FTSE Index Re-Balance Leads to $1.4B of Foreign Inflows Into Mainland Markets
Week In Review
- Oracle officially won the bid to become TikTok’s “trusted tech partner” on Monday. However, the details of Bytedance’s final restructuring of the app to appease both Washington and Beijing have yet to be finalized. The company has even floated pursuing a US IPO as a potential solution.
- China’s YoY retail sales growth for August was released on Tuesday. The release was positive as retail sales growth came in at +0.5% higher than August of 2019 compared to an estimate of zero growth YoY and July’s -1.1% YoY decline.
- President Xi announced a renewed effort to overhaul China’s healthcare system on Wednesday, which was met with a mixed market reaction. While healthcare outperformed in Hong Kong, the sector lagged on Mainland exchanges.
- Following Fed Chair Powell’s conference on Wednesday that left interest rates near zero for the foreseeable future, Asian equities moved lower, mirroring the risk-off sentiment in the US in the prior session.
Asian equities ended the week on a high note with Mainland Chinese equities outperforming on the day and ending the week around 2% higher overall. FTSE Russell indexes rebalanced overnight, which explains some of the Mainland markets’ outperformance. Foreign investors bought nearly $1.4 billion of mainland stocks overnight as Northbound Connect trading accounted for nearly 8% of Mainland turnover, which is twice the 1-year average. The influence of the FTSE rebalancing is evident in the outperformance of large caps over mid and small caps today.
Chatter that the PBOC may cut banks’ reserve requirement ratios in advance of China’s Golden Week holiday helped lift financials and real estate as well as gave support to the market overall. A Mainland media source noted that SOE reforms were a key topic in a policy meeting led overnight by Premier Li.
Today saw broad rally with all sectors in the green. Hong Kong also had a modestly positive day as Tencent fell -0.38% on the late-day headline that the US would review the company’s stakes in Epic and Riot games. However, these companies operate nearly independently from Tencent, so little is likely to come out of the review.
This morning’s headline that new downloads of TikTok and WeChat on the US would not be allowed strikes me as more “Art of the Deal” sabre rattling to get the TikTok deal done. Money transfers will also be banned on WeChat in the US. However, this is inconsequential as only those with a Chinese bank account can actually move cash through the app. The Commerce Department noted that this would not effect US companies that operate in China. With all the issues here in the US, this is what we are focused on? Absurd.
After Tencent, the volume leaders in Hong Kong were Meituan Dianping, which rose +0.33%, Alibaba HK, which rose +0.67%, Ping An Insurance, which rose +2.39%, and Semiconductor Manufacturing, which rose +3.31%. Meanwhile, healthcare saw a nice rebound in both markets. Clean energy stocks had a strong day as well as policies to shore up pollution made some headlines. The outperformance of solar energy stocks is not only a US phenomenon, but also a global one.
Ant Group’s STAR Board IPO has been approved by Mainland regulators and approval in Hong Kong is expected to follow. This could lead to a post-Golden Week IPO at the end of October. Our China Internet Report will give a full overview of Ant Group’s business as well as opportunities from its IPO. Please subscribe to kraneshares.com research in order to receive.
A Mainland media source and a broker noted that JD.com will spin off its tele-doctor unit JD Health via an IPO in Hong Kong.
58.com (WUBA US), the Craigslist of China, went private yesterday. The company grew revenue from $155mm in 2016 to $2.26billion in 2019. Since the end of 2016 to yesterday, the stock returned +97%. I have no doubt that we will see 58.com again in public markets through a Hong Kong listing.
Today is a massive trading day here in the US due to Quad Witching (single stock, index options, and futures roll today). We also have S&P and FTSE Russell index rebalances. A company called Catalent (CTLT US) is being added to the S&P 500 today. I don’t know if it will go up or down, but it will trade like crazy at 3:59.
The Hang Seng Index gained +0.47%/+114 index points to close at 24,455 as volume expanded +22%, which is back above the 1-year average. Breadth was off with 23 advancers and 25 decliners while the broader Hang Seng Composite Index gained +0.67% with 275 advances and 174 decliners. The 204 Chinese companies trading within the MSCI China All Shares Index gained +0.67% led by tech +1.88%, financials +1.53%, industrials +1.51%, health care +1.3% and discretionary +1.17%. Staples and communication were off -0.77% and -0.26%, respectively. Southbound Stock Connect volumes were light as Mainland investors bought $276mm worth of Hong Kong stocks today. Southbound Connect trading accounted for 7.5% of Hong Kong turnover.
Shanghai and Shenzhen gained +2.07% and +1.51% to close at 3,338 and 2,219, respectively, as volume rose +12%, which is above the 1-year average. Breadth was positive with 2,809 advancers and 892 decliners as large caps outperformed mid and small caps. The 517 Mainland Chinese stocks within the MSCI China All Shares Index gained +1.89% led by financials +3.73%, real estate +3.3%, energy +2.55%, communication +1.75%, materials +1.73% and health care +1.43%. There were no laggards today. Northbound Stock Connect volumes were moderate with foreign investors buying a massive $1.398 billion worth of Mainland stocks today as Northbound Stock Connect trading accounted for 7.9% of Mainland China turnover.
Last Night’s Exchange Rates & Yields
- CNY/USD 6.77 versus 6.76 yesterday
- CNY/EUR 8.02 versus 8.00 yesterday
- Yield on 1-Day Government Bond 1.16% versus 1.06% yesterday
- Yield on 10-Year Government Bond 3.12% versus 3.13%
- Yield on 10-Year China Development Bank Bond 3.68% versus 3.69%