Key News

After the Mainland’s close, a statement was released from today’s meeting of the Politburo, which is the Political Bureau of the CPC Central Committee, i.e. the highest echelon of China’s government, which was presided over by President Xi. The statement said that the body would “implement more proactive fiscal policies and moderately loosen monetary policies,” which sent the Hong Kong market vertical in the last hour of trading, as all sectors were positive amid very strong buying of Hong Kong stocks by Mainland investors via Southbound Stock Connect. Unfortunately, the Mainland China market was already closed when the statement was released.

Using the phrase “moderately loose” to describe monetary policies diverges from the usual term “stable” for the first time since 2011. The statement shatters the notion that China’s government is not focused on the economy, the stock market, and housing prices. The emphasis on domestic consumption is key, as many foreign investors have wanted a greater emphasis on this, which we saw today. The statement also de-emphasizes language toward tech and high-end manufacturing.

We will also have this week’s China Economic Work Conference (CEWC) taking place this week, which should provide further guidelines on policy. There is also speculation that a bank reserve requirement cut will take place this month.

Today’s move is highly problematic for strategists and institutional investors who are underweight China in their models or portfolios. What percentage of Wall Street equity strategists are overweight China? To my knowledge, two. Portfolio manager allocations to China within global, Asia, and Emerging Markets mutual fund portfolios remain underweight, which, going into quarter and year-end, should be slightly problematic. China’s government is telling you that stimulus is coming, meaning you can either get involved or hope the rally fades.

Below are additional key phrases from the politburo release, including commentary on the strong adjectives used.

• Strengthen extraordinary counter-cyclical adjustments
  • We should vigorously boost consumption, improve investment efficiency, and comprehensively expand domestic demand.
  • We should lead the development of new quality productive forces with scientific and technological innovation and build a modern industrial system. 
  • We should expand high-level opening-up and stabilize foreign trade and foreign investment. 
  • We should stabilize the property and stock markets
  • We should prevent and resolve risks and external shocks in key areas
  • We should promote the sustained recovery of the economy, continuously improve people's living standards

Asian equities were mixed overnight, as Hong Kong outperformed, and South Korea underperformed. Mainland China closed with small losses. However, the Politburo statement was released after the close and futures are indicating a +4% rise tomorrow.

China’s November inflation explains the pivot toward domestic consumption, as the government needs to shock the economy out of its negative deflationary feedback loop. The producer price index (PPI) declined -2.50% year-over-year versus an expected -2.80% and October’s -2.90%. Meanwhile, the consumer price index (CPI) gained only +0.20% versus expectations of +0.40% and October’s +0.30%.

Mainland investors bought a very healthy $1.64 billion worth of Hong Kong-listed stocks and ETFs. The National Team appeared to buy their favorite ETFs, as the Mainland market slipped into the mid-day lunch break. Hong Kong-listed growth stocks ripped higher, led by internet stocks, including Hong Kong’s most heavily traded stocks by value, which were Tencent, which gained +1.50%, Meituan, which gained +5.73%, and Alibaba, which gained +3.51%.

Wuxi Biologics gained +9.57% and Wuxi AppTec gained +9.62% after the US defense budget did not include the bill that would have harmed their US operations.

President Trump mentioned speaking with President Xi in a weekend interview though details were light.

Jack Ma spoke at Ant’s twentieth anniversary in Hangzhou in another positive sign of internet regulation’s demise.

The Hang Seng and Hang Seng Tech indexes gained +2.76% and +4.30%, respectively, on volume that increased +26.87% from Friday, which is 160% of the 1-year average. 456 stocks advanced, while 46 declined. Main Board short turnover increased +48% from Friday, which is 165% 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). The growth factor and small caps outperformed the value factor and large caps. All sectors were positive, led by Real Estate, which gained +4.54%; Consumer Discretionary, which gained +4.42%; and Materials, which gained +4.22%. The top-performing subsectors were household appliances, consumer staples, and consumer services. Meanwhile, industry conglomerates were the only negative subsector. Southbound Stock Connect volumes were just above the pre-stimulus average, as Mainland investors bought a net $1.6 billion worth of Hong Kong-listed stocks and ETFs, including the HK Tracker ETF, a large net buy, Alibaba, a moderate net buy, Meituan, a small net buy, Xiaomi, and Tencent. Wuxi Biologics was a moderate net sell.

Shanghai, Shenzhen, and the STAR Board fell -0.05%, -0.35%, and -1.09%, respectively, on volume that declined -8.65% from Friday, which is 165% of the 1-year average. 2,007 stocks advanced while 2,994 declined. The value factor and large caps “outperformed” (i.e. fell less than) the growth factor and small caps. The top-performing sectors were Communication Services, which gained +1.27%, Utilities, which gained +0.85%, and Consumer Discretionary, which gained +0.37%. Meanwhile, Real Estate fell -2.26%, Technology fell -1.16%, and Consumer Staples fell -0.47%. The top-performing subsectors were precious metals, autos, and land transportation. Meanwhile, Real Estate, Retail, and computer hardware were among the worst-performing subsectors. Northbound Stock Connect volumes were above average. CNY gained while the Asia Dollar Index fell versus the US dollar. Treasury bond prices were gained. Copper gained while steel fell.

Last Night's Performance

Last Night's Exchange Rates, Prices, & Yields

• CNY per USD 7.27 versus 7.26 yesterday
• CNY per EUR 7.69 versus 7.69 yesterday
• Yield on 10-Year Government Bond 1.92% versus 1.95% yesterday
• Yield on 10-Year China Development Bank Bond 1.99% versus 2.03% yesterday
• Copper Price 0.34%
• Steel Price -0.30%