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Key News

Asian equities were largely off today with South Korea and Hong Kong down on internet regulation news. South Korean internet giants Naver and Kakao were hit again as the government looks to supervise internet and fintech companies. Hong Kong-listed internet stocks were off on reports that Tencent and NetEase met with regulators on abiding with rules limiting minor hours.

The poor market action went from bad to worse when the South China Morning Post reported that the companies will be banned from launching new games, although the CEO of NetEase dismissed the reality of the ban. A few thoughts:

1) Minors make up an exceedingly small part of both companies’ revenues. Tencent lost $55B of market cap overnight despite this reality. Yes, no new games would be problematic but at this juncture, it is a rumor, as no “official” announcement has occurred.

2) Tencent bought back shares (again) last night. JOYY (YY US) recently announced a $200mm buyback of their shares.

3) Mainland investors bought Tencent in size last night via Southbound Stock Connect, doubling the amount they bought yesterday. Buys of the net of sales were $285mm in Tencent today.

4) People in China love video games. I understand the problems with video games having witnessed it with my kids. The reality is kids can download games and play offline.

Regulation isn’t going to solve this issue just as the SCMP wrote about tutoring going underground. I think pushing hard on this issue will cause people to push back. Why did the market take the news so badly? Hard to say as we’ve had the shoot first/ask questions later mentality.

We also have indexes rising to reach the 50-day moving average which has been a resistance level. For short-sellers, you would add at this point. At the same time, a punch through the 50 days could lead to a run-up to the 100-day moving average, which is 20% higher. In a nutshell, you have a battle between longs and shorts at this price level. I would assume today’s market action in US-listed Chinese companies will be ugly, but it feels like a final flush to me as stocks not related to gaming were hammered. At least I hope so!

There are other factors as Fed taper talk, NIO and Singapore e-commerce player SEA issuing shares, and August CPI and PPI were released at 0.8% and +9.5%. The latter is problematic as high commodity prices will eventually be passed along in higher prices for finished goods. I mentioned yesterday governments globally will push to get commodity prices down as China announced releasing oil from their national reserves according to a broker. The other “interesting” thing about today’s market action is the disparity between Hong Kong (foreigners’ definition of China) and the Mainland markets (Chinese investors’ definition of China).

Mainland was up today led by the clean technology sector along with mining, steel, and, ironically, coal companies. Foreign investors were net buyers of Mainland Chinese equities today reversing yesterday’s selling in Shanghai stocks.

H-Shares Update

The Hang Seng opened lower and ground lower all day closing -0.77% as volume increased +3.34% from yesterday. The 210 Chinese companies listed in Hong Kong within the MSCI China All Shares lost -3.52% as materials +2.92% and materials +1.71% while communication -8.31%, discretionary -4.45%, real estate -2.57%, tech -2.24%, healthcare -1.74% and financials -0.79%. Hong Kong’s most heavily traded by value were Tencent -8.48% on volume three times the second most heavily traded stock which was Meituan -4.75%, Alibaba HK -5.79%, Xiaomi -3.67%, BYD -2.67%, NetEase -11.03%, Kuahishou -6.9%, China Shenhua Energy +2.56%, JD.com HK -5.63% and Ping An -2.38%. Southbound Stock Connect volumes were elevated as Mainland investors bought $86mm of Hong Kong stocks today as Southbound Connect trading accounted for 13.1% of Hong Kong turnover.

A-Shares Update

Shanghai, Shenzhen, and STAR Board diverged +0.49%, James Bond +0.07%, and -0.75% on turnover -2.4% from yesterday which is 152% of the 1-year average. The 542 Mainland stocks within the MSCI China All Shares gained +0.4% led by energy +5.53%, materials +2.42%, industrials +1.12% and utilities +0.2% while communication -1.72%, tech -0.97%, and financials -0.32%. The Mainland’s most heavily traded by value were China Northern Rare Earth +6.15%, Longi Green Energy -2.23%, Zijin Mining Group +5.35%, Tianqi Lithium +2.61%, GoerTek -89%, Inner Mongolia Baotou Steel +2.1%, broker East Money -0.09%, TBEA -1.23%, Tibet Mineral Development +0.95% and Power Construction +0.23%. Northbound Stock Connect volumes were moderate/high as foreign investors bought +$405mm of Mainland stocks as Northbound trading accounted for 4.7% of Mainland turnover.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.46 versus 6.46 yesterday
• CNY/EUR 7.64 versus 7.63 yesterday
• Yield on 10-Year Government Bond 2.87% versus 2.87% yesterday
• Yield on 10-Year China Development Bank Bond 3.20% versus 3.20% yesterday
• Copper Price -0.26%