchanges +1.96%/+19 index points. Shenzhou International (2313 HK) was the day’s worst performer -3.75%/-8 index points. China-domiciled companies were off -0.48% while Hong Kong-domiciled companies were off -0.7% using the HS China Enterprise and HS HK 35 indexes as proxies. The Chinese companies within the MSCI China All Shares Index were off -0.91%: Real estate +0.32%, financials -0.3%, energy -0.82%, industrials -0.92%, communication -0.98%, staples -1.24%, materials -1.25%, utilities -1.25%, discretionary -1.87%, health care -2%, tech -2.25%.

Southbound Connect volumes were moderate as Mainland investors were small buyers of Hong Kong stocks today in mixed trading. It is interesting that Shangahi Connect saw net buying while Shenzhen Connect saw net selling. Volume leader Semiconductor Manufacturing was sold 4 to 3, Xiaomi was bought 5 to 3 and Meituan Dianping was bought 2 to 1. Mainland investors bought a very small amount of Hong Kong stocks today as Southbound Connect accounted for 8.5% of Hong Kong turnover.

A-Share Update

Shanghai & Shenzhen were flat until selling off into the close -0.55% and -0.95%. Volumes were off -8.5% from yesterday while breadth as mixed with 1,198 advancers and 2,2334 decliners as large, mid, and small caps were basically in line with one another. The Mainland stocks within the MSCI China All Shares were off -0.52%: health care +1.24%, staples +0.37%, energy -0.25%, real estate -0.26%, communication -0.4%, utilities -0.47%, financials -0.53%, discretionary -0.67%, materials -0.81%, industrials, -1.28%, and tech -2.14%.

Northbound Stock Connect volumes were moderate as foreign investors were net buyers of Mainland stocks. Volume leader Kweichow Moutai saw buyers outpace sellers by a small margin while Shenzhen Mindray saw buyers outpace sellers by 2 to 1. Foreign investors bought $299mm worth of Mainland stocks today as Northbound Connect trading accounted for nearly 5% of Mainland turnover.

Last Night’s Prices & Yields

  • CNY/USD 7.11 versus 7.09 yesterday
  • CNY/EUR 7.78 versus 7.80 yesterday
  • Yield on 10-Day Government Bond 0.71% versus 0.82% yesterday
  • Yield on 10-Year Government Bond 2.69% versus 2.69% yesterday
  • Yield on 10-Year China Development Bank Bond 3.00% versus 3.01% yesterday