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US-listed Chinese Companies’ Hong Kong Shares Rise Overnight Recognizing a Resolution to PCAOB Issue

Would you believe that a company increased revenue by +150% in the 2nd quarter of 2020 during the thick of coronavirus’s unfortunate consequence both socially and economically? How did a firm do so well? The unnamed company is an institutional broker and market maker that facilitates the buying and selling of stocks and financial instruments similar to the specialists at the NYSE. An element of its business involves buying when investors sell and selling when investors buy.

I suspect an element of the company’s fantastic Q2 was driven by the Senate’s passage of the Holding Foreign Companies Accountable Act, which lead to headlines screaming sell. The reality was that this firm, and likely other many professional investors, happily bought the shares, understanding the reality that the Senate passage was unlikely to result in delisting. The professionals were right and benefited from the subsequent rebound in US-listed shares.

Yesterday, the House passed the Senate’s bill. Once again headlines will scream sell. While your emotion may run hot, professional investors will happily capitalize on it. History may not repeat itself, but it does rhyme. Emotional and headline-driven trading rarely pans out.

California Representative Sherman, who sponsored the Holding Foreign Companies Accountable Act in the House, stated yesterday that “It is the intent of this legislation to provide the Securities and Exchange Commission with the discretion” to enforce the law abroad. The SEC has taken the recommendation of the President’s Working Group on Financial Markets to allow US-listed Chinese companies’ Big Four accounting firms to validate their Mainland subsidiaries’ audit work.

As we mentioned yesterday, the Securities and Exchange Commission (SEC) has made significant progress on this issue under the guidance of its well-respected Chairman Jay Clayton. The Chinese regulator has proposed several times to find a solution to this issue. The SEC has proposed allowing the US-listed Chinese companies’ Big Four auditors to validate their Mainland subsidiaries to work in conjunction with the PCAOB. No one wants to see $2.2 trillion of US savings hurt during a recession.

US listings are ambassadors providing an insight into China’s economy.  It is worth noting that the vast majority of US-listed Chinese companies with Hong Kong listings saw their shares rise overnight. 

Takeaway: The release rose for the seventh consecutive month in just another indication that China is experiencing a V-shaped recovery. 

Key News

Asian equities were largely higher overnight. The Hang Seng Index gained +0.74% led by consumer-oriented growth companies encouraged by the Services PMI. Hong Kong volume leaders were Tencent, which rose +2.61%, Meituan, which fell -0.72% despite its addition to the Hang Seng Index tomorrow, Xiaomi, which gained +4.12%, Ping An Insurance, which rose +0.32%, Alibaba Hong Kong, which was up +0.86%, China Construction Bank, which fell -1.94%, energy giant CNOOC, which was flat, BYD, which rose +0.06%, HSBC, which gained +2.12%, Hong Kong Exchanges, which rose +1.32%, and Hong Kong, which was up +1.66%.

Healthcare had a strong day as vaccines produced by Chinese companies are being fast-tracked for approval. Zhifei Biological announced that its Phase 3 trials will include 29,000 participants. Growth’s gains weighed on value sectors as the jocks outpaced the nerds. Mainland China had a mixed day led by healthcare and growth-oriented mid and small caps. Again, growth’s gain came at the expense of value sectors with energy and materials underperforming. Foreign investors were active, buying $548 million worth of Mainland Chinese stocks via Northbound Connect. CNY appreciated to a 52-week high versus the USD to reach 6.54 CNY per USD versus yesterday’s 6.56.

I read that foreign investors have allocated $7 billion to Chinese bonds year-to-date. The amount from US-listed ETFs? 0.0%! I suspect the vast majority coming from Europe and Asia.

H-Share Update

The Hang Seng gained +0.74%/+195 index points, closing at 26,728. Volume was off by -25% from yesterday though still 109% of the 1-year average while breadth was positive with 27 advancers and 19 decliners. The 203 Chinese companies within the MSCI China All Shares Index rose +0.75%, led by healthcare +2.5%, communication +2.42%, tech +2.15%, and staples +1.84%, while materials fell -1.34%, financials -1.08%, and real estate -0.85%. Southbound Stock Connect volumes were moderate/light today with buyers outpacing sellers.

A-Share Update

Shanghai & Shenzhen bounced around the room closing -0.21% and +0.12% at 3,442 and 2,290 respectively. Volume was off by -5.8%, which is 99% of the 1-year average while breadth was mixed with 1,576 advancers and 2,166 decliners. The 522 Mainland stocks within the MSCI China All Shares Index rose +0.31%, led by healthcare +2.69% and staples +1.31%, while energy fell -2.16% and materials -1.21%. Northbound Stock Connect volumes were moderate as foreign investors bought $548mm of Mainland stocks today.

Last Night’s Exchange Rates & Yields

  • CNY/USD 6.54 versus 6.56 yesterday
  • CNY/EUR 7.96 versus 7.94 yesterday
  • Yield on 1-Day Government Bond 1.13% versus 0.97% yesterday
  • Yield on 10-Year Government Bond 3.29% versus 3.29% yesterday
  • Yield on 10-Year China Development Bank Bond 3.73% versus 3.74% yesterday
  • China’s Copper Price +0.09%