NPC Q&A Better Than the Headline, Week in Review

Week in Review

• On Monday Yum China’s Q3 results exceeded analyst expectations, demonstrating strong financial performance and boosting investor confidence.
• On Tuesday Hong Kong and Mainland China led a strong rally in Asian equities, while the Caixin Services PMI for October rose to 53, beating forecasts and signaling economic resilience.
• On Wednesday investor sentiment was focused on Trump’s potential victory, but more attention is expected on the NPC’s fiscal stimulus plans set to be announced Friday.
• The National People’s Congress is expected to announce a fiscal stimulus package ranging from RMB 2 trillion to RMB 10 trillion, aimed at addressing local government debt and supporting key sectors.

Friday's Key News

Asian equities ended a positive week mixed as Taiwan outperformed and Hong Kong underperformed.

Hong Kong and Mainland China slid lower on high volumes in advance of the post-market close NPC press conference. Tech was a lone bright spot after SMIC reported better-than-expected results, though the Mainland held up better than Hong Kong. Today’s market action occurred before the main event, i.e., the NPC press conference.

Minister of Finance Lan Fo’an reported that the NPC approved RMB 6 trillion to replace hidden debts by issuing special local government debt. The original release and headline of RMB 6 trillion likely fed algorithmic trading as Hong Kong and China futures immediately fell. In the Q&A with reporters, Lan announced that RMB 800B of new special-purpose bonds for local governments will be issued for five consecutive years. RMB 10 trillion ($1.4 trillion) is 7.8% of GDP using 2023 GDP’s of $17.79 trillion. Yes, it is spread out, so it's not exactly fair.

Also in the Q&A was the announcement that RMB 2 trillion will focused on shantytown development debt due in 2029. As highlighted below, he stated, “We are actively planning for the next fiscal policy and increasing countercyclical adjustments.” He specifically said, “implement a more powerful fiscal policy in combination with next year’s economic and social development goals.” The upcoming December CEWC meetings could articulate that fiscal policy strategy. 100% of the lack of domestic consumption-focused fiscal stimulus, especially after yesterday’s rumor-driven rally of RMB 2 trillion for that purpose, disappointed the market, though I suspect the RMB 6 trillion headline and algorithmic trading was a factor. A few highlights from the press conference and Q&A:  

• “increase the local government debt limit of 6 trillion yuan to replace existing hidden debts…implemented over three years.”   
• "I noticed that all sectors of society are very concerned about the orientation and intensity of fiscal policies, and many experts and scholars have also expressed their opinions and suggestions. On October 12, I mentioned at the press conference that the central government still has room for debt raising and deficit improvement.  We are actively planning for the following fiscal policy and increasing countercyclical adjustments."
• “Many policy effects will continue to be released next year.” 
• “we will increase efforts to support large-scale equipment updates and expand the variety and scale of consumer goods for trade-in.” 

With the US election and NPC, I suspect most investors forget Monday is Alibaba’s Singles Day. Chatter is positive thus far, especially versus JD.com’s 618 (June 18) sales event, which, similarly to 11/11, is pushed by all e-commerce companies. Next week's earnings releases will be from Tencent on Wednesday, JD.com, NetEase (lower on a report of an executive arrested on bribery charges), and Meituan on Thursday, and Alibaba on Friday. On Monday, November 18, is Trip.com, Weibo on November 19, Kuaishou on November 20, and Baidu on November 21.

Prime Minister Li Qiang presided over a State Council meeting on raising foreign trade. President Xi will attend the 19th G20 Summit in Rio de Janeiro, though it is unknown if a meeting with President Biden will occur. Rare net sell for Mainland investors via Southbound Stock Connect with the Hong Kong Tracker ETF, a large net sell. Southbound turnover accounted for 47% of Hong Kong turnover.

The Hang Seng and Hang Seng Tech fell -1.07% and -0.2% on volume +6.06% from yesterday, which is 187% of the 1-year average. 147 stocks advanced, while 347 declined. Main Board short turnover increased -10.64% from yesterday, which is 143% of the 1-year average, as 12% of turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging).  Value and small caps fell less than growth and large caps. All sectors were negative, less tech +1.23%, led lower by real estate -3.39%, energy -2.02%, and communication -1.83%. The top sub-sectors were consumer durables, capital goods, and technical hardware, while insurance, software, and retailing were the worst. Southbound Stock Connect volumes were 2X the average as Mainland investors sold -$391mm of Hong Kong stocks and ETFs with  SMIC and Alibaba were moderate net buys, Sunac and Meituan were small net buys, the Hong Kong Tracker ETF a large net sell, Tencent a moderate net sell, and Xiaomi a small net sell.  

Shanghai, Shenzhen, and STAR Board fell -0.53%, -0.29%, and -0.27% on volume +6.99% from yesterday, which is 292% of the 1-year average. 1,134 stocks advanced, while 3,878 declined. Growth and small caps fell less than growth and large caps. All sectors were negative less tech +0.77%, while real estate -3.31%, staples -2.31%, and financials -2.05%. Top sub-sectors were computer hardware, aerospace/military, and power generation equipment, while real estate, securities, and liquor were the worst. Northbound Stock Connect volumes were high, just over 2X the average. CNY and the Asia dollar index fell versus the US dollar. Treasury curve steepened. Copper and steel rose.

Last Night's Performance

Last Night's Exchange Rates, Prices, & Yields

• CNY per USD 7.16 versus 7.16 yesterday
• CNY per EUR 7.72 versus 7.70 yesterday
• Yield on 10-Year Government Bond 2.11% versus 2.11% yesterday
• Yield on 10-Year China Development Bank Bond 2.18% versus 2.19% yesterday
• Copper Price +1.70%
• Steel Price +0.35%