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Key News

Asian equities gained overnight minus Japan, which went back on holiday. Mainland markets were supported by another large cash injection into the financial system. As we’ve mentioned earlier this week, four of the five biggest markets, i.e. liquidity pools/big investors, were closed (Japan, Taiwan, South Korea, and China). Today all were back online, leading to a strong day in Hong Kong, which saw volumes increase 50% from yesterday. Worth noting that real estate was the best performing sector in both Hong Kong and the Mainland today.

Yesterday, Evergrande’s Chairman Xu Jiayin, told Evergrande workers to continue to work on unfinished projects. In addition, the company would work to ensure investors in wealth management products tied to property development would be reimbursed as reported in China financial media. Investors took this as a sign Evergrande isn’t going away, sending Evergrande’s Hong Kong stock (3333 HK) +17.62%.

Early this morning, Bloomberg reported that the Chinese government told Evergrande not to default, which was followed by a WSJ article from “unnamed sources” that local governments were told to prepare for an Evergrande default. Which are we to believe? Neither! We simply don’t know, but we do know an outright default would be a significant negative economic event. Evergrande owes many suppliers, such as construction companies, steel beam suppliers, electricians, etc. The downstream effect would have an adverse impact on the broader economy.

Will the Chinese government “save” Evergrande? They don’t want to as they don’t want to incentivize bad corporate behavior. This leads to the most likely outcome which is creditors taking a haircut through negotiations.  Easier said than done due to the large number of creditors.

There is chatter that Evergrande could be broken into several pieces, but that’s a rumor. What we do know is CNH, China’s offshore currency, appreciated versus the US $ last night and the night before in an indication that investors have some confidence the situation will be resolved. We also had the volatility of CNH, which had spiked on the Evergrande news, fall significantly overnight.

Tencent, which bought back shares again, was a strong net buy via Southbound Stock Connect overnight in the first opportunity since last Wednesday. Foreign investors were net sellers though Shanghai stocks were a net sell; Shenzhen stocks were a net buy.  

Last week there was a roundtable with major Wall Street/global banks and China policymakers. Worth noting that several sell-side analysts from those attending firms have turned a touch more bullish on internet regulation being in the latter innings. Let’s hope so!

H-Shares Update

The Hang Seng opened higher but came off the day’s highs to close +1.2% as volume increased +50% from yesterday which is 105% of the 1-year average. The 210 Chinese companies listed in Hong Kong gained +0.56% led by real estate +7.41%, communication +2.83%, energy +2.1%, and utilities +1.95% while staples were off -0.27% and -0.2%. Hong Kong’s most heavily traded by value were Tencent +2.93%, Meituan +5.2%, Alibaba HK -0.2%, Xiaomi -2.6%, AIa -0.39%, Ping An +0.95%, China Merchants Bank +1.73%, China Resources Power +14.23%, Geely Auto -5.12% and Li Ning -2.85%. Southbound Stock Connect reopened on very heavy volumes as Mainland investors were net sellers of Hong Kong stocks to the tune of $58mm as Southbound trading accounted for 16% of Hong Kong turnover.

A-Shares Update

Shanghai, Shenzhen, and STAR Board opened higher and stayed there closing +0.38%, +0.46%, and +0.63% as volume increased +15% from yesterday which is 137% of the 1-year average. The 541 Mainland stocks within the MSCI China All Shares gained +0.59% led by real estate +2.01%, tech +1.86%, and communication +1.59% while energy -1.09%, materials -0.64%, and healthcare -0.36%. The Mainland’s most heavily traded by value were China Three Gorges -4.4%, TBEA -1.27%, Inner Mongolia BaoTou Steel +9.97%, China Northern Rare Earth +1.6%, Power Construction +7.94%, broker East Money -0.06%, CECEP Solar Energy +6.5%, Xinjiang Goldwind -7.86%, Tianqi Lithium +0.3%, and CECEP Wind Power +1.42%. Northbound Stock Connect volumes were high as foreign investors sold -$667mm of Mainland stocks today as Northbound trading accounted for 7.3% of Mainland turnover.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.46 versus 6.47 yesterday
• CNY/EUR 7.57 versus 7.59 yesterday
• Yield on 10-Year Government Bond 2.86% versus 2.86% yesterday
• Yield on 10-Year China Development Bank Bond 3.19% versus 3.19% yesterday
• Copper Price +0.28% overnight