Week In Review

• Yum China is looking to relist in Hong Kong, reports confirmed Monday. The firm could raise over $2 billion through the listing, the latest in the parade of US-listed firms seeking to raise their valuations by listing in the financial hub.
• The August Caixin Manufacturing PMI, which was released on Tuesday, came in at 53.1 compared to an estimate of 52.5. This was a very strong release as new orders grew faster than in July, export sales picked up for the first time in 2020, output increased to the highest level since January 2011, and new orders rose from July to the highest level since January 2011.
• Walmart denied selling its Chinese stores on Wednesday after a Mainland media source reported that it was. However, Walmart did sell its China online business to JD.com in 2016. Walmart executives were quoted saying that they wanted to open up 500 more stores in China, though some may be converted to fulfillment centers post Covid-19.
• The August Caixin Services PMI came in at 54, compared to an estimate of 53.9, on Thursday. This is a good confirmation that China’s consumers are alive and well, which is great for US multinationals doing business in China today.

Key News

Asian equities followed Wall Street lower overnight though losses were light in comparison. However, it is worth noting that most Asian markets closed above their intra-day lows. An element of yesterday’s US sell off was driven by US investors buying call options on technology stocks. Market makers who sell the call options to investors have to buy the underlying stocks as a hedge. This cycle likely explains an element of US technology stocks’ outperformance though, unfortunately, the process works in reverse as well. Several institutional brokers early this week noted that the disparities between Apple and Tesla’s call options prices were exceeding their put option prices by very significant amounts, a sign that things might be reaching a breaking point. The fact that all of this occurred during the last week of summer did not help.

It is important to remember that Hong Kong stocks represent foreign investors’ traditional definition of China. The stocks and sectors foreign investors own were off the most as the US selloff caused global de-risking. The volume leaders in Hong Kong were Alibaba HK, which fell -3.59%, Xiaomi, which gained +2.51%, Tencent, which fell -3%, Meituan Dianping, which fell -0.3%, Semiconductor Manufacturing, which fell -3.86% despite rumors of new policies to support the semiconductor space, AIA, which fell -3.05%, and Wuxi Biologics, which fell -2.23%.

Today was also trade date for the inclusion of Alibaba HK, Xiaomi, and Wuxi Biologics in the widely tracked Hang Seng Index. Alibaba HK traded 78mm shares today with 29mm occurring at close. Wuxi Biologics traded 19mm shares with 12mm occurring at the close. Meanwhile, Xiaomi traded 758mm shares with 282mm occurring at the close. The power of passive was on full display as index funds, ETFs and futures market makers were obligated to buy the stocks. Favored sectors such as health care were off.

The Mainland market also came off its low as foreign investors’ favorite sectors were hit the hardest with staples and healthcare off the most. This includes our DND trade (drugs, i.e. pharmaceuticals, and drinks, i.e. alcohol stocks) such as Kweichow Moutai, which was down -1.28%. Foreign investors sold a net -$923mm worth of Mainland stocks today as global de-risking is consequential even for Mainland China. However, foreign ownership of Mainland stocks is fairly low as Connect trading normally accounts for only about 5% of Mainland trading.

After the close in Hong Kong, the list of stocks eligible for Shanghai and Shenzhen Hong Kong Stock Connect was updated. Alibaba’s Hong Kong listing was conspicuously absent from the revised list. I believe Alibaba HK will be added to Stock Connect once the regulators devise a solution that can limit Mainland Chinese investors’ ability to convert from Hong Kong to US shares, while keeping the stock freely convertible for overseas investors. This should not be that hard in my opinion as the conversion requires working with your custodian and is never automatic. The custodian could simply be legally obligated to reject conversion requests from the Mainland. Fortunately, the eligibility updates occur once a month so we may not have to wait much longer for a solution.

JP Morgan raised its ownership stake in its Mainland securities brokerage from 51% to 71%. There has also been talk that JP Morgan Asset Management is in the process of buying out its Mainland joint venture partner for full control over its China investment arm. A Mainland media source noted that JP Morgan’s securities division would join Morgan Stanley, Credit Suisse, and UBS along with several Japanese firms in taking controlling positions of their Mainland securities division. China asset management is seen as a significant growth area for global firms.

H-Share Update

The Hang Seng Index opened lower but rose off of intra-day lows to close -1.25%/-312 index points at 24,695. Volume has high, rising  +45% from Thursday and reaching nearly 2X the 1-year average. However, breadth was off with 12 advancers and 37 decliners. The broader Hang Seng Composite was off -1.23% with 106 advancers and 333 decliners. Hong Kong stocks fared worse than Mainland-listed stocks -1.76% versus -0.56% using the HS HK 35 and China Enterprise indexes as proxies for the markets. The 204 Chinese companies listed in Hong Kong and within the MSCI China All Shares Index fell -1.06% with tech +0.23%, materials +0.12%, and financials -0.1%, communication -2.59%, health care -1.74%, and discretionary -0.78%. Southbound Stock Connect volumes were light as Mainland investors bought a net $619mm worth of Hong Kong stocks on the day. Southbound Connect trading accounted for 7.2% of turnover in Hong Kong.

A-Share Update

Shanghai and Shenzhen also rose off their intra-day lows to close -0.87% and -0.49% at 3,355 and 2,290, respectively. Volume was off -10% from yesterday to just above the 1-year average while breadth was off with 1,533 advancers and 2,184 decliners. Large, mid, and small cap companies ended the session lower, in line with one another. The 517 Mainland stocks within the MSCI China All Shares Index were off -1.07% with real estate +0.11%, tech -0.18%, communication -0.4%, staples -2.32%, health care -1.89%, and industrials -0.99%. Foreign investors sold a healthy net -$923mm worth of Mainland stocks overnight as Northbound Stock Connect trading accounted for 5.2% of Mainland turnover.

Last Night’s Exchange Rates & Yields

• CNY/USD 6.84 versus 6.85 yesterday
• CNY/EUR 8.08 versus 8.10 yesterday
• Yield on 1-Day Government Bond 1.05% versus 1.04% yesterday
• Yield on 10-Year Government Bond 3.12% versus 3.11% yesterday
• Yield on 10-Year China Development Bank Bond 3.70% versus 3.68% yesterday