Key News

Asian equities were mixed with Hong Kong and China sharply lower. Reuters published an article yesterday citing SEC Commissioner Allison Lee's comments that “Chinese companies listed on US stock exchanges must disclose the risks of the Chinese government interfering in their businesses as part of their regulator reporting obligations…” This is coming post-Didi’s IPO debacle, though Didi had sixty pages of risk disclosures including Chinese internet regulation. There is talk that this article was interpreted as a potential ban on Hong Kong and China investments, leading to panic selling from local investors in both Hong Kong and China. By my calculation, this was the largest volume day ever in Hong Kong.

To say that broader regulatory uncertainty is weighing on the space would be an understatement. It is worth noting that Tencent and Meituan were net buys via Shanghai Southbound Stock Connect though Tencent was net sell in Shenzhen Stock Connect.

It has been reported that Tencent’s WeChat will temporarily suspend new users from signing up until a security review takes place. Based on WeChat’s already massive user base, I don’t think it will be an issue for the company.

June Industrial Profits grew +20% year-over-year versus May’s +36.4% as high commodity prices have been eaten by manufacturers, which affected their profits. Reigning in high commodity prices has thus far been unsuccessful as copper prices rally. 

Credit default swaps (CDS) protect bonds investments, similar to the insurance on your house. If holders of Chinese internet companies’ bonds were worried the same way equity investors currently are, that would translate into spikes in insurance costs via CDS. We don’t see this worry in the CDS charts below. Alibaba and Tencent’s CDS prices today versus one year ago have widened (i.e., more expensive), but only by a very small amount. Stock investors are always looked down upon by math guru fixed-income investors. Why are the people who do the math not worried? Simply because they are doing the math and see that the companies are not being financially impacted by regulation. In my opinion, equity investors are reacting to news and responding emotionally.

H-Share Update

The Hang Seng opened higher but fell all day, closing off -4.22% while the Hang Seng TECH dropped -7.97% as volume surged +34% from yesterday to 220% of the 1-year average. The 208 Chinese companies listed in Hong Kong within the MSCI China All Shares Index declined -6.38%, led lower by communication -8.82%, discretionary -8.43%, healthcare -7.83%, industrials -5.63%, tech -5.46%, real estate -5.06%, staples -5%, materials -2.26%, financials -1.52%, utilities -0.89%, and energy -0.46%. Hong Kong’s most heavily traded by value were Tencent, which fell -8.98%, Meituan, which fell -17.66%, SMIC, which gained +5.8%, Alibaba HK, which fell -6.35%, HK Exchanges, which fell -6.56%, Xiaomi, which fell -5.8%, Wuxi Biologics, which fell -7.78%, NetEase, which fell -13.07%, Geely Auto, which fell -2.78%, and JD.com HK, which fell -9.43%. Mainland investors sold $163mm of Hong Kong stocks today as Southbound trading accounted for 15.1% of Hong Kong turnover.

A-Share Update

Shanghai, Shenzhen, and STAR Board declined 2.49%, -3.33% and -0.75% respectively as volume increased +8% from yesterday, which is 317% of the 1-year average. The 522 Mainland stocks within the MSCI China All Shares declined -3.67%, led lower by industrials -5.42%, staples -4.71%, communication -4.5%, real estate -4.08%, materials -4.07%, discretionary -3.69%, healthcare -3.68%, financials -3.25%, tech -1.51%, utilities -1.37%, and energy -0.97%. The Mainland’s most heavily traded by value were SMIC, which rose +12.59%, Kweichow Moutai, which fell -5.06%, Sanan Optoelectronic, which fell -6.17%, China Northern Rare Earth, which fell -1.56%, Tianqi Lithium, which fell -5.26%, East Money, which fell -5.61%, Wuliangye Yibin, which fell -7.37%, Ziijin Mining, which rose +4.52%, CATL -8.3%, which fell, and BYD, which fell -3.96%. Northbound Stock Connect volumes were high as foreign investors sold -$641mm of Mainland stocks as Northbound trading accounted for 6.4% of Mainland turnover.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.50 versus 6.48 Yesterday
• CNY/EUR 7.67 versus 7.65 Yesterday
• Yield on 10-Year Government Bond 3.03% versus 2.87% Yesterday
• Yield on 10-Year China Development Bank Bond 3.30% versus 3.27% Yesterday
• Copper Price +2.08% overnight