Key News

Asian equities had a good day while Mainland Chinese and Hong Kong equities surged overnight. It is worth noting CNY’s strong move versus the US dollar gaining +0.68% to close at 7.02. The selloff in China’s bond market meant that the yield on the 10-Year Government Bond rose 10 basis points (+0.1%). My colleague Fernando, with a career background in fixed income, is likely picking himself off the floor having fallen off his chair because 10bps is massive for fixed income.

One driver for today’s remarkable market action was a front-page article in the widely followed China Securities Journal stating that a “bull market” is a good thing. The foundation for today’s move has been in the works for quite some time as veteran China Last Night readers know. We highlighted this mid-last week by noting the massive increase in volumes. Today’s move was on even stronger volume as Hong Kong turnover was 2.5X the 1-year average, Mainland China turnover was 3X the 1-year average, and volume on the Northbound Stock Connect, the trading venue for foreign investors to access the mainland market, was 2X the 1-year average. Hong Kong’s volume leaders were Tencent -0.86% as investors likely sold stock for the Semiconductor Manufacturing  (SMIC) IPO discussed below, Ping An +6.23%, SMIC +20%, and Alibaba HK +2.08%. Geely Auto jumped +15.82% after reporting June sales +21% in another sign of China’s auto sector troughing. Meituan Dianping -0.37% also faced profit taking for funding the SMIC IPO though JD.com HK +3.8% and NetEase +1.64%. In both Hong Kong and the Mainland, financials and real estate had very strong days as financial reforms such as the new STAR Board IPO market drove brokerages higher. The market largely expects last week’s lowering of the relending rate to to support housing prices. Tech was also strong of you take into account the cash being raised to participate in the SMIC STAR IPO.

Semiconductor Manufacturing (981 HK) will relist on the Shanghai Stock Exchange’s STAR Board tomorrow. The company is raising $6.6B, though a Mainland source stated that the total raise is likely to reach $7.5B, by selling 1.69B shares at a price of RMB 27.46. The IPO price comes at a slight discount to their Hong Kong listing, which closed though once it starts trading it is going to be insane! Insane is not a financial term, but it is the best way to describe what will happen tonight. The IPO will be the largest since the Agricultural Bank of China raised $22.1B in June of 2010. The US policy of tightening China’s access to chips has led to an unintended consequence. If Intel and Qualcomm chip supply is potentially in jeopardy, what choice does China have but to create their own supply?

US-listed online media company SINA (SINA US) announced this morning it had received a privatization proposal from an entity controlled by Chairman and CEO Charles Cao for $41 a share versus Thursday’s close of $36.67. The entity owns 12% of SINA’s shares currently, which lends credibility to the offer. Privatization would likely lift Sina spinoff Weibo (WB US) as well. SINA was one of the first ever US-listed Chinese companies. The company’s IPO occurred on April 12, 2000 after then CFO Cao found a way to list in the US despite what was a grey area at the time. Several years ago, Cao believed Sina was undervalued so he spun off Weibo and then bought several hundred million dollars worth of Sina stock. I assume he believes that US investors will continue to undervalue the stock so relisting in Hong Kong may provide a better valuation. While it would be a shame to see them leave the US market, it may make financial sense for the company to do so.

I have already been asked whether this a 2015 in the remaking. Back in 2014 and 2015, media attention and loose margin rules led to a spectacular rise in Mainland stocks only to be followed by a collapse. I doubt that 2015 is repeating itself because margin standards have been tightened considerably. China, like Asia broadly, benefitted from strong quarantines, which have allowed the economy to rebound more sharply than in the US and Europe. Furthermore, China’s household stock ownership is only 2% so a margin allocation shift from bank deposits and the bond market can have a big effect. Asset classes compete with one another, which we have often demonstrated by comparing the Mainland stock yield with the 10-Year Chinese Treasury yield. Back in March, this ratio hit 2 standard deviations meaning stocks were very cheap relative to bonds. Today, we are at the 5 and 10-year averages. This gives stocks plenty of room to run before becoming overly expensive compared to bonds.  

In sticking with my US home bias theme, one interesting research report from CLSA compared the market capitalizations of the S&P 500’s top ten holdings to those of Asian countries’ stock markets. Apple is larger than Australia, Microsoft is larger than Taiwan, Amazon is larger than South Korea, and Alphabet is larger than India. I am tipping my hat to CLSA for the intriguing comparison.

H-Share Update

The Hang Seng opened higher and kept going to close +3.81%/+966 index points at 26,339. Volumes jumped +52% from Friday, which is 2.5X the 1-year average. Breadth was strong with 47 advancers and 2 decliners led by China Construction Bank +6.19%/+132 index points, HSBC +4.94%/+119 index points and Ping An Insurance +6.23%/+96 index points. Geely Auto was today’s best performer +15.8%/+46 index points while Sino Biopharma was the day’s worst performer -4.17%/-13 index points. China-domiciled companies outperformed Hong Kong-domiciled companies +6.3% versus 2.89% using the HS China Enterprise and HK 35 indices as proxies. The Chinese companies listed in Hong Kong and within the MSCI China All Shares Index gained +3.37% with financials +6.99%, tech 7.3%, materials +5.76%, industrials +5.18%, real estate +5.13%, energy +3.91%, discretionary +2.14%, utilities +2.08%, staples +1.73%, communication +0.09%, and heath care -0.87%.

Southbound Connect volumes were 3X the 1-year average as Mainland investors bought Hong Kong stocks. Volume leader Semiconductor Manufacturing was net bought while Tencent was actually sold slightly. Yield play China Construction Bank was bought aggressively.

A-Share Update

Shanghai and Shenzhen opened higher and kept going to close +5.71% and +3.9% at 3,332 and 2,121, respectively. Volume jumped +33% from Friday to nearly 3X the 1-year average. Breadth was absurdly strong with 3,580 advancers and 222 decliners. Large caps vastly outperformed mid and small caps by more than 2%. The Mainland stocks within the MSCI China All Shares Index rose +5.86% with financials +9.88%, real estate +9.15%, energy +6.58%, tech +5.98%, industrials +5.86%, discretionary +5.85%, materials +5.68%, staples +3.73%, communication +3.72%, utilities +3.55%, and heath care +0.79%.

Northbound Connect volumes rose to more than 2X the 1-year average as foreign investors were net buyers of Mainland stocks. The day’s top buys were Ping an Insurance, Kweichow Moutai, and Gree Electric Appliances. However, liquor stock Wuliangye Yibin was sold by a very small margin. Foreign investors bought $1.9B worth of Mainland stocks today.

Last Night’s Exchange Rates & Yields

• CNY/USD 7.02 versus 7.07 Friday
• CNY/EUR 7.95 versus 7.95 Friday
• Yield on 1-Day Government Bond 1.00% versus 1.02% Friday
• Yield on 10-Year Government Bond 3.29% versus 3.18% Friday
• Yield on 10-Year China Development Bank Bond 3.15% versus 3.14% Friday