- Asian equities were mostly lower this week on mixed, but generally positive economic releases coming out of China and CBBC contracts reaching their liquidation levels in Hong Kong and Mainland China.
- According to a Wednesday release, China’s 2023 GDP growth was 5.2% versus expectations of 5.2% and 2022’s 5.2%.
- China’s “National Team” or institutions with government links were active in the market this week, leading to heightened flows into Shanghai and Shenzhen-listed ETFs.
- Taiwan’s election saw the incumbent DPP party retain power in the executive branch with a deadlocked legislature, likely leading to little change in cross-strait relations.
Asian equities ended a down week higher except for Mainland China and Hong Kong as Taiwan outperformed following Taiwan Semiconductors’ strong results released yesterday. US Treasury yields and the US dollar were basically flat overnight.
Mainland China was off though not nearly as much as Hong Kong as the National Team’s favorite Mainland China-listed ETF saw volume of 3.69 million shares trade today following yesterday’s volume of 4.7 million shares. The ETF had $1.06 billion worth of net inflow yesterday, which flows into mega/large cap stocks. The move prevents Mainland Snowballs (i.e. financial products with knockout/liquidation levels) from hitting their automatic redemption levels.
The South China Morning Post estimates Snowballs market capitalization is $30 billion. More important is where the liquidation/knockout levels are. It is worth noting that the small cap CSI 500 breached 6,000 today and went straight down as Exhibit A for automatic liquidations. The Mainland has the cavalry, the National Team, while Hong Kong resembles General Custer.
The South China Morning Post also had a good article on Hong Kong sentiment as investment professional do not understand why the market keeps going down. In the absence of buyers, the market drops precipitously as Callable Bull/Bear Contracts (CBBCs) breach index knock out levels. Doesn’t the exchange, regulator or government recognize this?
Why the absence of buyers? As we discussed in our 2024 Outlook Webinar yesterday and in our written 2024 Outlook, US stocks’ massive outperformance over the last 14 years has pulled money out of non-US equities including Emerging Markets and China. The AI craze has fueled the US technology outperformance versus everything, creating the most crowded trade globally as nothing else appears to work. This is creating a feedback loop as investors capitulate.
Concerns about China are legitimate, though arguably many have improved, such as US-China diplomatic relations, Zero Covid’s economic scar tissue, real estate, etc. I experienced this a month ago visiting Hong Kong and Shenzhen as things appeared normal with crowded restaurants and malls. However, the National Development and Reform Commission statement that “the basic trend of China’s economic recovery and long-term improvement has not changed” comes off as a little tone deaf.
Sunday night, the 1 and 5-Year Loan Prime Rate (LPR) will be released with no cut expected, though a strategist with a good track record is expecting a cut. The probability of a cut has to be higher following the dismal December home sales release.
Foreign investors sold a net $724 million worth of Mainland stocks overnight via Northbound Stocks. Hong Kong’s most heavily traded stocks were Tencent, which fell -2.31% despite the 3rd day of buying via Southbound Stock Connect and buying back 3.64 million shares today, Alibaba, which fell -1.65%, Meituan, which fell -1.65% despite buying 5.75 million shares today and the 4th day of net buying via Southbound, AIA, which gained +2.03%, and BYD, which fell -0.41% despite a good article on the Chinese government addressing Chinese EVs exceeding demand and creating a price war domestically and internationally. Psychologically speaking, we are at a bottom, in my opinion.
Bloomberg’s article on China’s Mainland-listed active equity fund outflows fails to mention the strong inflows into passive equity ETFs. Active funds have failed to add sufficient alpha to justifying their fees, leading to investors’ passive pivot. This is happening globally, as well.
The Hang Seng and Hang Seng Tech indexes fell -0.54% and -1.45%, respectively, on volume that declined -9.76% from yesterday, which is 95% of the 1-year average. 103 stocks advanced while 391 declined. Main Board short turnover declined -4.4% from yesterday, which is 102% of the 1-year average, as 18% of turnover was short turnover (remember Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). The value factor and large caps “outperformed” (i.e. fell less than) the growth factor and small caps. Consumer Staples and Financials gained +0.19% and +0.02%, respectively, while Health Care fell -3.7%, Communication Services fell -1.76%, and Consumer Discretionary fell -1.59%. The top-performing subsectors were food and beverage, insurance, and media. Meanwhile, biotech, software, and semiconductors were among the worst-performing. Southbound Stock Connect volumes were light as Mainland investors bought a net $131 million worth of Hong Kong-listed stocks and ETFs, including Tencent, China Mobile, and Meituan. Meanwhile, Mainland investors sold the Hong Kong Tracker ETF, Li Ning, China Shenhua, and Wuxi Biologics. These were small net sells compared to recent history, but large compared to longer-term patterns.
Shanghai, Shenzhen, and the STAR Board fell -0.47%, -0.93%, and -0.37%, respectively, on volume that declined -23% from yesterday, which is 77% of the 1-year average. 805 stocks advanced, while 4,095 declined. The value factor and large caps “outperformed” (i.e. fell less than) the growth factor and small caps. The top-performing sectors were Communication Services, which gained +0.77%, Consumer Staples, which gained +0.74%, and Real Estate, which gained +0.26%. Meanwhile, Energy fell -1.53%, Industrials fell -0.67%, and Technology fell -0.63%. Northbound Stock Connect volumes were moderate as foreign investors sold a net -$724 million worth of Mainland stocks, including Kweichow Moutai, ICBC, and Wuxi AppTec, which were large net buys, while LONGi Green Energy, BYD, and Midea Group were moderate net sells. CNY and the Asia Dollar Index gained versus the US dollar. Treasury bonds rallied, while copper fell and steel gained.
- CNY per USD 7.19 versus 7.20 yesterday
- CNY per EUR 7.82 versus 7.82 yesterday
- Yield on 1-Day Government Bond 1.50% versus 1.50% yesterday
- Yield on 10-Year Government Bond 2.50% versus 2.51% yesterday
- Yield on 10-Year China Development Bank Bond 2.64% versus 2.64% yesterday
- Copper Price -0.12%
- Steel Price +0.72%