Buy The Dip & Bank RRR Cut Speculation Lead to Spectacular Day
Takeaway: The release took place just after the market open though few brokers considered the release a catalyst today. Remember there were fewer workdays in February due to Chinese New Year so the month-over-month decline was anticipated. The index is still above 50, meaning conditions improved month over month, albeit at a slower pace. This was the 10th straight month that the Caixin PMI Services, which has its survey conducted by IHS Markit, has indicated an expansion. While business expectations rose, employment was off and export demand fell. Not too hot not too cold! The reading reaffirms why stimulus policies will not be suddenly pulled away. Rather, policy will be tightened gradually.
Asian equities had a strong day as China, Hong Kong, India, and Thailand all outperformed. By far the most important catalyst for Mainland China and Hong Kong overnight was a report that banks’ reserve requirement ratio (RRR), the amount of deposits they need to hold, could be cut for regional banks, which would free up cash for lending. We also saw investors buying yesterday’s dip, focusing on many of the stocks and sectors that were hit the worst yesterday as many recouped their losses today.
There has been some chatter about fines for group buying companies. It is a non-event in my opinion as the fines were small, but I suspect the nattering nabobs of negativity will be shouting about it.
Hong Kong opened higher and kept going as the Hang Seng Index gained +2.7% while the Hong Kong stocks within the MSCI China All Shares Index gained +2.73%. Financials were the best performing sector in both Hong Kong and Mainland China as the sector is likely to benefit from the RRR cut. Also, chatter that the Mainland stamp tax (which only applies to sales) might be cut lead to brokers rallying. Hong Kong volume leaders by the value traded were Tencent, which gained +3.58%, Meituan, which gained +2.81%, Ping An Insurance, which gained +3.26%, Alibaba HK, which gained +1.31%, China Construction Bank, which gained +5.61%, China Mobile, which gained +2.27%, Xiaomi, which gained +1.54%, HK Exchanges, which gained +2.13%, GCL-Poly Energy, which gained +9.49%, and ICBC, which gained +5.81%. Southbound Stock Connect saw a healthy $70 million worth of net buying of Hong Kong stocks as Tencent saw large net buying as a result.
Shanghai, Shenzhen, and STAR Board were up +1.95%, +1.3%, and +0.54%, respectively, after opening down and grinding higher all day. The Mainland’s volume leaders by value traded were Kweichow Moutai, which gained +3.98%, and Ping An Insurance, which gained +4.23%. Solar and wind stocks were off on the Mainland following a report that subsidies might be cut. Brokers universally felt the downdraft reaction was overdone as the remaining policies supporting the sector should continue to drive demand. Northbound Stock Connect saw a large inflow of $1.394 billion of net buying of Mainland stocks from foreign investors. CNY rallied versus the US dollar while bonds were flat and copper rallied.
CNBC noted that the Ministry of Industry and Information Technology announced that it would like to see 70% of semiconductor chips used in China being domestically manufactured. The global demand for semiconductors has pressured supply lines as Work From Home demand for computers, laptops, phones, and tablets has created bottlenecks. As you may recall, Ford had to idle a plant due to a lack of chips. The article points out that China likely came in below its goal of 40% semiconductor production, which is why we expect semiconductors will be a focus at the Two Sessions, China’s policy meetings, which are taking place this week. What can they do? Tax breaks seem logical for the companies.
I caught up with CICC’s Beijing-based equity strategist Kevin Liu last night to get his thoughts on the recent correction. Kevin believes the market was a little fragile after repo rates (short-term lending rates) spiked before Chinese New Year, leaving investors worried that the foot was coming off the monetary and fiscal policy gas pedal. The PBOC said “no sharp turns,” which should be reiterated during the Two Sessions policy meetings. Elements of economic support will come off incrementally later this year. We are in the earnings season for Mainland, Hong Kong, and US-listed Chinese companies, which should help support stocks. At the same time, companies need to deliver, especially in higher valuation market segments. Real estate appears to be increasingly in policymakers’ sights as housing prices have risen. Investors have gravitated to growth names as value sectors such as banks and real estate have lagged while many energy and material stocks have risen on higher commodity prices.
Details on Autohome’s Hong Kong relisting are coming to light. It appears the company is selling 30.291 million shares at HKD 251.80, which would raise $984 million. The expected date listing is March 15th. Most importantly, the offering offers a healthy 10% premium over the US share class’ closing price.
The Wall Street Journal had a good article reviewing Tencent’s extensive investment portfolio in E-Commerce companies including Meituan, Pinduoduo, JD.com, KE Holdings, and private Uber slayer Didi Chuxing. The portfolio also includes gaming companies, such as Sea, Epic (Fortnite), and Activision Blizzard, Media companies, such as Kuaishou, Universal Music, Spotify, Bilibili, and Snap, in addition to Nio, CICC, and WeBank. A year or ago there was a similar focus on Ping An Insurance, which also made many private investments. The article rightly points out that Tencent does not play nice with its rivals and is shutting them out of its ecosystem, which regulation will be changing. It is worth noting that the highly respected research firm Sanford C. Bernstein was quoted in the article. Upgrading coming?
The Hang Seng opened higher and kept going +2.7% to close at 29,880. Volume was off -20%, which is still 123% of the 1-year average while breadth saw 48 advancers and 4 decliners. The 200 Chinese companies listed in Hong Kong and within the MSCI China All Shares Index gained +2.73% led by financials +4.73%, materials +4.18%, energy +3.72%, communication +3.51%, discretionary +1.91%, real estate +1.38%, health care +1.37%, tech +1.34% and industrials +0.88% while utilities -0.04%. Southbound Stock Connect volumes moderate/light as Mainland investors bought $740 million worth of Mainland stocks as Southbound Connect trading accounted for 14.3% of Hong Kong turnover.
Shanghai and Shenzhen opened lower and grinded higher to close +1.95% and +1.3% at 3,576 and 2,363, respectively. Volume was off -6% which was just below the 1-year average while breadth had 3,039 advancers and 793 decliners. The 519 Mainland Chinese stocks within the MSCI China Index gained +1.85% led by financials +3.78%, energy +2.95%, materials +2.43%, staples +2.22%, communication +1.71%, healthcare +1.68%, utilities +1.29% and real estate +0.82%. Foreign investors were active in the Mainland market, buying $1.394 billion worth of Mainland stocks via Northbound Stock Connect, which accounted for 6.2% of Mainland turnover.
The STAR 50 Index had 32 advancers and 18 decliners, gaining +0.53%. Volume was a touch above the 1-year average.
Last Night’s Exchange Rates, Prices, & Yields
- CNY/USD 6.47 versus 6.47 yesterday
- CNY/EUR 7.80 versus 7.79 yesterday
- Yield on 1-Day Government Bond 1.40% versus 1.60% yesterday
- Yield on 10-Year Government Bond 3.26% versus 3.25% yesterday
- Yield on 10-Year China Development Bank Bond 3.71% versus 3.71% yesterday