Week in Review

• China’s GDP grew by +4.9% year-over-year in Q3 versus an estimated 5.1%, according to an official release Monday, as covid lockdowns dampened economic activity. But, consumers moved online as retail sales in September grew by +4.4% year-over-year in September versus and estimated 2.7%
• Hong Kong internet stocks rallied this week, especially in Tuesday trading, as China’s currency appreciated versus the US dollar, with an especially big move on Tuesday.
• Jack Ma was reported to be on vacation in Spain on Wednesday as Hong Kong internet stocks continued their rebound.
• Alibaba’s Singles’ Day sales event began on Thursday. Demand was so high that Alibaba’s systems crashed for twenty minutes.

Friday’s Key News

Asian equities were largely higher on lower volumes as Mainland China and India were both off a touch.

“It’s the end of the world (and I feel fine)” is a great song from the band REM. I was reminded of the song today as, contrary to the media narrative, Evergrande made a $83.5 million bond payment. While the common narrative is that international/non-Chinese investors will get the short end of the stick versus Mainland bondholders, the payment was to international investors. That being said, Evergrande is by no means out of the woods yet as this issue will keep rearing its head in the near term. However, it is abundantly clear that Chinese regulators and policymakers are aware of the situation and want to prevent the company’s troubles from snowballing into a financial crisis, which they are more than capable of pulling off. Evergrande will complete its ongoing projects to ensure apartment buyers and investors are made whole and that the construction companies, plumbers, electricians, etc. are paid for their work. After that, Evergrande will likely be broken up geographically. Bond investors will have to take a haircut, but an outright default is unlikely.

Contagion fears have put a hurt on China’s US dollar-denominated high yield bond market as real estate accounts for a significant portion of issuance in the market. Spreads in the Asia high yield bond market are likely to tighten after widening by 49 basis points in September. Meanwhile, US high yield spreads are at a 5-year low. Sounds like an opportunity to me!

Hong Kong posted a small gain led by internet companies including Tencent, which gained +0.79%, Alibaba HK, which gained +0.29%, and Meituan, which gained +0.28%. The head of the China Banking and Insurance Regulatory Commission (CBIRC) was on Chinese TV stating that “substantive progress” had been made in internet oversight, an indication that the worst could be behind us. Fingers crossed, though we really haven’t had any “bad” news in weeks.

Tencent and Kuaishou, which gained +5.74% overnight, were net buys from mainland investors via Southbound Stock Connect. However, Meituan saw a small net sale.

MSCI China is beating MSCI India this week by more than +6%, which is apt to draw more active managers to China internet stocks due to their recent dive into India and significant underweight to the space.

The clean technology ecosystem, which includes the electric vehicle (EV) ecosystem, wind, solar, and metals, was largely higher in both Hong Kong and Mainland China. Semiconductors had a strong day on the Mainland as well.

Foreign investors bought a very healthy net $2.06 billion worth of Mainland stocks via Northbound Stock Connect following yesterday’s $1.59 billion. This brings the weekly total to $3.65 billion in net buying from foreign investors.

MSCI’s Hong Kong-listed China A 50 Index futures launched on Monday as volumes and open interest picked up steam throughout the week. This is the first China A futures product approved to be listed outside of China as Singapore’s FTSE A50 was not approved by Chinese regulators. The notional value of the futures contract traded exceeded $1 billion for the week. Having a futures contract was an issue preventing MSCI China A’s inclusion factor from being raised from the current level of 20%.

China’s currency, the renminbi, closed at 6.39 today while bonds and copper were off.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.39 versus 6.39 yesterday
• CNY/EUR 7.43 versus 7.44 yesterday
• Yield on 1-Day Government Bond 1.50% versus 1.65% yesterday
• Yield on 10-Year Government Bond 3.00% versus 2.97% yesterday
• Yield on 10-Year China Development Bank Bond 3.33% versus 3.31% yesterday
• Copper Price -2.41% overnight