Week in Review
- Asian equities had an off week as Hong Kong had a short week due to Easter Monday.
- According to a release Monday, China’s GDP grew by +4.8% year-over-year in Q1, higher than expectations of 4.2%.
- This week was an important one for central bank signaling. After cutting the reserve requirement ratio (RRR) by 25 basis points last Friday, the People’s Bank of China (PBOC), China’s central bank, left the 1 and 5-year loan prime rates (LPRs), which help set mortgage rates, unchanged Wednesday at 3.7% and 4.6%, respectively.
- This week, delisting concerns led to volatility in US-listed Chinese stocks and internet stocks listed in both Hong Kong and the US as the SEC added more companies to the list of potential delisting targets. Meanwhile, a Thursday Bloomberg article noted the increase in Hong Kong shares outstanding for dually listed companies as US ADRs are converted to Hong Kong shares. However, Fang Xinghai, Vice Chairman of the China Securities Regulatory Commission (CSRC), China’s primary securities regulator, expressed his confidence in the ability of his agency and its US counterpart to arrive at a solution and avoid delisting.
Asian equities ended an ugly week lower as Mainland China was one of the only markets in the green.
Overnight, Asian investors took yesterday’s positive news much better than US investors. We had the CSRC’s positive comments on a solution to the Holding Foreign Companies Accountable Act (HFCAA), stating that the two sides are talking weekly and recommended that Chinese institutional investors raise their equity allocations. The issue with the market of late has been a crisis of confidence and a buyers’ strike as investors have become skeptical of repeated statements from the China side on a solution but nothing from the US side. Throw in a Shanghai lockdown, a global rotation out of growth and into value, the PCAOB’s pivot to incremental monetary easing, rising US interest rates, and the current political climate, and you have a nasty mix for growth/internet stocks.
The lack of buyers is an issue as shorts can press their bets since no one is stepping up into the void. Today, 20% of all Hong Kong volume was short-selling versus the 1-year average of around 12%.
Yesterday’s sell-off in US-listed Chinese stocks was a head-scratcher as there was no “news.” Yes, the SEC added more names to the HFCAA non-compliant list, but the names were off before the release. The SEC is fulfilling its duty as the HFCAA enforcement agency, which might not be understood. The issue is the lack of buyers, as evidenced by the fact that the weights of Alibaba and Tencent in active EM funds are at one-half of the companies’ weights in the MSCI Emerging Markets Index. Yesterday was a dark day for me, seeing a sell-off on no news. There was a lack of attention to the positives as well.
Did anyone read about the US Defense Secretary meeting with his Chinese counterpart for the first time in two years? Did anyone read about the Deputy National Security Advisor talking about rolling back tariffs? Did anyone notice the comments from the Chinese Ambassador to the US on Russia? If you take my emotional state as a barometer, combined with the lack of attention to our space, one should be very bullish. Yesterday, I was a small/incremental buyer as I tend to put my money where my mouth is. I provide a little anecdote below on this.
One type of type of investor that profited from yesterday’s price action were hedge funds that bought US ADRs at the close, converted their shares, and then sold them in Hong Kong. I’ll use Alibaba as an example as they have the best investor relations team in our space and deserve a shout-out. Yesterday, Alibaba’s US listing was down -by 3.83%, but Alibaba’s Hong Kong listing closed down by only -1.42%. Easy money! Well, sort of, as this is not a “riskless” arbitrate. Alibaba’s Hong Kong-listed shares opened -5.01% lower, so you had to ride out a loss.
CNY is on a losing streak, having lost versus the US dollar -0.41% Tuesday, -0.4% Wednesday, -0.49% Thursday, and -0.79% today. On Monday, CNY was at 6.36, but today, it is at 6.50. I am a little surprised we haven’t seen headlines screaming that China is devaluing its currency. What is happening? US Treasury yields are rising while Chinese Treasury yields are falling, making US Treasury bonds more attractive. At this level, the State Administration of Foreign Exchange (SAFE) is not likely to step in as they don’t want to be labeled a currency manipulator.
In the late 1990s, I worked at Salomon Brothers Asset Management. We had a great portfolio manager named George Williamson, who had previously worked at the US Fed. George, a proud Princeton graduate and a heck of a good guy, spoke often about the 1973 and 1974 bear market. He talked about the mental grind of the US equity market going down every day for two years. George told us this because he was highly skeptical of late 1990s internet stocks. At times, he did not want to get out of bed because he knew stocks would only go down further, which is how I felt yesterday. Is my mental anguish a sign of the bottom? Fingers crossed! Enjoy the weekend.
The Hang Seng Index and Hang Seng TECH Index closed -0.21% and +0.28%, respectively, after grinding higher throughout the trading day. Volume was down -9.52% from yesterday, which is only 75% of the 1-year average, while Hong Kong’s short turnover was off -6.43%, which is 98.8% of the 1-year average. Breadth was balanced with 254 advancers and 225 decliners. Value factors outperformed growth factors though tech, which gained +1.16%, was one of the best performing sectors. Meanwhile, Tencent fell -2.13%, which weighed on communication, which fell -1.84% overall. The financial sector was the only other down sector, off -0.15%. Southbound Stock Connect saw net buying in both Tencent and Meituan and broadly.
Shanghai, Shenzhen, and the STAR Board diverged to close +0.23%, -0.5%, and -1.63%, respectively, on volume -12.09% lower than yesterday, which is only 69% of the 1-year average. There were 1,874 advancing stocks and 2,481 declining stocks. Value factors outperformed growth factors overnight as real estate gained +1.95%, energy gained +1.31%, and utilities gained +1.14%. Tech and materials were off -2.44% and -1.13%, respectively. Clean energy plays had a good day. Today, foreign investors bought $1.04 billion worth of Mainland stocks via Northbound Stock Connect. Chinese Treasury bonds sold off while CNY declined -0.79% to 6.50 and copper gained +0.6%.
Last Night’s Exchange Rates, Prices, & Yields
- CNY/USD 6.50 versus 6.45 yesterday
- CNY/EUR 7.03 versus 7.00 yesterday
- Yield on 1-Day Government Bond 1.28% versus 1.33% yesterday
- Yield on 10-Year Government Bond 2.84% versus 2.83% yesterday
- Yield on 10-Year China Development Bank Bond 3.08% versus 3.06% yesterday