Market

Services PMI Miss Lifts Defensive Plays, Week In Review

Week in Review

  • China-based food delivery giant Meituan reported Q2 financials Monday, beating analyst expectations across the board and kicking off a comeback week for Hong Kong-listed China internet stocks. Hong Kong-listed shares of Alibaba and Tencent gained +4.24% and +4.77%, respectively, during the week.
  • China reported August manufacturing and non-manufacturing PMIs on Tuesday. Both economic indicators came in below estimates and July’s figures as flooding and the temporary closure and quarantine of Ningbo’s port, the third largest in the world, weighed on economic activity.
  • Video streaming site Kuaishou was added to Southbound Stock Connect, the program that allows Mainland investors to buy Hong Kong stocks, on Thursday before gaining +5.24%.
  • Xi Jinping announced the planned establishment of the Beijing Securities Exchange on Thursday, which would allow small and medium-sized enterprises to list in the nation’s capital. The new exchange’s listing rules will parallel those of the STAR Board, allowing pre-profit companies to list publicly.

Key News

Asian equities were largely higher as Japanese investors cheered the resignation of PM Suga, which must sting a touch. However, China and Hong Kong were off today.

The August Caixin Services PMI release was a big miss, coming in at 46.7 versus expectations of 52 and July’s 54.9. Usually, investors would cheer bad economic data as it means it will force policy support. That did not happen today as defensive plays outperformed.

Meanwhile, Hong Kong was dragged lower by internet stocks as Alibaba’s donation weighed on the space. Defensive/value sectors outperformed growth sectors as energy and healthcare posted strong performance.

It is worth noting that Kuaishou Technology (HK) bucked the trend after being added to Southbound Stock Connect yesterday. I provide a thorough review of Connect below. Why would Chinese regulators allow Mainland investors to buy the company’s stock if they are going to put the company out of business? Kuaishou saw net buying today, which was almost 2X yesterday’s volume of nearly ~$100 million. Remember that Tencent and Meiutan have 6% and 4% ownership in the company, respectively, so we could see a nice uptick in those names as a result.

Mainland China had a similar day as Hong Kong. Defensive/value sectors outperformed growth sectors. Meanwhile, clean tech had an off day as electric vehicle metals got hit by profit taking along with solar stocks though wind managed to hold up. Foreign investors were big buyers of Mainland stocks today in what was a big week for Northbound Stock Connect. Foreign investors bought $1.1 billion worth of Mainland stocks overnight, bringing the weekly total to $4.3 billion!

There has been a great deal of chatter on news that Didi will receive an investment from the City of Beijing. I don’t really know whether this is a good thing or a bad thing. One could argue that a local government taking a stake in the company is an indication that it will survive.

Yesterday we wrote about President Xi’s speech at the China International Fair for Trade in Services that included an announcement of a new Beijing-based stock exchange focused on “innovative SMEs” (small and medium-sized enterprises). It appears this new exchange will take the top companies from the National Equities Exchange and Quotations (NEEQ), which is an over-the-counter (OTC) market similar to the pink sheets here in the US. The NEEQ, which is often referred to as the “Third Board”, is comprised of micro-cap companies so this is neither a competitor nor a threat to the STAR Board. SMEs have historically had trouble gaining access to capital as banks prefer to lend to State Owned Enterprises (SOEs) over private companies, which can go bankrupt. There has been a big push to help SMEs gain access to not only bank loans, but also investor capital. I am not worried about this new exchange as a threat to the STAR Board as the latter is different in that it is focused on technology companies. The speech also included a healthy commitment to China continuing to open its financial markets to foreigners, which hasn’t garnered much attention.

Yesterday, I had the distinct pleasure of catching up with a friend who is a seasoned investor. Our catch up also provided an excuse to get out of the house after having to deal with a flooded basement. We discussed Stock Connect, which I write about daily, but realized I’ve never given an in-depth review.

Back in early 2013, Jonathan Krane and I went to Beijing to meet with the China Securities Regulatory Commission (CSRC), China’s SEC, followed by a visit to the State Administration of Foreign Exchange (SAFE). Back then, one needed approval to invest in Shanghai and Shenzhen stocks through quota programs called QFII and RQFII. One also needed permission to convert your US dollars into CNY. Several emerging market (EM) countries restrict FX after witnessing “hot” capital go into the Asian Tigers in 1990s. When that capital left, it wiped out some of those economies and led to the downfall of several governments. No bueno! Established in 2014 and expanded in December 2016, Northbound Stock Connect is a trading platform that allows institutional investors to trade and take custody of Shanghai and Shenzhen stocks through accounts in Hong Kong. Its sister program, Southbound Stock Connect, allows Mainland Chinese institutional investors to buy Hong Kong-listed stocks. Back in 2013, the quota programs only permitted to use of one custodian and one broker. Stock Connect allows for the use of several custodians and any number of brokers. Competition is good as it lowered trading costs. The Hong Kong Stock Exchange provides transparency on which stocks investors are buying and selling daily through both Northbound and Southbound Stock Connect programs. I will keep a very close eye on both Northbound and Southbound flows.

Did anyone catch the Wall Street Journal article about CVS’ efforts to catch thieves who rob their store and then sell the goods on Amazon? Solid article. I had to laugh thinking if this was a Chinese company instead of Amazon? DEFCON 1. The article dances around it, but falls short of explicitly calling out Amazon for what one could argue is aiding and abetting criminal activity. I am not opining on Amazon, but just pointing out the hypocrisy.

H-Share Update

The Hang Seng opened lower and stayed down for the count closing -0.72% as volume increased 18.65% from yesterday. The 210 Chinese companies listed in Hong Kong and within the MSCI China All Shares Index lost -0.9% as energy +2.47%, healthcare +1.61%, industrials +1.1%, materials +0.94%, utilities +0.91%, and real estate +0.61%. Meanwhile, discretionary -2.81%, communication -1.55%, and tech -0.41%. Hong Kong’s most heavily traded stocks by value were Tencent, which fell -1.61%, Meituan, which fell -3.47%, Alibaba HK, which fell -3.57%, Li Ning, which fell -0.3%, China Merchants Bank, which was flat, Kuaishou Technology, which gained +2.04%, Hong Kong Exchanges, which fell -2.17%, Ping An Insurance, which fell -0.49%, AIA, which gained +0.05%, and BYD, which fell -2.97%. Southbound Stock Connect volumes were moderate as Mainland investors sold -$27 million worth of Hong Kong stocks as Southbound Connect Trading accounted for 11.6% of Hong Kong turnover.

A-Share Update

Shanghai, Shenzhen, and the STAR Board diverged -0.43%, -0.56% and +0.1%, respectively, as volume increased +9.56% from yesterday, which was just shy of Wednesday’s record-breaking volume day. Today’s volume was 167% of the 1-year average. The 543 Mainland stocks within the MSCI China All Shares Index were off -0.38% led by utilities +2.44%, staples +1.61%, and healthcare +0.64%. Meanwhile materials -2.91%, industrials -1.79%, and tech -0.66%. The Mainland’s most heavily traded stocks by value were TBEA, which gained +5.15%, China Northern Rare Earth, which gained 0.13%, Inner Mongolia BaoTou Steel, which fell -7.32%, China Three Gorges Renewables, which gained +8.7%, Tianqi Lithium, which fell -8.05%, broker East Money, which fell -1.45%, Kweichow Moutai, which gained +2.44%, Xinjiang Goldwind Science, which gained +10.01%, Longi Green Energy, which fell -2.89%, and Ganfeng Lithium, which fell -6.87%. Northbound Stock Connect volumes were moderate/high as foreign investors bought +$1.1 billion of Mainland stocks today as Northbound trading accounted for 5.9% of Mainland turnover.

Last Night’s Exchange Rates, Prices, & Yields

  • CNY/USD 6.44 versus 6.46 yesterday
  • CNY/EUR 7.66 versus 7.66 yesterday
  • Yield on 1-Day Government Bond 1.54% versus 1.40% yesterday
  • Yield on 10-Year Government Bond 2.83% versus 2.83% yesterday
  • Yield on 10-Year China Development Bank Bond 3.17% versus 3.17% yesterday
  • Copper Price +0.42%

Krane Funds Advisors, LLC is the investment manager for KraneShares ETFs. Our suite of China focused ETFs provide investors with solutions to capture China’s importance as an essential element of a well-designed investment portfolio. We strive to provide innovative, first to market strategies that have been developed based on our strong partnerships and our deep knowledge of investing. We help investors stay up to date on global market trends and aim to provide meaningful diversification. Krane Funds Advisors, LLC is majority owned by China International Capital Corporation (CICC).

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