Week in Review

• Mainland markets were closed Monday through Thursday this week in celebration of the Golden Week holiday. This led to low volumes in Hong Kong all week as Southbound Stock Connect was also closed.
• Trading in both Evergrande and Evergrande Property Services was suspended Monday as the company sold a 51% stake in its Property Services division to Hopson Development, in an effort to raise cash to pay debts.
• Charlie Munger, vice chairman of Berkshire Hathaway, doubled his position in Alibaba in Q3, according to an SEC filing released Wednesday.
• Asian equities cheered progress on extending the US debt ceiling and a proposed virtual call between Biden and Xi following US-China talks in Zurich.

Key News

Asian equities rebounded overnight except for South Korea and Taiwan, which closed lower. Meanwhile, Mainland China markets reopened for the first time since September 30^th.

After the close, the State Administration for Market Regulation (SAMR) fined Meituan $530 million for the exclusivity requirements it had been placing on merchants. It might sound crazy, but I believe this is a good outcome as the fine puts the issue to bed and is less than the market had anticipated. The fine represents 3% of 2020 revenues and only 4.7% of the $11.07 billion worth of cash on the books as of the end of Q2.

Tencent’s League of Legends is arguably the most popular video game globally though if you aren’t a Chinese teenager you might not know it exists. The mobile version of the game has been approved for launch in a positive development for the company. Mainland investors gobbled up Tencent as Southbound Stock Connect reopened today. The $227 million worth of net purchases is a little less than the $289 million worth bought on the last day of Southbound Stock Connect trading pre-Golden Week holiday. It does extend Tencent has seen net buying from mainland investors in 12 of the last 13 trading days.

Meituan also $178 million worth of net buying via Southbound Stock Connect, the 4^th consecutive trading session that saw net buying on the part of Mainland investors.

Internet and financial stocks led Hong Kong higher while decliners outpaced advancers in the broader Hang Seng Composite. Energy, utilities, and healthcare were weak and anything power-related, which includes wind, solar, and nuclear, was off.

China’s energy shortage is receiving the full attention of the government. Premier Li led a meeting to address the issue in advance of the coming winter months. Fortunately, the issue subsided over the Golden Week holiday as some factories and other high-power intensity businesses were closed. We will find out next week when factories get back to work whether the grid can handle the rising need for electricity (demand shock) in the face of low coal stockpiles (supply shock). A Mainland media source noted that heavy rainfall has hampered coal mining efforts.

The mainland market mirrored Hong Kong as energy and materials were weak led by the clean technology ecosystem, which includes wind, solar, electric vehicles (EV), and metal stocks. Metals, energy transmission, and energy intensive industries such as steel were weak. The consumer discretionary, communication, consumer staples, and financial sectors all gained more than +2% overnight. Semiconductor names were a drag on the STAR Board, which closed down today, which, candidly, is a head scratcher to me.

Foreign investors were net sellers of Mainland stocks to the tune of -$398 million though, interestingly, Shanghai-listed stocks were net buys while Shenzhen-listed stocks accounted for the net selling. Bonds were off while CNY appreciated slightly versus the US dollar.

September Caixin Services PMI

China Last Night might be the only place you can read about the positive economic data as good China news does not seem fit to print these days. The over 50 reading indicates an expansion in the demand for services following August’s contraction, which was mostly due to flooding and lockdowns prompted by delta outbreaks. However, input and output prices rose as manufacturers pass along higher commodity prices to consumers (i.e. inflation).

H-Share Update

The Hang Seng opened higher and took a mid-day swoon before rallying to close +0.55% on volume that increased +55% from yesterday, which is 95% of the 1-year average. The 210 Chinese companies listed in Hong Kong and within the MSCI China All Shares Index gained +0.84% led by discretionary +2.88%, communication +2.09%, and financials +0.92%. Meanwhile, utilities -4.97%, energy -2.99%, healthcare -2.58%, materials -1.62%, and tech -1.43%. Hong Kong’s most heavily traded stocks by value were Tencent, which gained +2.21%, Alibaba HK, which gained +5.57%, Meituan, which gained +2.07%, Ping An Insurance, which gained +2.75%, Wuxi Biologics, which fell -5.88%, ANTA Sports, which fell -2.38%, Li Ning, which fell -5.82%, Sunny Optical, which gained +0.96%, Xiaomi, which fell -0.94%, and NetEase, which gained +4.32%. Southbound Stock Connect volumes were high as Mainland investors bought $307 million worth of Hong Kong stocks today.

A-Share Update

Shanghai, Shenzhen, and the STAR Board diverged, closing +0.67%, +0.79%, and -0.31%, respectively, as volume increased +12% from September 30^th, which is 109% of the 1-year average. The 542 Mainland stocks within the MSCI China All Shares Index gained +0.91% led by discretionary +2.87%, communication +2.78%, staples +2.46%, financials +2.25%, and tech +0.5%. Meanwhile, utilities -1.93%, materials -1.41%, and energy -0.9%. The Mainland’s most heavily traded stocks by value were Ping An Insurance, which gained +7.73%, Wuliangye Yibin, which gained +4.02%, Kweichow Moutai, which gained +0.52%, CATL, which gained +1.57%, Longi Green Energy, which fell -3.55%, Tianqi Lithium, which fell -4.85%, Jiangsu Hengrui Medicine, which gained +7.88%, Cosco Shipping, which fell -2.78%, Inner Mongolia Yilin Industrial Group, which gained +5.09%, and China Energy Engineering, which fell -8.94%. Northbound Stock Connect volumes were elevated as Shanghai-listed stocks were net buys while Shenzhen listed stocks were net sells. Foreign investors sold -$398 million worth of Mainland stocks today.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.44 versus 6.45 last Thursday
• CNY/EUR 7.46 versus 7.46 last Thursday
• Yield on 1-Day Government Bond 1.60% versus 1.65% last Thursday
• Yield on 10-Year Government Bond 2.91% versus 2.88% last Thursday
• Yield on 10-Year China Development Bank Bond 3.23% versus 3.22% last Thursday
• Copper Price +1.61% overnight