Key News

Asian equities had a strong day as growth stocks outperformed along with India on strong earnings. By far the biggest catalyst was the PBOC’s injection of liquidity into the financial system, negating fears that China’s central bank would tighten monetary conditions too quickly as the overnight repo rate fell. The good, but not great, PMIs made the PBOC wary of pulling stimulus too quickly. It is important to note that brokers barely noticed the PMIs. Meanwhile, chatter on increased anti-monopoly regulation was also equally dismissed by the market.

Health care had a strong day in Hong Kong and Mainland China as Cansino Biologics gained +17% after announcing strong phase 3 coronavirus clinical trials. Prestigious private equity firm Hillhouse announced an ownership stake in Luye Pharma, which ripped +51.67%. Meanwhile, Executive Order sanctioned stocks rallied on news of Xiaomi’s legal challenge, which is discussed below.

Growth names dominated in Hong Kong as the Hang Seng Index opened higher and kept going to close +2.15% in a very strong and broad rally. The Hong Kong stocks within the MSCI China All Shares Index gained an impressive +3.31%. Hong Kong volume leaders were Tencent, which gained +4.48%, Meituan, which gained +9.89%, Alibaba HK, which gained +1.78%, Xiaomi, which gained +2.05%, energy giant CNOOC, which gained +3.28%, HK Exchanges, which gained +1.33%, China Mobile, which gained +2.43%, BYD, which gained +3.2%, GCL-Poly Energy, which fell -7.92%, and Luye Pharma, which surged +51.67%. Growth names also outperformed in Mainland China too. This caused Shenzhen to outperform Shanghai +1.17% versus +0.64% though the STAR Board was off a touch.

Xiaomi filed a “complaint” in a DC court against the Department of Defense and US Treasury on Friday as the company is challenging the Executive Order’s claim that the company is affiliated with the Chinese military, which led to divestment from the company’s Hong Kong listing by US investors. In the suit, the company notes that it is majority owned by its two co-founders. Remarkably, this is the first legal challenge by any entity related to the Executive Order banning investments in certain companies. Unlike the Executive Order’s guilty verdict without evidence, a court requires evidence. I doubt that the current administration will put up much of a fight in defending the prior administration’s policy. Hopefully, with the seal broken, other legal challenges come forward.  

Kuaishou’s Hong Kong IPO, which is expected Friday, should be fun with reports the stock is trading up 100% in the “grey” or over-the-counter market between brokers.

I quit my job on a Friday in early 2013 to join KraneShares and help make Jonathan Krane’s vision investable. That Sunday, 60 Minutes aired an episode on China’s ghost cities, which came up in every investor conversation for two or three years thereafter. The ghost city narrative completely missed the urbanization trend in China. But, why let the facts get in the way of a good story? Last night, 60 Minutes did a piece on a Chinese company doing coronavirus testing, insinuating a Chinese company may have DNA though admitting they were not sure whether nasal swap tests contain DNA. How many investors missed the great returns due to “ghost cities”? An equal number probably missed out over the last two years due to trade/tech war headlines. Ignore the media and study the data and the charts.  

H-Share Update

The Hang Seng opened higher and kept going to close +2.15%/+609 index points at 28,8992. Volumes were off -16% from Friday, which is almost 40% above the 1-year average. Meanwhile, breadth was decent with 28 advancers and 9 decliners. The 196 Chinese companies listed in Hong Kong and within the MSCI China All Shares Index gained +3.31% led by discretionary +6.66%, materials +4.64%, communication +4.47%, health care +3.94%, tech +3.01%, utilities +2.24% and industrials +1.07%. Southbound Stock Connect volumes were nearly 50% above the 1-year average though well off the volume levels seen recently.

A-Share Update

Shanghai and Shenzhen gained +0.64% and +1.17% to close at 3,505 and 2,362, respectively. The 511 Mainland Chinese companies within the MSCI China All Shares Index gained +0.99% led by materials +3.25%, communication +2.17%, health care +2.08% and financials +1.26%. Meanwhile, utilities lost -0.8% and energy fell -0.07%. Northbound Stock Connect volumes were elevated as foreign investors bought $535 million worth of Mainland stocks today.

Last Night’s Exchange Rates & Yields

• CNY/USD 6.47 versus 6.43 Friday
• CNY/EUR 7.82 versus 7.81 Friday
• Yield on 1-Day Government Bond 2.35% versus 2.84% Friday
• Yield on 10-Year Government Bond 3.17% versus 3.18% Friday
• Yield on 10-Year China Development Bank Bond 3.58% versus 3.59% Friday
• China’s Copper Price -0.55% from Friday