Key News

Asian equity markets had a very strong night with every market in the green as the majority of markets were up more than +1%. Alibaba jumped as Softbank announced they have no intention to sell Alibaba shares nor did they have anything to do with the company registering more shares. I previously stated that the registration of shares is likely driven by investors wanting to convert their US ADRs to Hong Kong shares, which would necessitate creating more ADRs first. Alibaba HK jumped +6.83% on the Softbank statement as Hong Kong-listed internet stocks had a strong day.

The other big news was that electric vehicle (EV) maker XPeng’s Hong Kong share class was added to Southbound Stock Connect today as the stock jumped 8% on 8.751mm of volume versus yesterday’s volume of 1.999mm (+337%). Below is a deep dive on Southbound Stock Connect and why this is a big deal. The Hang Seng Index and Hang Seng Tech Index jumped +2.06% and +3.65%, respectively, led by Hong Kong internet stocks on volume that was up +8.68% from yesterday, which is 90% of the 1-year average. Advancers outpaced decliners by more than 3 to 1 as all sectors were in the green except for energy, which fell -0.41%. Growth stocks/sectors led the charge led by discretionary +4.86% driven by BABA, tech +3.46% and materials +3.34%. Wuxi Biologics -1.04% as investors are more worried about US government involvement than the reality of being on the unverified list.

This morning the Wall Street Journal had an article about the FDA giving scrutiny to an Eli Lilly cancer drug because it was tested in China. It is amazing to think that Americans dying of cancer are being denied a lower-cost drug for political reasons.

It is interesting to note that Tencent, which gained +2.72% was a net sale in Southbound Stock Connect. Shanghai, Shenzhen, and the STAR Board gained +0.79%, +1.61%, and +0.52%, respectively, on volume that was +5.97% higher from yesterday, which is 88% of the 1-year average. Mainland investors cheered loosening bank loan restrictions to property developers as growth sectors/stocks rebounded today.

It was fairly quiet in the Mainland markets as investors focus on the Olympics. Foreign investors bought $76 million worth of Mainland stocks via Northbound Stock Connect. One interesting release was from the Beijing Municipal Committee on a new “Implementation Plan on Optimizing the Birth Policy to Promote the Long-term Balanced Development of the Population”. Raising China’s birth rate from 1.3 to 2.1 will be a big effort over the next few years. This piece spoke to lower the costs of having kids such as nursery and childcare costs, improving maternity leave policies, and “improving fertility”. However, there was not a lot of ink spilled on housing, which is the real culprit, in my opinion. We’ll keep an eye on this!

Treasury bonds eased, the renminbi appreciated versus the US $, and copper was off-0.48%.

Southbound Stock Connect is the trading platform that allows Mainland Chinese investors to buy Hong Kong-listed stocks. Trading from Mainland investors via Southbound Stock Connect accounted for 14.6% of Hong Kong volumes today, which is slightly above average. Northbound Stock Connect is the opposite as it allows foreign investors to buy Shanghai and Shenzhen listed stocks through Hong Kong. Eligibility for Southbound Stock Connect is being added to a subset of Hang Seng indexes. When the US-listed Chinese companies relist in Hong Kong, they chose whether they want Hong Kong to be their primary listing (Hong Kong is their legal and regulatory home), dual-listed (shared between HK and US), and secondary (the US is still technically their legal/regulatory home). Pursuing a secondary listing is the easiest and fastest way to relist, which explains why virtually all of the companies have gone down that path. Remember that the SFC, Hong Kong’s SEC, is a very strict regulator while the HKeX has strict listing standards. As mentioned in our interview with Hong Kong’s VIE expert and private equity lawyer, Marcia, there are no shareholder class action lawsuits allowed in Hong Kong so the regulator and exchange place a high degree of focus on IPOs. I’ve assumed that once Hong Kong is home to more than 50% of the outstanding shares, the city will become the home for the dual-listed names. There are only three companies that have relisted as dual primary: Xpeng, Li Auto, and biotech stock Beigene. It is interesting that all of the SOEs listed in the US have relisted in Hong Kong with the Hong Kong shares as their primary listing. There clearly is some discretion in who gets into Southbound as Li Auto relisted in Hong Kong prior to Xpeng and has more shares held in Hong Kong than Xpeng. Beigene is in Southbound Stock Connect already. This will provide an incentive for more companies to move away from the secondary listing to a dual primary as Tencent has 6.49% of their Hong Kong stock held by Mainland investors and Meituan 6.57%.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.36 versus 6.37 yesterday
• CNY/EUR 7.28 versus 7.28 yesterday
• Yield on 10-Year Government Bond 2.73% versus 2.72% yesterday
• Yield on 10-Year China Development Bank Bond 2.97% versus 2.96% yesterday
• Copper Price -0.48% overnight