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NY Fed Estimates Trade War Cost Investors $1.7 Trillion

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Asian equities had another good day as stocks climb the wall of US-China political rhetoric worry as the Philippines had another outsize gain. I need to reach out to Brian, my main man in Manila, to find out what’s going on. It is also worth noting that China’s currency, the renminbi, has been remarkably stable over the last month.

Hong Kong posted a modest gain as growth stocks had a good day with Tencent +0.55%, Meituan Dianping +5.73%, and Alibaba HK +0.67%. Premier Li’s comment that E-Commerce companies will assist small businesses likely helped on sentiment. Macau stocks ripped on chatter that Mainland restrictions on visiting could be lifted while a broker noted that positive indications from Las Vegas likely helped as well. Meanwhile, HSBC rose +1.83% after endorsing the new security law.

 The US equity market ignored restrictions on flights to China. However, China did loosen inbound flights restrictions overnight in a sign of goodwill. Their restriction by no means targeted the US as they limited all inbound flights. I am not sure that demand to visit China will snap back quickly considering there is currently a 14-day quarantine requirement for inbound visitors.

Mainland equities had a choppy trading day. Mainland tech stocks were weak as the US new restricted entity list was expanded. I noticed Qihoo360, which had been publicly traded in the US before going private, was placed on the list. The US-listed Qihoo360 was a maker of mobile anti-privacy software, but I am not sure what they are up to today.

I stumbled across a piece from the NY Fed’s Liberty Street Economics titled “The Investment Cost of the U.S.-China Trade War”. The blog post highlights an issue that we have previously written on: the US’ trade position that defines exports as solely goods manufactured in the US and put on a boat to China. By this definition, we run a large trade deficit as China imported $130B of shipped physical goods versus the US’ receiving $570B of Chinese physical good imports. What the tally leaves out is the $376B of US goods manufactured and sold in China by US multinationals. If one adds the $130B of boat goods to the $376B of US-sold goods, suddenly the US’ trade deficit shrinks dramatically. 46% of the 3,000 largest US-listed stocks have exposure to China in terms of sales, imports or exports for an average of 2.3% of their revenues. During the 7 days of US-China trade war escalation in 2018 and 2019, the US stock market lost a total of 8.87%. The study then looks at the profit and investment consequence on companies. In total, the NY Fed calculates that US stocks lost $1.7 trillion in market cap. Meanwhile, US companies that are in sectors protected by tariffs found no “beneficial effect”. The report makes for a worthwhile read!

GM announced a $20B investment in their China auto business as the company ramps up their EV efforts through a partnership with CATL, the world’s largest battery maker. GM’s Q1 earnings show that its China joint ventures with SAIC sold 462,000 cars for the quarter versus 618,000 in the US. As the previous bullet points note, these sales weren’t included in US trade figures despite the revenue flowing to Detroit. The same goes for Apple’s sales in China as well as Walmart, Costco, McDonalds etc. The Apple iPhones sent to the US are considered a Chinese export despite the revenues flowing to Cupertino, which makes no sense.

FTSE will be adding both Alibaba HK and Alibaba Healthcare to the FTSE China 50 Index on June 19th. The move will require passive managers that track the index to trade these stocks at the close on June 18th. However, it won’t generate anywhere close to the flows generated by MSCI’s Semi-Annual Index Review last Friday. Nonetheless, I believe it puts further pressure on Hang Seng Indices to add the stock and ultimately influences whether they will be included in Southbound Connect.

H-Share Update

The Hang Seng opened higher but slipped into choppy trading to close +0.17%/+40 index points at 24,366. Volumes were off -10% from yesterday though remained above the 1-year average while breadth was off with 21 advancers and 26 decliners. HSBC gained +1.83%/+35 index points, energy giant CNOOC -4.19%/-20 index points, and Tencent +0.55%/+16 index points. Macau casino Sands China rose +4.87%/+13 index points while China Shenhua Energy -10.6%/-14 index points. Hong Kong-domiciled stocks rose +0.4% compared to China-domiciled stocks, which were unchanged, using the HS HK 35 and China Enterprise indices as proxies. The Chinese companies listed in Hong Kong gained +0.54% with discretionary +3.22%, staples +1.7%, health care +0.39%, communication +0.36%, financials +0.12%, real estate +0.1%, materials +0.09%, industrials +0.03%, energy, -0.29%, and tech -0.42%.

Southbound Connect volumes were light in mixed trading. Tencent and Meituan Dianping were sold slightly while Shenzhou International was sold heavily. Mainland investors bought $82mm worth of Hong Kong stocks today as Southbound Connect turnover accounted for just over 6% of Hong Kong trading.

A-Share Update

Shanghai & Shenzhen bounced around the room in choppy trading to close -0.14% and +0.28%, respectively, on volume that fell -16% from yesterday. While still above the 1-year average, breadth came in at a nearly a tie with 1,872 advancers and 1,749 decliners. Mid and small caps outperformed large caps by ~1%. The Mainland stocks within the MSCI China All Shares Index fell -0.11% with staples +0.8%, healthcare +0.67%, discretionary +0.25%, materials -0.02%, communication -0.2%, industrials -0.28%, financials -0.42%, real estate -0.55%, tech –0.73%, energy -1.25%, and utilities -1.44%.

Northbound Connect volumes were mixed. Shanghai (large cap) volumes were light while Shenzhen (mid and small cap) volumes were moderate. Both saw net buying as Shanghai volume leader Kweichow Moutai was bought by 2 to 1, Ping An was bought by a small amount and Jiangsu Hengrui Medicine was bought slightly. In Shenzhen, Gree Electric Appliances was sold by 5 to 4, BOE Tech was bought by 3 to 2 and Wuliangye Yibin was sold 2 to 1. Foreign investors bought a net $405mm worth of Mainland stocks today as Northbound Connect trading accounted for 5% of Mainland turnover.

Last Night’s Exchange Rates & Yields

  • CNY/USD 7.12 versus 7.12 yesterday
  • CNY/EUR 8.02 versus 7.99 yesterday
  • Yield on 1-Day Government Bond 1.08% versus 1.02% yesterday
  • Yield on 10-Year Government Bond 2.83% versus 2.79% yesterday
  • Yield on 10-Year China Development Bank Bond 3.14% versus 3.09% yesterday