Week in Review

• China continues to ramp up efforts to meet its obligations under the phase one trade deal despite setbacks due to the coronavirus pandemic. The USDA released export data for the week ended July 2 on Monday and highlighted that China was the largest buyer of both soybeans and corn.
• Hong Kong was fairly resilient on Wednesday considering the fact that President Trump revoked Hong Kong’s special trade status though tech fell on news of the UK’s decision to eliminate Huawei telecom gear.
• The Semiconductor Manufacturing International Corporation listed on the STAR Board, the Nasdaq of China, on Thursday. The stock gained 201% on the first day of trading.
• China's June Industrial Production came in at 4.8%, in line with estimate of 4.8%. June GDP came in 3.2%, well above the estimate of 2.4%. The June data, released on Thursday, shows that China is experiencing a V-shaped rebound following a strong quarantine.
• While we had been expecting a correction, Thursday’s market sell off was especially deep. Nonetheless, the medium and long-term prospects for the Mainland market remain strong.

Friday's Key News

Asian equities ended the week with a quiet session as both Hong Kong and Mainland China posted modest gains following Thursday's correction. Bargain hunters nibbled on the growth stocks that took the brunt of yesterday’s sell off as Northbound and Southbound Stock Connect had net buying. The Mainland financial publication that sparked yesterday’s sell off reversed course, noting that pullbacks were “normal” as the medium and long term prospects are strong.

Today’s Hong Kong volume leaders are identical as yesterday’s, though today’s was up versus yesterday’s down, with Tencent up +1.56%, Semiconductor Manufacturing +0.87%, Meituan Dianping +3.24%, Alibaba Hong Kong +2.4%, Xiaomi +2.79%, Hong Kong Exchanges +3.15% and Geely Auto +2.05%; JD.com gained +2.38% while NetEase eased -1.4%. The Hong Kong gains are noteworthy, as going into the session, news sentiment was off led by small outbreak occurring within social distancing rules. Additionally, attorney general Barr attacked Disney and Apple for making money in China.

Shanghai & Shenzhen had small gains though were off -5% and -4% for the week, respectively. Both indices managed to hold the technical levels of 3,200 and 2,100. Semiconductor Manufacturing was off -7% today, while the DnD trade was back on with liquor stocks; Kweichow Moutai and Wuliangye Yibin bounced +2.11% and +1.9% after yesterday’s rout. Healthcare had a nice bounce today while financials were lower, as brokers sold off again.

Asset classes compete with one another for investors cash. A simple way to measure the appeal of stocks versus bonds is to compare the dividend yield to the yield on a 10-year Treasury. We can then chart the two yields as ratio. How does this look for an investor in Mainland China? Stocks yield, on average, 1.88% today compared to a 10-year Chinese Government Bond’s yield of 2.95%. The ratio of 0.64 is just above the 10-year average, which means stocks are attractive relative to bonds from a yield perspective. This ratio hit a two standard deviation high (stocks appealing, during the March selloff as the bond yield fell below 2.5%). Bond yields subsequently rose to above 3% just as the pullback occurred. In the mega bull market of 2014/2015, stock yields rose to nearly two standard deviations above bond yields. This ratio is far from a perfect tool, though it does provide an indicator of extreme moves. We are far from extreme levels today. 

H-Share Update

The Hang Seng stayed in a narrow range +0.47%/+118, with index points closing at 25,089. Volumes fell -35% to just above the 1-year average, while breadth was off with 23 advancers and 24 decliners. The index was led by Tencent +1.56%/+45 index points, Hong Kong Exchanges +3.15%/+39 index points and Techtronic Industries +4.39%/16 index points. Today’s best performer was Hengan International +7.13%/+10 index points while Swire Pacific was the day’s worst -1.83%/-1 index point. Chinese domiciled stocks were up +0.69% versus Hong Kong domiciled stocks +0.53% using the HS China Enterprise and Hong Kong 35 indexes as proxies. The Chinese companies listed in Hong Kong within the MSCI China All Shares were up +1.19% with staples +3.98%, discretionary +2.82%, health care +2.41%, industrials +1.53%, tech +1.44%, communication +1.37%, utilities +1.05%, materials +0.9%, real estate +0.21%  energy -0.19%, and financials -0.25%

Southbound Stock volumes returned to normal levels as Mainland investors bought Hong Kong stocks. Volume leader Semiconductor Manufacturing was still sold slightly while Tencent was bought 2 to 1. Xiaomi bought 2 to 1 and Meituan bought slightly. Foreign investors bought $240mm of Hong Kong stocks today as Southbound Connect turnover accounted for 9% of Hong Kong trading. 

A-Share Update

Shanghai & Shenzhen bounced around the room +0.13% an +0.69%, closing at 3,214 and 2,158 respectively. Turnover was +3%, which is 50% higher than the 1 year average. Breadth was off slightly with 1,661 advancers and 2,044 decliners. Large, mid and small caps were up uniformly. The Mainland stocks within the MSCI China All Shares were all up +0.68% with discretionary +2.53%, staples +2.16%, materials +2.13%, health care +1.59%, industrials +0.59%,  communication +0.57%, utilities +0.33%, tech +0.16%, energy -0.41%, real estate -0.66%, and financials -1.04%.

Northbound Stock Connect volumes were still elevated, but with foreign investors as buyers. Shanghai volume leader Kweichow Moutai was sold 1.1 to 1, while Ping an was bought 13 to 9. Shenzhen Connect volume leader Wuliangye Yibin was sold very slightly as well 1.6 to 1.5, while CATL was sold slightly as well. Foreign investors bought $149mm of Mainland stocks today as Northbound Connect trading account for 5% of Mainland turnover. For the week, foreign investors sold -$2.725B.

Last Night’s Exchange Rates & Yields

• CNY/USD 7.00 versus 7.00 yesterday
• CNY/EUR 7.99 versus 7.99 yesterday
• Yield on 1-Day Government Bond 1.57% versus 1.59% yesterday
• Yield on 10-Year Government Bond 2.95% versus 2.95% yesterday
• Yield on 10-Year China Development Bank Bond 3.45% versus 3.46% yesterday