Week in Review
- Asian equities were mixed but mostly higher this week as Mainland China, especially the technology-focused STAR Board, outperformed, and Hong Kong underperformed.
- Hong Kong’s downdraft this week exposed the fragility of China’s recent bull market, as investors await more stimulus and consumer support confirmations from the National People’s Congress (NPC), which is expected to convene in the coming weeks.
- China reported trade and inflation data for September this week, indicating that inflation was light but not negative, while import and export growth fell short of expectations.
- Semiconductor names across Asia received a boost from Taiwan Semiconductor’s strong earnings beat on Thursday.
Key News
Asian equities were higher overnight as Hong Kong and Mainland China outperformed while South Korea underperformed.
The mid-morning September Chinese economic data release was a factor as GDP, retail sales, and industrial production beat expectations. However, the real catalysts for today’s rally were comments from the People’s Bank of China (PBOC), China Securities Regulatory Commission (CSRC), and especially President Xi.
Technology was the best sector in both Hong Kong and Mainland China, closing higher by +6.48% and +7.96%, due to President Xi’s comments while visiting Anhui province. He stated, “…science and technology must take the lead, with technological innovation being the necessary path to follow…” and “High-tech development cannot be begged for; we must accelerate the realization of high-level technological self-reliance and self-improvement,” according to the South China Morning Post. Mainland media noted his comments “that it is necessary to accelerate technological innovation and industrial transformation and upgrading.”
Yesterday’s note mentioned President Xi must be frustrated that recent agency press conferences have caused markets to fall after there is a clear effort to get the stock market higher. Also fueling the rally was PBOC President Pan’s speech at the 2024 Financial Street Forum Annual Meeting. While acknowledging the challenges facing the economy, including real estate, he outlined a clear path of policy changes that have occurred and will occur, including mentioning banks’ deposit reserve ratio, which is the amount of deposits that need to be held. The lower the deposit reserve ratio, the more banks will be able to lend, which will likely be lowered again soon with the government’s focus on the economy.
Pan reviewed the monetary policy bazooka unleashed while mentioning that “the deposit reserve ratio will be further reduced by 0.25 – 0.5 percentage points at an appropriate time” following the September 27th reduction by 0.5%. In addition, the 7-day reverse repo rate was lowered by 0.2%, the medium-term lending facility was lowered by 0.3% to 2%, and the 1—and 5-year loan prime rates were lowered by 0.2% and 0.25%, respectively.
He also reiterated that the mortgage refinancing, swap line for buying stocks from mutual funds, insurance and brokerage houses, and the loans available for companies to buy back stock.
He acknowledged the challenges, especially domestic consumption, stating, “The current economic operation needs to implement strong macro-total support policies…. insufficient effective demand, weak social expectations, low-priced operations, etc., and the market generally believes that it is necessary to launch a large-scale macro policy.”
Due to the challenges, “The central government’s decisive decision to launch a package of incremental policies reflects the firm determination to stabilize the economy, expectations, promote consumption, and benefit people’s livelihoods. “
A fascinating line here: “The role of consumption continues to increase, and the proportion of consumption, investment, and net exports to GDP has been adjusted from 49%, 47%, and 4% in 2010 to 56%, 42%, and 2% in 2023.”
CSRC Chairman Wu Qing’s speech at the Financial Street Forum acknowledged the economic challenges though recent policies should be effective, stating, “We believe that with the accelerated implementation of key reform tasks and the successive launch of a package of incremental policies, stock policies continue to exert force, and the foundation for China’s sustained economic recovery will be more stable and stable.” His speech focused on capital market reforms but did mention “we need to accelerate the implementation of guidance on long-term capital entering the market” while referencing the swap and buyback programs.
Yes, there was the economic data release!
- Q3 GDP was 4.6% versus expectations of 4.5%, and Q2’s 4.7%
- September Industrial Production was 5.4% versus expectations of 4.6%, and August’s 4.5%
- September retail sales were 3.2% versus expectations of 2.5%, and August’s 2.1%
- Online retail sales increased by +8.6% year to date versus the same time period last year.
- September fixed asset investment was 3.4% versus expectations of 3.3%, and August’s 3.4%
- September real estate data was unsurprisingly weak, with new home prices down -0.71% month over month, used home prices down -0.93% month over month, and property investment down -10.1% year over year
Growth stocks/sectors led the way in both the Hong Kong and Chinese markets, which exhibited very strong breadth and volumes, as recent profit takers might be kicking themselves today. Mainland investors took profits via Southbound Stock Connect in a rare net sell day—$399 million, with the Hong Kong Tracker ETF a large net sell, though Alibaba and Tencent were net buys. Worth noting that Alibaba filed that they bought their ADR yesterday on weakness. Smart!
The WSJ’s Gregory Ip wrote a great article on Trump’s tariff policies and potential consequences. Funny, the number of references to the 1930s! Was that a good economic time period? The excerpt below is from the 2020 NY Fed blog post-Liberty Street Economics. What if there is no trade deficit?
Discussions of the trade war often focus only on U.S. exports to and imports from China, missing the much larger exposure of U.S. firms emanating from their subsidiaries in China. For example, while the United States only exported $130 billion of goods to China in 2017, sales by U.S. multinationals in China amounted to $376 billion that year. Although the large bilateral deficit in 2017 was driven by the fact that U.S. exports to China were only a quarter as large as Chinese exports to the United States, total sales (exports plus multinational sales) by U.S. firms in China were $505 billion—only 11 percent lower than total sales by Chinese firms in the U.S. market ($570 billion).
Link:
The Hang Seng and Hang Seng Tech gained +3.61% and +5.77%, respectively, on volume up +35.45% from yesterday, which is 217% of the 1-year average. 501 stocks advanced, while 12 declined. Main Board short turnover increased by 19% from yesterday, which is 129% of the 1-year average, as 10% of turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). Growth and small capitalization stocks outperformed value and large capitalization stocks. All sectors were positive, led higher by technology, up +6.47%, consumer discretionary, up +4.54%, and consumer staples, up +4.54%. All sub-sectors were positive, led higher by technical hardware, semiconductors, and utilities. Southbound Stock Connect volumes were high/3X the average as Mainland investors sold -$399 million of Hong Kong stocks and ETFs, with Alibaba a large net buy, Xiaomi, Tencent, and SMIC small net buys, while the Hong Kong Tracker ETF a large net sell.
Shanghai, Shenzhen, and the STAR Board gained +2.91%, 4.09%, and +11.33%, respectively, on volume up +40% from yesterday, which is 250% of the 1-year average. 4,808 stocks advanced, while 233 declined. Growth and small capitalization stocks outpaced value and large capitalization stocks. All sectors were positive, led by technology, up +7.96%, healthcare, up +4.09%, and industrials, up +3.85%. All sub-sectors were positive, led higher by computer hardware, software, and education. Northbound Stock Connect volumes were very high/3X the average. CNY and the Asia dollar index gained versus the US dollar. Treasury bond prices fell (yields rose). Copper and steel fell.
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Last Night’s Performance
Last Night’s Exchange Rates, Prices, & Yields
- CNY per USD 7.10 versus 7.12 yesterday
- CNY per EUR 7.70 versus 7.73 yesterday
- Yield on 10-Year Government Bond 2.12% versus 2.11% yesterday
- Yield on 10-Year China Development Bank Bond 2.20% versus 2.19% yesterday
- Copper Price -0.13%
- Steel Price -2.27%