Week in Review

• Asian equities were mostly higher this week though China’s Shenzhen and STAR Board markets underperformed.
• Internet earnings kicked off this week as KE Holdings, Tencent Music, Tencent, Huya, and JD.com all beat analyst expectations while Alibaba came in slightly lower than expected.
• Online streaming company Huya announced a $1.08 per share special dividend on Tuesday.
• China reported mixed economic data for July on Wednesday as industrial production and overall retail sales were lower than expected while online retail sales increased nearly +10% year-over-year (YoY).

Friday’s Key News

Asian equities had a strong finish to a strong week as Japan outperformed.

Hong Kong had a strong day, led growth stocks and sectors, as the most heavily traded stocks by value were Alibaba, which gained +4.84% versus the US listing’s gain of +0.09% yesterday after mixed financial results and ahead of the likely conversion of its Hong Kong listing into a dual primary with the US, Tencent, which gained +1.14% versus its US listing’s gain of +0.59% yesterday and having purchased 2.7 million shares overnight, Meituan, which gained +5.18%, and JD.com, which gained +8.91% versus its US listing’s gain of only +4.25% yesterday, on better-than-expected Q2 results. Given the same piece of news, Asian investors were 2X more excited. The one element of MSCI China that is improving fundamentally are internet stocks.

At 8 am this morning, a State Council release from Prime Minister Li Qiang expressed the need to “expand domestic demand more effectively, focus on boosting consumption, and take targeted measures to smoot the economic cycle” Wow! The statement continues with a “Focus on areas with strong growth and the driving force to promote consumption, accelerate the expansion and quality of service consumption, effectively promote bulk consumption.”

Also helping Hong Kong was yesterday’s post market close statement from the PBOC ‘s President on economic policy support. The statement was followed by a Reuters article today on the government issuing cash vouchers to stimulate tepid domestic consumption that received a lot of attention in Asia. The well-written article, which I’ll post on Twitter (@ahern_brendan), notes three Chinese economists wrote in the China Daily the government should issue $139 billion in consumption vouchers, which would expand the fiscal deficit to 4% from 3% as real estate prices have fallen -20% to -30%. The article notes that the release from the Third Plenum “pledged an incremental tilt towards consumer stimulus, in what analysts saw as an official admission that previous toolkit was not working as intended”. 100% true that the economy’s situation is recognized at the highest level of government!

Coincidentally, CCTV News reiterated that the subsidy for buying a new electric vehicle (EV) has been increased from RMB 10,000 to RMB 20,000 and RMB 7,000 to 15,000 for a new gas-powered vehicle. Are these “subtle signs” that domestic consumption policy support is coming?

Also helping markets was $606 million worth of net buying from Mainland investors via Southbound Stock Connect, including the Hong Kong Tracker ETF, the Hang Seng Tech ETF, and Tencent beneficiaries. The Mainland market continues to exhibit why the government needs to ratchet up policy support as equities largely fell while the Treasury bond market rallied. The National Team appeared to support the market based on the pick-up in their favorite ETFs at the day’s end.

Today’s China Daily included an interview with Zhang Ming, deputy director of the Institute of Finance & Banking at the Chinese Academy of Social Sciences stating, “gradually expanding the proportion that provincial-level social security funds are allowed to invest in A shares is a feasible measure to channel more long-term funds into the market.” The purchases by a market stabilization fund would be funded by $140 billion (RMB 1 trillion) worth of bonds. He stated that China could learn from “Japan, where the central bank directly purchases exchange-traded or ETFs”. Have at it!

It was hard to ignore several prominent hedge fund managers buying Chinese stocks and ETFs last quarter, based on quarterly 13Fs filed with the SEC. This is against the backdrop of US-listed China ETFs seeing sales. In fact, two of the four largest ETFs have seen shares outstanding decline by -38% and -40%, respectively. Ouch! At the same time, MSCI Emerging Markets will rebalance China to 24% and India to 20%. So, the country with a GDP of $3.5 trillion is almost at the same weight as the country with a GDP of $18 trillion. In fact, Taiwan’s GDP is less than $1 trillion, despite a weight of 18.45%. MSCI Taiwan has a market cap of $1.39 trillion with Taiwan Semiconductor Manufacturing Co. (TSMC) representing 50% of the index, like how ASML is 43% of the MSCI Netherlands Index. Having been involved in the indexing world, very high single stock or sector concentration in an index can be a signal of a top in that stock. Nortel Networks became 50% of MSCI Canada in 1999 just before rolling over.

The Hang Seng and Hang Seng Tech indexes gained +1.88% and +2.21%, respectively, on volume that increased +15.32% from yesterday, which is 99% of the 1-year average. 316 stocks advanced while 142 declined. Main Board short turnover increased +24% from yesterday which is 113% of the 1-year average as 20% of turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). Large caps and growth outperformed small caps and value. The top-performing sectors were Consumer Discretionary, which gained +4.22%, Health Care, which gained +1.84%, and Materials, which gained +1.72%. Meanwhile, Utilities fell -0.62%, Real Estate fell -0.50%, and Tech, which fell -0.08%. The top-performing subsectors were retail, pharmaceuticals, and consumer durables. Meanwhile, food & beverage and media were among the worst-performing. Southbound Stock Connect volumes were light as Mainland investors bought a net $606 million worth of Hong Kong-listed stocks and ETFs, including the Hong Kong Tracker ETF, which was a large net buy, the Hang Seng Tech ETF, which was a moderate net buy, and Tencent, which was a small net buy. Meanwhile, Meituan and China Construction Bank were small net buys.

Shanghai, Shenzhen, and the STAR Board were mixed, closing with a James Bond +0.07%, -0.30%, and -0.33%, respectively, on volume that increased +0.07% from yesterday which is 74% of the 1-year average. 1,696 stocks advanced while 3,238 declined. Large caps and value outperformed small caps and growth. The top-performing sectors were Energy, which gained +0.87%, Financials, which gained +0.60%, and Consumer Discretionary, which gained +0.59%. Meanwhile, Utilities fell -0.76%, Real Estate fell -0.66%, and Industrials fell -0.42%. The top-performing subsectors were shipping, telecom, and banking. Meanwhile, motorcycles, agriculture, and forest industry were among the worst-performing. Northbound Stock Connect volumes were light on foreign investor selling with Agricultural Bank a small net buy, China Unicom and Sokon moderate/small net buys while BYD, CATL and Midea were small net sells. Treasury bonds rallied. CNY and the Asia dollar index rallied. Copper gained while steel fell.

Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.16 versus 7.16 yesterday


• CNY per EUR 7.87 versus 7.88 yesterday


• Yield on 10-Year Government Bond 2.20% versus 2.21% yesterday


• Yield on 10-Year China Development Bank Bond 2.26% versus 2.27% yesterday


• Copper Price: 1.73%


• Steel Price: -0.39%