Key News
Asian equities were largely higher while Mainland China and Hong Kong were off, but not nearly as much as US ADRs fell yesterday.
South Korea was closed for Hangul Day, a holiday commemorating the invention of Hangul, the Korean alphabet.
The US dollar strengthened overnight versus Asian currencies, with the US 10-year Treasury Yield rising above the 4% level. Impossible to know, but I suspect an element of the “fast money”/Swift Boats that went into Mainland China came out based on exceedingly high Northbound Stock Connect volumes yesterday, which were more than 5X the average and today’s 4X the average.
Hedge funds are incentivized to take profits based on their 2% expense ratio & 20% of gains. The mega-cap stocks favored by foreign investors for their liquidity profile were hit hard, such as CATL, down -14.72%, Kweichow Moutai, down -7.42%, Ping An, down -9.77%, Wuliangye, down -9.98%, Sungrow, down -16.85%, and BYD, down -6.63%. Domestic favorites and several stocks foreign investors aren’t allowed to buy due to US regulation were up, such as broker East Money, up +2.22%, broker Citic, up +1.44%, and US-sanctioned Semiconductor Manufacturing, up +16.53%, though September global semiconductor sales increased from August which was a factor in the latter. It is feasible that the Mainland’s retail investors/traders who got in early had taken profits/sold at break-even levels as well.
The market rebounded when the Ministry of Finance (MoF) announced they would host a press conference this Saturday in order to discuss “increasing the countercyclical adjustment of fiscal policies and promoting high-quality economic development.” I would assume that post-National Development and Reform Commission (NDRC), the MoF press conference, was put together with real policies. As we discuss below, the MoF, not the NDRC, is responsible for articulating fiscal policies, which would then be approved by the National People’s Congress (NPC) in a month.
Obviously, a non-factor, though worth noting Mainland media, covered Prime Minister Li’s meeting with “economic experts and entrepreneurs, emphasizing the implementation of a package of incremental policies, providing specifically for the policies under research as soon as possible.” Seems a little short sighted to sell now but profit taking happens I suppose. Hong Kong opened higher but was dragged lower on the Mainland’s weakness to close lower. It is worth noting that Meituan is bucking the Hong Kong drawdown, up +2.33% on a broker upgrade based on strong Golden Week sales data. Strong Golden Week data has been totally ignored, though we’ll review it tomorrow. Southbound Stock Connect volumes were also elevated at 4X the average, with Mainland investors net sellers of Hong Kong stocks and ETFs, with a net sell of -$82 million, though Alibaba was a net buy. Tencent was right back buying stocks.
With markets whipping around, it’s worth taking a step back to review recent events and consider where we are headed. On Tuesday, September 24th, the People’s Bank of China (PBOC), China’s central bank, unleashed an unprecedented monetary (interest rate cuts, bank reserve requirement ratio cut), housing (mortgage rate cut, 1st/2nd time down payment amounts reduced, push through mortgage refinancing), and stock market (RMB 500 billion for brokerage, mutual funds and insurance companies to buy stocks) bazookas sending both Hong Kong and Mainland China equity markets. The unprecedented action was followed by the even more surprising and unexpected Central Committee meeting presided by President Xi and the meeting release stating where they stated the below (bond and underlining are mine to highlight the importance of words used):
- The meeting said it is necessary to take a comprehensive, objective, and sober view of the current economic situation, face the difficulties squarely, and remain confident.
- The country should effectively implement existing policies, step up efforts to roll out incremental policies, further make policy measures more targeted and effective, and strive to accomplish the targets and tasks for this year’s economic and social development, according to the meeting.
- The meeting stressed the need to issue and use ultra-long special treasury bonds and local government special-purpose bonds effectively to better leverage government investment’s driving role.
- It is imperative to lower the reserve requirement ratio and implement impactful interest rate cuts, the meeting said.
- The meeting said efforts would be made to stabilize the property market and reverse its downturn, adjust the policy of housing purchase restrictions, lower interest rates on existing mortgage loans, promptly improve land, fiscal, tax, and financial policies, and promote the establishment of a new model for real estate development.
- The meeting called for efforts to boost the capital market, vigorously guide medium—and long-term funds into it, and clear the obstacles for social security, insurance, and wealth management funds to invest in it.
- The meeting noted that mergers, acquisitions, and restructuring of listed firms will be supported. It urged efforts to steadily advance the reform of publicly offered funds and mull over and introduce policy measures to protect small and medium-sized investors.
- On Tuesday, China’s central bank, top securities regulator, and financial regulator announced a raft of monetary stimulus, property market support, and capital market strengthening measures to boost the country’s high-quality economic development.
There are three areas to review, so let’s start with Capital Markets:
An element of the Hong Kong and US ADR rally was short covering as Bank of America’s global fund manager survey had just published the most popular trade was long Magnificent 7 followed by short China equities. However, there has been clear buying as Japan and India, beneficiaries of China allocations being redeployed, fell last week. Was Hong Kong overdue for a pullback after its massive rally? 100%. Key things to recognize: 1) Southbound Stock Connect was a net buy yesterday as Mainland investors bought the dip. 2) Tencent bought 1.56 million shares yesterday following Monday’s buyback of 1.05 million shares. Mainland China ETFs with Shanghai and Shenzhen stocks had risen above the 10% daily limit up, and the STAR Board above their 20% daily limit up, which was a bit of a head-scratcher. Things got a little ahead of themselves.
NDRC Press Conference
The Mainland markets reopened following the Golden Week holiday and were up +10% until the NDRC press conference started, so clearly, the press conference failed to meet investors’ expectations. Those expectations were too high as the NDRC doesn’t have the ability to announce the fiscal stimulus bazooka, which kind of begs the question, why host it? The idea that the press conference was deliberately done to cool animal spirits is ridiculous, IMO. Ultimately, the press conference should never have been held, though it did reveal our third point.
The Great Wall of Worry, Disbelief & Skepticism
The NDRC press conference highlights the skepticism and disbelief of domestic and foreign investors to these seismic events. The former should be especially disconcerting. Foreign investor confidence has been shattered, leaving a high level of skepticism, disbelief, or a complete lack of caring about what happens over there (despite having massive implied China exposure via the US and global multi-nationals China revenue exposure). The bearish narrative appears completely accurate based on political, economic, and regulatory policies taken over the last three or four years. Moving the supertanker of investor skepticism, ie doesn’t turn quickly, will take time. That’s why I am so focused on the internet companies buying back their own stock, which has nothing to do with government policy, as the founder-led companies simply think their stock is cheap. Make no doubt that the world’s second-largest economy is headed toward fiscal stimulus following the monetary, housing, and stock market bazookas. Moving the economy and the housing market higher are two other supertankers that will take time. Fiscal policy will be coming with a Ministry of Finance meeting this weekend.
Where do we go from here?
Over the last month, Mainland China and Hong Kong stocks have been up +20% even with the recent correction. We’ll need further fiscal stimulus policy articulated, as investors will demand proof of concept. The more policy articulation, the more money will come in and buy, IMO.
The Hang Seng and Hang Seng Tech fell -1.38% and -1.17%, respectively, on volume down -31.18% from yesterday, which is 364% of the 1-year average. 65 stocks advanced, while 439 declined. Main Board short turnover decreased -36% from yesterday, which is 252% of the 1-year average, as 11% of turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). Growth and large capitalization stocks fell less than value and small capitalization stocks. All sectors were negative, led lower by materials, down -4.33%, industrials, down -3.66%, and utilities, down -3.65%. All sub-sectors were negative except for media, led lower by diversified finance, food/consumer staples, and capital goods. Southbound Stock Connect was a net seller of Hong Kong stocks and ETFs with a net sell of -$86 million.
Shanghai, Shenzhen, and the STAR Board fell -6.62%, -8.65%, and -2.55%, respectively, on volume down -14.73% from yesterday, which is 138% of the 1-year average. 388 stocks advanced, while 4,700 declined. Growth outpaced value, while large and small capitalization stocks were up approximately the same. All sectors were negative, led lower by communication services, down -9.47%, industrials, down -9.46%, and healthcare, down -8.87%. All sub-sectors were negative, led lower by cultural media, chemical fibers, and electric power. Northbound Stock Connect volumes were very high. CNY and the Asia dollar index fell versus the US dollar. Treasury bond prices gained. Copper and steel fell.
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Last Night’s Performance
Last Night’s Exchange Rates, Prices, & Yields
- CNY per USD 7.06 versus 7.05 yesterday
- CNY per EUR 7.74 versus 7.74 yesterday
- Yield on 10-Year Government Bond 2.18% versus 2.19% yesterday
- Yield on 10-Year China Development Bank Bond 2.27% versus 2.32% yesterday
- Copper Price -0.78%
- Steel Price -2.34%