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Hong Kong Internet Stocks Cheer Proposed CSRC Rule Change

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Key News

Saturday night the China Securities Regulatory Commission (CSRC), China’s SEC, issued a “Notice on Public Solicitation of Comments on the "Provisions on Strengthening the Confidentiality and Archives Management Work Related to the Overseas Issuance and Listing of Securities by Domestic Enterprises”.  The release was followed by a Q&A with the CSRC, which included the clarification that the proposed rule change removes language that onsite inspections should only be done by Chinese regulatory agencies. The proposed rule change would allow US-listed Chinese companies to have an onsite inspection of their auditors done by the US Public Company Accounting Oversight Board (PCAOB), thereby allowing them to comply with the Holding Foreign Companies Accountable Act (HFCAA).

The notice was not only issued by the CSRC, but also by the Ministry of Finance and State Secrecy Administration. As we’ve previously noted, allowing for HFCAA compliance would require an amendment to Chinese law. Here we go! Mainland China is on a four-day weekend, though the regulators released this on Saturday, which shows the importance of this release.

The Q&A includes that the revision “…will also help relevant regulatory authorities and overseas regulatory agencies to carry out cross-border regulatory cooperation activities safely and efficiently, including joint inspections, and jointly safeguard the rights and interests of global investors.”  The weekend announcement does not solve the issue as it takes two to tango, i.e. the US side wants proof that the onsite audits can indeed take place. The release does decrease the probability of delisting, though it does not take that probability to zero.  Hopefully, the two sides can put this issue to bed, which would eliminate a risk for US and global investors. It is worth noting that this news has not received significant attention from western financial media.

Shanghai’s 25 million residents will be tested for covid-19 as the city grapples with a significant outbreak. Overnight, three new covid vaccines were approved by the State Drug Administration, two of which are mRNA vaccines, which are supposedly more effective.  An effective mRNA vaccine would allow a move away from the draconian lockdown policy, to the benefit of consumer sentiment.

The best performing sector in Hong Kong today was real estate, which gained +7.66%, outpacing healthcare, which gained +5.42%, and the internet-heavy consumer discretionary sector, which gained +4.59%, and communication, which gained +3.49%. The catalyst was Evergrande’s statement that it had resumed work on 95% of its projects. Real estate was included in Vice Premier Liu He’s statement on March 16th with an emphasis on addressing risks in the sector. The market appears to believe that more support for the sector is on the way.

Asian equity markets were higher as Hong Kong and India outperformed while China, Taiwan, and Pakistan were on holiday. Both Hong Kong and China are off tomorrow, so there will be no China Last Night tomorrow.

The Hang Seng Index gained +2.1%, while the Hang Seng Tech Index gained +5.43%, led by internet stocks.  Volumes were +8% higher than Friday, though at only 69% of the 1-year average as Southbound Stock Connect was closed today. Breadth was strong with 422 advancers and just 62 decliners as consumer staples represented the only down sector. Real estate was the top performer, gaining +7.66%, followed by healthcare, which gained +5.42%, and the internet-heavy consumer discretionary sector, which gained +4.59%, and communication services, which gained +3.49%. Electric Vehicle names were positive on March delivery data and BYD’s announcement that it will stop making non-EVs.

Shanghai, Shenzhen, and the STAR Board were closed today.

Last Night's Exchange Rates, Prices, & Yields

Mainland bond, currency, and commodity markets were closed overnight.