Key News
Asian equities were lower except for Japan which closed higher.
Hong Kong and Mainland China faced several headwinds, or as I like to say, had the kitchen sink thrown at them going into the trading day. AMD’s disappointing financial results, reported after the US close yesterday, weighed on the semiconductor space. Hua Hong Semiconductor closed lower by -4.63%, and Semiconductor Manufacturing International (SMIC) fell by -7.32% in Hong Kong and by -7.02% in Mainland China.
The EU is moving forward with electric vehicle (EV) tariffs and anti-subsidy taxes on China for five years, as cooperating companies will be tariffed at a 20.70% rate, while non-cooperating companies will be tariffed at a 35.30% rate. The news hit Hong Kong-listed BYD, as it fell by -0.67% (17% tariff), Li Auto fell -2.51%, Nio fell -6.58%, Geely Auto fell -2.96% (18.8% tariff), Great Wall fell -2.72%, and XPeng fell by -3.92%. Tesla will be tariffed at 7.80%.
PetroChina reported financial results yesterday, and fell -1.10% in Mainland China and -0.34% in Hong Kong, which weighed on sentiment as investors sold down the big banks and insurance companies going into results announced after the market’s close. Today’s pessimism seems overdone as Q3 results appear in line despite the headwind of low interest rates on net margin income, as the Agricultural Bank of China’s net profit is up +5.88% year-over-year (YoY), ICBC’s net profit was up +3.8% YoY, Bank of China’s net profit was up +4.38%, Bank of Communication’s net profit was up +1.2%, and China Construction Bank’s net profit was up +3.79%.
Insurance company China Life reported that its revenue grew by an impressive +54.8% YoY. Also, after the close, home appliance maker Midea reported a large revenue decline, falling -68% YoY, though net income increased by +15%. However, the company should benefit from Singles Day and home appliance purchase subsidies.
Hong Kong-listed growth stocks were off on no significant news as the US election is seemingly keeping investors sidelined.
Yesterday’s Reuters stimulus article was viewed as “not new”, though I would argue provides an indication of what could be coming. Garnering attention was a speech by economist and former official Liu Shijin who last month stated the Chinese government should raise RMB 10 trillion via special purpose bonds for stimulus. In a speech today, he clarified his views by stating “short term stimulus measures are necessary to stabilize the economy” though China shouldn’t replicate developed countries’ “helicopter money” since some of the money could go to “billionaires” versus those that need it. Meanwhile, several of the issues that are weighing on domestic consumption are structural. The structural issues are lower income groups and migrant workers who face challenges in securing adequate and sustainable “housing, pensions, social security.”
Mainland investors net sold Hong Kong-listed stocks and ETFs via Southbound Stock Connect, as the Hong Kong Tracker ETF saw the majority of the -$614 million worth of net selling. Real estate was a rare bright spot in Mainland China on a strong uptick in Shenzhen home sales in October, reaching a level last seen in December 2008. Shanghai is also reporting that this past weekend’s transaction volume was the highest of the year, as October’s data is looking very strong. Luckin Coffee beat analyst expectations in their pre-US market open release.
Tomorrow is the release of the “official” Manufacturing PMI with September’s 49.8 and expectations of 49.8 and the Non-Manufacturing PMI with September’s 50 and expectations of 50.3.
One of the first things I learned while visiting Mainland China back in early 2013 was the popularity of hybrid mutual funds in Mainland China to mitigate equity volatility. We’ve spoken about foreign investors being sidelined by the US election, skepticism surrounding the Chinese government’s commitment to stimulus, the outperformance of US technology stocks versus global equity markets including China and Emerging Markets, and the overweight to Japan and India at China’s expense in the Asia region. Exhibit A was yesterday’s US ADR fade following the Reuters stimulus news which again isn’t necessarily “new news” but is a strong indication of what could be coming.
Have professional mutual fund managers in China reacted to the September 24th monetary policy bazooka and September 26th Politburo release? On September 23rd, the average equity position across 8,813 Mainland Chinese mutual funds in Mainland China was 64.85% versus the year-to-date through September 23rd average of 65%. Since September 24th, the average position rose to 67.04% while as of yesterday it was 66.57%. Funds haven’t had this high of equity allocation since the removal of zero COVID back in late 2023. As you can see, this is across a big data set, so we can say confidently portfolio managers have either allocated more to Mainland stocks or allowed their equity profits to run.
An alternative is to look at the total assets under management (AUM) of all Mainland Chinese mutual funds including stock, balanced/hybrid, and bond funds (doesn’t total because I’m not including “other asset” category, warrants, and a few others). Because China lacks a social safety net like in the developed world, households save a lot, which explains the very high cash and bond fund allocations along with $45 trillion of bank deposits. At the end of Q1 2024, 16% of AUM was in Mainland stocks versus 53.04% bonds and 18.4% cash. At the end of Q2, Mainland stocks were 15.05%, 53.58% bonds, and 18.21% cash. At the end of Q3, stocks were 17.94% stocks, 48.61% bonds, and 19.49% cash. Again, big picture, there is a shift. My favorite childhood movie line from Clint Eastwood altered would be “you’ve got to ask yourself one question: are you shifting? Well, are you?”
The Hang Seng and Hang Seng Tech indexes fell by -1.55% and -2.38%, respectively, on volume that increased +8.04% from yesterday, which is 136% of the 1-year average. 96 stocks advanced while 395 declined. Main Board short turnover increased by 12.05% from yesterday, which is 105% 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 capitalization stocks fell less than growth and large capitalization stocks. All sectors were negative, led lower by healthcare, down -3.32%, consumer discretionary, down -2.25%, and materials, down -2.14%. The only sub-sectors that were positive were food/staples and technical hardware, while semiconductors, pharmaceuticals, and consumer durables were the worst sub-sectors. Southbound Stock Connect volumes were 1.5X the average as Mainland investors sold -$614 million of Hong Kong stocks and ETFs, with Alibaba a moderate/large net buy, Xiaomi a small net buy, Tencent a very small net buy, while the Hong Kong Tracker ETF was a large net sell, CNOOC and Meituan were moderate net sells, and SMIC was a small net sell.
Shanghai, Shenzhen, and the STAR Board fell -0.61%, +0.04%, and -1.70%, respectively, on volume that was down -10.42% from yesterday, which is 210% of the 1-year average. 1,788 stocks advanced while 3,207 declined. Value and small capitalization stocks fell less than growth and large capitalization stocks. The top-performing sectors were real estate, up +0.7%, technology, up +0.4%, and communication services, up +0.31%, while financials fell by -0.88%, energy fell by -0.82%, and healthcare fell by -0.72%. The top sub-sectors were comprehensive industry, power generation, and education, while insurance, office supplies, and soft drinks were the worst sub-sectors. Northbound Stock Connect volumes were high, 2X the average. CNY and the Asia dollar index gained versus the US dollar. Treasury bonds fell. Copper and steel gained.
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Last Night’s Performance
Last Night’s Exchange Rates, Prices, & Yields
- CNY per USD 7.12 versus 7.13 yesterday
- CNY per EUR 7.71 versus 7.72 yesterday
- Yield on 10-Year Government Bond 2.16% versus 2.16% yesterday
- Yield on 10-Year China Development Bank Bond 2.24% versus 2.24% yesterday
- Copper Price +0.20%
- Steel Price +0.15%
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