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US-China Discussion Overnight Overshadowed by Micro-Cap Real Estate Default

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Key News

Asian equities were largely higher, though China and Hong Kong were off. Shanghai, Shenzhen, and the STAR Board were off -0.34%, -0.36%, and -0.3%, respectively, on moderate volume while the Hang Seng was off -0.36% on moderate volume as well. The Hang Seng has rallied up to 26,038 with 26,500 short-term resistance. If we can punch above that level, game on.

Headlines are screaming about real estate developer Modern Land (1107 HK) missing a bond repayment of $250 million. The company’s equity market cap is $136 million, making it a micro-cap and highlighting the fact that the debt outstanding was twice the company’s market cap. The company is having an issue because it is clearly highly levered. Yes, it adds to the concerns surrounding Evergrande though I would like to reiterate the attention being paid by policymakers to prevent Evergrande from becoming a financial crisis.

The call overnight between US Treasury Secretary Janet Yellen and Vice Premier and Trade Envoy Liu He did not receive much attention overnight.

Real estate in both Hong Kong and China was off -4.05% and -2.21%, respectively, though the Modern Land news weighed on sentiment overnight. Hong Kong internet stocks were off as Tencent fell -0.59% and Meituan fell -1.32%, seeing net selling from Mainland investors via Southbound Stock Connect. Once again, Kuaishou Technology bucked the trend, gaining +0.19% with net buying from Mainland investors.

Alibaba announced that 70% of Singles Day packages handled by logistics arm Cainiao will be recycled with the E-Commerce event around the corner. The Ministry of Commerce also released the 14th Five Year Plan by the Ministry of Commerce.

Tesla’s 100,000 electric vehicle (EV) deal with Hertz helped elements of the EV ecosystem such as metals though it also led to profit-taking in battery maker CATL and elements of the clean technology sector such as solar and wind. EV bus maker BYD announced it will be raising the prices of its EV batteries by 20%, largely driven by higher input costs.

Northbound Stock Connect volumes were moderate/light as foreign investors bought $132 million worth of Mainland stocks today. Mainland bonds rallied along while CNY was flat versus the US dollar and copper rallied. The PBOC was active again in supplying liquidity to the financial system.

The Wall Street Journal picked up a recent theme of mine: India’s outperformance detaching from fundamentals. The article noted that retail investors appear to be getting in on the action along with India being overweight for active managers. Coincidentally, another major global investment bank upgraded China to overweight from neutral overnight.

Last Night’s Exchange Rates, Prices, & Yields

  • CNY/USD 6.38 versus 6.39 Yesterday
  • CNY/EUR 7.41 versus 7.42 Yesterday
  • Yield on 10-Year Government Bond 2.98% versus 2.99% Yesterday
  • Yield on 10-Year China Development Bank Bond 3.32% versus 3.33% Yesterday
  • Copper Price +0.38% overnight