PBOC Recommends Two Hands on the Wheel to Avoid Sharp Turns
Asian equities had a strong day except for India and South Korea. The big news overnight was the release of the PBOC’s Q4 monetary report, which said there would no “sharp turns” in the policy. An early exit from monetary and fiscal support is an investor concern, though the PBOC continues to reiterate that it won’t pull the rug out. No one likes a party pooper. As China’s economy strengthens, stimulus will be incrementally brought in to prevent inflation and bubbles.
All sectors in both Hong Kong and the Mainland were up today other than real estate, which was down on news of tightening apartment purchases. The Mainland market liked the monetary report as Shanghai, Shenzhen, and STAR Board gained +2.01%, +2.43%, and 1%, respectively, in a very broad rally.
Foreign investors bought $407 million worth of Mainland stocks today via Northbound Stock Connect. The Hang Seng gained +0.53% as the index bounced around the room on lighter volume due to Southbound Stock Connect being closed for the New Year holiday. Hong Kong volume leaders were Kuaishou, which rose +15.71% as numerous index providers will add the stock to their indexes post IPO in the coming weeks, Tencent, which gained +0.54%, Alibaba Hong Kong, which fell -0.39%, Meituan, which was up +0.64%, GCL-Poly energy, which gained +17.61%, Xiaomi, which rose +0.55%, Ping An, which fell -0.33%, Geely Auto, which rose +3.72%, BYD, which was up +4%, and Hong Kong Exchanges, which fell -0.77% after naming JP Morgan’s CEO of Asia-Pacific Nicolas Aguzin to fill the big shoes of legendary CEO Charles Li. CNY strengthened versus the dollar while copper rallied.
Yesterday I mentioned the strong Northbound Stock inflows, which, as of yesterday, totaled $42 billion since 12/31/2019. I believe the strong inflows are a result of emerging markets managers’ having been chronically underweight to China in 2020. How big is the under-investment? ETF data shows that US-listed China ETFs have $28 billion of AUM versus US-listed emerging market ETFs that have $339 billion. As of January 29th, China made up 40.13% of MSCI Emerging Markets. Taking EM ETFs’ assets multiplied by China’s weight would be a good way to indicate what dedicated China ETF assets should be, right? US-listed China ETFs AUM should be $136 billion, meaning the AUM would need to increase by 500%!
This morning an investor reached out about a STAR Board listed company. I was surprised to discover there are only two US investors in the company! Two! That means only two US investors are capitalizing on the immense opportunity presented by what could be the Intel of China.
Takeaway: The strong release occurred after the Mainland and Hong Kong stock market’s close so it was a non-event for today’s market action. The rush for pre-Chinese New Year funding has an effect though the strong demand for loans shows the underlying economy’s strength. M2 reflects the small amount of monetary tightening from the PBOC as Chinese New Year is not seeing the usual demand for cash due to coronavirus related travel restrictions.
The Hang Seng bounced around the room to close up +0.53%/+156 index points to close at 29,476. Volume was off by -19% from yesterday, which is just above the 1-year average while breadth had 27 advancers and 23 decliners. The 196 Chinese companies listed in Hong Kong within the MSCI China All Shares Index gained +0.8%, led by tech +3.1%, materials +2.49%, energy +2.09%, industrials +1.15%, health care +1.12%, and discretionary +1%, while real estate fell -0.54%. Southbound Stock Connect is closed.
Shanghai and Shenzhen grinded higher all day to close higher +2.01% and +2.43% at 3,603 and 2,418 respectively. Volume increased by +3.8% from yesterday, which is -5% from the 1-year average while breadth saw 3,229 advancers and 607 decliners. The 511 Mainland stocks within the MSCI China All Shares Index gained +2.47%, led by materials +4.5%, staples +3.33%, industrials +3.05%, tech +2.79%, energy +2.53%, health care +2.34%, communication +2.24%, discretionary +1.72%, and financials +1.04%, while read estate fell -0.16%. Northbound Stock Connect flows were elevated as foreign investors bought $407mm of Mainland stocks and Northbound Connect trading accounted for 7.6% of Mainland turnover.
Last Night’s Exchange Rates & Yields
- CNY/USD 6.44 versus 6.46 yesterday
- CNY/EUR 7.79 versus 7.76 yesterday
- Yield on 10-Year Government Bond 3.23% versus 3.24% yesterday
- Yield on 10-Year China Development Bank Bond 3.70% versus 3.70% yesterday
- Price of Copper +1.18% Overnight