Investors Demand Policy Action As Nvidia Becomes Front Page News In China
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Key News
Asian equities were mixed overnight as South Korea bounced after yesterday’s 52-week low.
US-listed China ADRs and ETFs had a very strong day yesterday following Politburo’s very strongly worded release, including “proactive fiscal policy” and “loose monetary policy.” A key point is the release occurred after the Mainland’s 3 PM close, giving Hong Kong an hour to rally/go vertical. During US trading hours, Hong Kong futures tracked the US-listed China ADRs and China ETFs higher, though strangely, Mainland Chinese futures were barely higher. This led to speculation yesterday that the US-China ADR and China ETF rally was driven by short covering as opposed to “real” money being put to work. Both Hong Kong and Mainland China opened higher but faded across the trading day, with the former, shockingly in my opinion, closing down for the day while later managing a small gain. Why the lack of follow-through overnight?
Scar tissue/skepticism: There have been several China rallies that the consensus/general public would say “failed.” This isn’t true, as yes, there have been pullbacks, but the market continues to make higher highs and higher lows. A trading mentality versus an investing mentality is a factor as quick profits are locked in again, indicating the skepticism/scar tissue theory.
Overnight in Hong Kong, Wuxi Biologics and Wuxi AppTec both fell -3.89% and -3.59% after yesterday’s rise of +9.57% and +9.62%.
Geopolitics: How do you allocate to China with Trade War 2.0 on the horizon? How do you go to your investors, board, trustees, or investment committee advocating cheap Chinese stocks when the Western media narrative is so negative? Ironically, investors are up to their eyeballs in US companies with higher China revenue, though as long as global investors continue to throw money at US stocks, they will go higher. Despite most Chinese growth stocks having zero US revenue exposure, the US-China ADRs still trade on US tariff/geopolitical headlines. That’s why we prefer to hold the Hong Kong shares over the US ADRs. We firmly believe in the Art of the Deal versus the Grapes of Wrath, i.e., President Trump will negotiate a deal versus implementing economic and tariff policies that led to the 1929 stock market crash and Great Depression. Today’s China export/import data show how integrated the two countries’ economies are.
Seasonality: A big factor is simply that investors have closed the books for 2024. Why rock the boat? Who knows that China has outperformed India, Japan, EM, and EM ex-China YTD? Who knows, China's growth stocks have beaten the S&P 500 since their January bottom? Out of sight equals out of mind.
Where’s the beef? Has talk become cheap even if it comes from the highest echelon of the government? It's hard to say for certain, though articulating policy would go further than speaking of it.
Today’s market action was disappointing, though the above factors indicate China’s rally will be a grind higher rather than a sprint, which isn’t a bad thing.
November trade data likely weighed on sentiment as it missed expectations as exports increased by +6.7% year over year (YoY) versus expectations of +8.7% and October’s +12.7%. Imports fell by -3.9% versus expectations of +0.9% and October’s -2.3%. The trade data indicates the necessity of raising domestic consumption regardless of a trade war. The Hang Seng and Hang Seng Tech opened higher by +3.21% and +4.24% but closed lower by -0.5% and -1.39% on high volumes. Mainland investors sold -$1.327 billion of Hong Kong stocks and ETFs today after buying $1.543 billion yesterday.
The Shanghai, Shenzhen, and STAR Board opened higher by +2.58%, +3.35%, and +4.8% but closed at +0.59%, +0.87%, and +0.75%, respectively, on high volumes. It is worth noting that Mainland investors noticed the inclusion of consumption and real estate in the Politburo release as consumer staples gained +2.2% and real estate gained +1.44%. Tomorrow, the China Economic Work Conference starts with expectations of further policy support. CSI’s semi-annual index rebalance will occur on Friday, with record trading and turnover expected driven by the year-to-date (YTD) rise of Mainland Chinese ETFs assets under management. President Xi and, subsequently, Premier Li met in Beijing with the “1 + 10” Dialogue, including leaders from the World Bank, International Monetary Fund (IMF), World Trade Organization (WTO), International Labour Organization, The Organisation for Economic Co-operation and Development (OECD), and Financial Stability Board. Premier Li said, “Increase countercyclical adjustments, strengthen the intensity of macroeconomic policies, and make every effort to expand domestic demand and boost consumption.” We’ll end on a high note.
In full disclosure: I am not a Nvidia expert. I’ll simply reiterate the significant Mainland coverage of the State Administration of Market Regulation’s (SARM) investigation into Nvidia for the suspected violation of China’s anti-monopoly law regarding the company’s acquisition of Mellanox Technologies. SARM approved Nvidia’s acquisition back in February 2020 with several stipulations, including prohibiting the bundling of Nvidia GPU accelerators with Mellanox high-speed network interconnection equipment and not requiring the bundling in purchases. According to Sina Finance, Article 58 of the Anti-Monopoly Law states that a violation of the law includes a fan of 10% of the previous year’s sales with a max fine between $2 billion and $5 billion. China media noted that the EU recently opened an antitrust investigation as well. Is this tit-for-tat for US-China geopolitics? It is hard to say for certain as this type of foreign company investigation does occur. If anything, the SAMR investigation looks completely contradictory to yesterday’s Politburo release, stating the continued opening up of China to foreign companies. Within the big bureaucracy, sometimes, one hand doesn’t know what the other hand is doing, which is why I’m less concerned that Nvidia is a chess piece.
If you are looking for a holiday book gift, I’ll submit two recommendations. Hampton Sides’ The Wide Wide Sea chronicles Captain Cook’s 3rd and (spoiler alert) final voyage to Tahiti, Hawaii, and Alaska. I’m embarrassed to admit how little I knew of Cook, though I found the book to be an easy and educational read. Yuval Noah Harari’s Sapiens is a well-known book that isn’t always the easiest read but worthwhile. I learned a lot from the book, especially how long humans have run around the planet. Maybe due to my summer reading of Peter Frankopan’s very good The Silk Roads, which provides a history of the world from a Middle East perspective, I thought Sapiens might include Asia in addition to its review of European imperialism and the impact of the “age of discovery” on the people of South America and Africa. Two good books in my opinion.
The Hang Seng and Hang Seng Tech fell by -0.5% and -1.39%, respectively, on volume up +19.86% from yesterday, which is 191% of the 1-year average. 111 stocks advanced, while 388 declined. Main Board short turnover increased by 18% from yesterday, which is 195% of the 1-year average, as 16% of turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). Value and large capitalization stocks fell less than growth and small capitalization stocks. All sectors were negative, led lower by healthcare, down -2.89%, real estate, down -2.54%, and materials, down -2.15%. The top sub-sectors were household/personal products, textiles, and coal, while semiconductors, pharmaceuticals, construction materials, and industry conglomerates were the worst. Southbound Stock Connect volumes were 3x pre-stimulus levels as Mainland investors sold -$1,327 million of Hong Kong stocks and ETFs, with Alibaba a moderate/small net buy, Sunac a small net buy, the Hong Kong Tracker ETF a large net sell, Tencent, Meituan, and CNOOC were moderate net sells and Xiaomi small net sell.
Shanghai, Shenzhen, and the STAR Board gained +0.59%, +0.87%, and +0.75%, respectively, on volume up +34% from yesterday, which is 220% of the 1-year average. 2,781 stocks advanced, while 2,331 declined. Growth and large capitalization stocks outperformed value and small capitalization stocks. The top sectors were consumer staples, up +2.18%, real estate, up +1.42%, and financials, up +1.38%, while utilities fell -0.69% and communication services fell -0.14%. The top sub-sectors were leisure products, retail, and chemical fiber industry, while highway, power, and comprehensive were the worst. Northbound Stock Connect volumes were almost 2X the average. CNY managed to gain a small amount while the Asia dollar index experienced a small loss compared to the US dollar. Treasury bonds rallied. Copper and steel rose.
Last Night's Performance
| Country/Index | Ticker | 1-Day Change |
|---|---|---|
| China (Hong Kong) | HSI Index | -0.5% |
| Hang Seng Tech | HSTECH Index | -1.4% |
| Hong Kong Turnover | HKTurn Index | 19.9% |
| HK Short Sale Turnover | HKSST Index | 18.5% |
| Short Turnover as a % of HK Turnovr | N/A | 15.8% |
| Southbound Stock Connect Net Buy/Sell (US $ Millions) | N/A | -212.1 |
| China (Shanghai) | SHCOMP Index | 0.6% |
| China (Shenzhen) | SZCOMP Index | 0.9% |
| China (STAR Board) | Star50 Index | 0.8% |
| Mainland Turnover | .chturn Index | 34.7% |
| Nouthbound Stock Connect Net Buy/Sell (US $ Millions) | N/A | Not Available |
| Jing Daily China Global Luxury Index | CHINALUX Index | 0% |
| Japan | NKY Index | 0.5% |
| India | SENSEX Index | 0% |
| Indonesia | JCI Index | 0.2% |
| Malaysia | FBMKLCI Index | -0.2% |
| Pakistan | KSE100 Index | -0.9% |
| Philippines | PCOMP Index | 0.7% |
| South Korea | KOSPI Index | 2.4% |
| Taiwan | TWSE Index | -0.6% |
| Thailand | SET Index | -0.3% |
| Singapore | STI Index | 0.5% |
| Australia | AS51 Index | -0.4% |
| MSCI China All Shares Index | # of Stocks | Average 1-Day Change (%) |
|---|---|---|
| Hong Kong Listed | 152 | -1.12 |
| Communication Services | 9 | -1.65 |
| Consumer Discretionary | 30 | -0.53 |
| Consumer Staples | 13 | -1.47 |
| Energy | 7 | -1.04 |
| Financials | 23 | -0.83 |
| Health Care | 13 | -2.9 |
| Industrials | 19 | -1.5 |
| Information Technology | 10 | -1.07 |
| Materials | 10 | -2.16 |
| Real Estate | 6 | -2.54 |
| Utilities | 12 | -0.71 |
| Mainland China Listed | 432 | 0.93 |
| Communication Services | 9 | -0.17 |
| Consumer Discretionary | 31 | 0.71 |
| Consumer Staples | 27 | 2.15 |
| Energy | 16 | 0 |
| Financials | 63 | 1.35 |
| Health Care | 40 | 0.28 |
| Industrials | 69 | 0.56 |
| Information Technology | 85 | 1.03 |
| Materials | 68 | 0.67 |
| Real Estate | 7 | 1.39 |
| Utilities | 17 | -0.72 |
| US & Hong Kong Dually Listed | Ticker | 1-Day Change (%) |
|---|---|---|
| Tencent HK | 700 HK Equity | -1.8 |
| Alibaba HK | 9988 HK Equity | -0.3 |
| JD.com HK | 9618 HK Equity | 0.7 |
| NetEase HK | 9999 HK Equity | 0.2 |
| Yum China HK | 9987 HK Equity | -1.6 |
| Baozun HK | 9991 HK Equity | 5.9 |
| Baidu HK | 9888 HK Equity | -1.8 |
| Autohome HK | 2518 HK Equity | -2.3 |
| Bilibili HK | 9626 HK Equity | 3.4 |
| Trip.com HK | 9961 HK Equity | -2.3 |
| EDU HK | 9901 HK Equity | -3 |
| Xpeng HK | 9868 HK Equity | -1.8 |
| Weibo HK | 9898 HK Equity | -2 |
| Li Auto HK | 2015 HK Equity | -2 |
| Nio Auto HK | 9866 HK Equity | -0.5 |
| Zhihu HK | 2390 HK Equity | -0.1 |
| KE HK | 2423 HK Equity | 0.2 |
| Tencent Music Entertainment HK | 1698 HK Equity | -1.2 |
| Meituan HK | 3690 HK Equity | 0.1 |
| Hong Kong's Most Heavily Traded by Value | 1-Day Change (%) |
|---|---|
| TENCENT HOLDINGS LTD | -1.8 |
| MEITUAN-CLASS B | 0.1 |
| ALIBABA GROUP HOLDING LTD | -0.3 |
| XIAOMI CORP-CLASS B | 0 |
| HONG KONG EXCHANGES & CLEAR | -1 |
| PING AN INSURANCE GROUP CO-H | -1 |
| KUAISHOU TECHNOLOGY | -2.7 |
| SUNAC CHINA HOLDINGS LTD | -9.7 |
| CHINA CONSTRUCTION BANK-H | -0.2 |
| AIA GROUP LTD | 1.9 |
| Shanghai and Shenzhen's Most Heavily Traded by Value | 1-Day Change (%) |
|---|---|
| EAST MONEY INFORMATION CO-A | 1.7 |
| SERES GROUP CO L-A | -7.1 |
| HITHINK ROYALFLUSH INFORMA-A | -1 |
| LEO GROUP CO LTD-A | -10 |
| CITIC SECURITIES CO-A | 1.2 |
| KWEICHOW MOUTAI CO LTD-A | 1.8 |
| CONTEMPORARY AMPEREX TECHN-A | 0.9 |
| WINTIME ENERGY GROUP CO L-A | 3.1 |
| IFLYTEK CO LTD - A | 3.5 |
| WULIANGYE YIBIN CO LTD-A | 2.3 |
Last Night's Exchange Rates, Prices, & Yields
- CNY per USD 7.25 versus 7.27 yesterday
- CNY per EUR 7.64 versus 7.69 yesterday
- Yield on 10-Year Government Bond 1.85% versus 1.92% yesterday
- Yield on 10-Year China Development Bank Bond 1.92% versus 1.99% yesterday
- Copper Price +0.83%
- Steel Price +2.98%
