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Inflation Weighs on the Mainland as Hong Kong Internet Rebounds

Key News

Asian equity markets were largely off overnight with India off nearly -2%. Mainland China was dragged lower by energy and materials stocks as coal stocks were down significantly on policies capping the price of coal. Coal futures on the Dalian Exchange slumped -11% overnight and have fallen -35% from their October 19th high. Inflationary fears have been driven by higher commodity prices. Commodities markets may see further examination and intervention in China and other countries. I would suspect that OPEC is going to feel significant pressure to ramp up production. This is at odds with climate change commitments, but ensuring homes can be heated this winter is a greater short-term priority.

Sentiment was not helped by escalating US-China political rhetoric and scattered Delta outbreaks. Real estate was off in both Hong Kong and China after property developer Kaisa Group (1638 HK) fell -18.49% after its bonds were downgraded by credit rating agencies. I’ve often believed that rating agencies’ downgrades of companies during periods of financial stress only exacerbates the companies’ problems. I would suspect China might do something about addressing the vicious cycle of downgrades, which makes it nearly impossible for companies to raise cash when they need it the most.

Evergrande’s CEO pledged his Hong Kong mansion as collateral while Bloomberg reported Evergrande’s advisors are meeting with offshore bondholders’ advisors. Additionally, the company has restarted work on more than forty projects, proving out our thesis that the company will finish what it’s started in order to pay its supply chain.

A major global investment bank’s Asia research team recommended that investors buy China high yield bonds due to the market’s current extreme valuation. Interesting! In addition to sky-high yields and market prices implying the sector is going to zero, they noted the high likelihood of policy support. I suspect this might be announced after the major government meetings in early November.

Hong Kong-listed internet stocks outperformed overnight as Tencent gained +0.25% on net buying from Mainland investors, Alibaba HK gained +0.4%, and Meituan gained +1.35%. Kuiashou Technology was off -1.33% though saw another day of net buying via Southbound Connect.

While the broad Hang Seng Composite was off -0.43%, the Hang Seng Tech Index was up +0.06%. A similar situation unfolded on the Mainland as the Shanghai Composite fell -1.23%, Shenzhen fell -1.47%, and the STAR Board fell -0.4%, though the Mainland stocks within the MSCI China All Shares Index were off -0.96%. Electric vehicle (EV) battery maker CATL was off -1.27% despite reporting Q3 revenues of RMB 29.29 billion versus analyst estimates of RMB 28.22 billion and net income of RMB 3.27 billion versus an analyst estimate of 2.61 billion.

CATL has become the #1 holding for Mainland mutual funds, overtaking liquor stock Kweichow Moutai. Foreign investors were active in the Mainland market, buying a healthy $1.12 billion worth of Mainland stocks on moderate/high Northbound Stock Connect volumes. The PBOC was active in maintaining liquidity in the financial system. Chinese government bonds rallied while the RMB depreciated versus the US $ and copper slumped -1.51%.

Two US-listed Chinese online brokers were called out by the PBOC for “conducting illegal financial activities” by allowing Mainland investors to access foreign markets including the US. TIGR US and FUTU US are being crushed in the pre-market though the two stocks are not in major indexes. This is a non-event for passive investors.

Last Night’s Exchange Rates, Prices, & Yields

  • CNY/USD 6.40 versus 6.39 Yesterday
  • CNY/EUR 7.43 versus 7.42 Yesterday
  • Yield on 10-Year Government Bond 2.97% versus 2.98% Yesterday
  • Yield on 10-Year China Development Bank Bond 3.31% versus 3.32% Yesterday
  • Copper Price -1.51% overnight