Investors Wait For Fed Guidance
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North Asia equity markets were mainly off apart from South Korea while South Asia was mixed. Investors are cautious before hearing the Fed’s taper game plan this week. The Hang Seng opened +1.81% higher but slid throughout the trading day to close -0.22%. The afternoon slide curtailed the strong performance of Hong Kong-listed internet stocks. Tencent was off -1.19% though saw net buying via Southbound Stock Connect along with Meituan, which gained +1.35%, and Kuaishou, which gained +0.1%. Alibaba HK had a good day, gaining +1.32%, but did not fare as well as Alibaba's US listing yesterday, which explains Alibaba US' fall this morning.
Hong Kong and Mainland electric vehicle ecosystem stocks had a good day after Tesla announced an agreement with Gangfeng Lithium (1772 HK), which gained +3.41%. Real estate and energy stocks were the weakest sectors in both Hong Kong and the Mainland as Shanghai was off -1.1%, Shenzhen fell -0.81%, and the STAR Board gained +0.1%.
A few culprits weighed on Mainland sentiment as the PBOC replaced maturing repos with fewer new repos, leading to a net withdrawal of liquidity. The net withdrawal spooked the market in the short term though the strong net month-end injections were likely driven by month-end needs. Delta outbreaks in Beijing show the persistence of this virus, which may lead to fiscal stimulus.
Foreign investors bought $369 million worth of Mainland stocks today via the Northbound Stock Connect program. Chinese Treasury bonds rallied on equity weakness while CNY was off a touch versus the US dollar and copper was off as well.
Several weeks ago, I mentioned the increased scrutiny of the Variable Interest Entity (VIE). The VIE structure was first used by Sina back on April 21, 2000, as their then CFO Charles Chao, who later became their CEO, found a loophole in Chinese law that prohibited technology companies from listing overseas. By having a Cayman entity own the Mainland assets, the Cayman entity could go public overseas. The listings forced the question of whether this was allowed by Chinese law as regulators did not directly address the issue. The answer appears to be yes as last year the State Administration for Market Regulation approved the merger of two Chinese companies, one of which utilized the VIE structure, and has implied support for the structure.
In June of last year, Ninebot listed on the Shanghai Stock Exchange’s STAR Board, a platform that allows pre-profit companies to list, unlike the Shanghai and Shenzhen exchanges, which require companies to be profitable to list, using the VIE structure. Some would argue these examples show an implicit acknowledgment of the VIE structure though an outright explicit statement has not been made. The other expressed disadvantage of VIEs is that investors have no recourse if something goes wrong as you are left suing a PO Box in the Cayman Islands. Luckin Coffee just settled a class-action lawsuit. The most reassuring element about the VIE structure is that management owns the same stock we do. More to come on this issue!
It is our belief distressed property developer Evergrande will see its bonds’ maturity extended and interest rates cut as part of default avoiding restructuring. The problem is that every time a coupon is due, headlines are going to scream. Here are the dates to prepare ourselves for the end of the world headlines: November 6th ($82 million coupon due), December 29th ($255 million coupon due), January 8th (local coupon due), January 22nd ($117 million coupon due), January 24th ($235 million coupon due), March 23rd ($2 billion coupon due).
Last Night’s Exchange Rates, Prices, & Yields
- CNY/USD 6.40 versus 6.40 Yesterday
- CNY/EUR 7.42 versus 7.40 Yesterday
- Yield on 10-Year Government Bond 2.93% versus 2.94% Yesterday
- Yield on 10-Year China Development Bank Bond 3.23% versus 3.27% Yesterday
- Copper Price -0.37% overnight