Asian equities were off overnight, except for South Korea, while Taiwan was closed for holiday.
What a difference a day makes for Mainland China and Hong Kong, which did a complete 180-degree swing from yesterday’s very strong day, which was marked by very strong breadth. Mainland China and Hong Kong were both positive until mid-afternoon when the market came under significant selling pressure as decliners outpaced advancers by a very significant margin.
While profit-taking was potentially a factor, the likely culprits were new rules, or the rumor of the new rules, coming from the new head of the CSRC regarding Mainland China quantitative investment strategies’ use of leverage in long/short strategies. Quantitative traders may have to move from the 300% leverage that is currently permitted to only 200%. However, we need more clarity on what the rules might be. And, more importantly, we do not know the amount of money in these strategies. They focus on mid and small-caps, which fell dramatically.
Shenzhen snapped its nine-day winning streak while Shanghai and Shenzhen closed below the 3,000 and 1,700 levels. The new CSRC head may need to think about implementing this strategy due to the market’s steep decline after a nice run. Hong Kong mirrored the sell-off in the Mainland’s afternoon sell-off.
There was a steep divergence between Hong Kong-focused real estate stocks, which rallied after Hong Kong removed non-resident housing purchase restrictions, and China-focused real estate developers, which fell on news that one of Country Garden’s creditors called for the developer to be liquidated. Shares of Country Garden fell -12.50% overnight. However, and as always, creating a financial crisis through a disorderly unwind seems unlikely.
Hong Kong’s most heavily traded stocks by value were Hong Kong Exchanges, which fell -2.24%, Tencent, which fell -2.67%, Li Auto, which gained +0.8%, Alibaba, which fell -1.66%, and Meituan, which fell -4.04%. Meanwhile, NetEase gained +4.56% after the popular game Naraka Bladepoint was approved for mobile use. After the Hong Kong close, search giant and increasingly AI-focused Baidu and e-commerce Vipshop reported Q4 financial results.
Baidu Q4 – Year over Year Comparison
- Revenue increased 6% to RMB 34.951B ($4.923B) versus expectations of RMB 35B
- Adjusted Net Income increased 44% to RMB 7,755B ($1.092B) versus expectations of RMB 6.37B
- Adjusted EPS increased 43% to RMB 21.86 ($3.08) versus expectations of RMB 17.86
- 2023 Buyback totaled $669mm
Vipshop Q4 – Year over Year Comparison
- Revenue increased +9.2% RMB 34.7B ($4.9B) versus expectations of RMB 33B
- Adjusted Net Income RMB 3.198B ($450mm) versus expectations of RMB 2.77
The Hang Seng and Hang Seng Tech indexes fell -1.51% and -2.19% on volume that increased +4.3% from yesterday, which is 108% of the 1-year average. 79 stocks advanced, while 417 declined. Main Board short turnover declined -8.08% from yesterday, which is 96% of the 1-year average, as 15% of turnover was short turnover. All factors were negative, with the value factor and large caps “outperforming”/falling less than the growth factor and small caps. All sectors were negative. The worst-performing sectors were Real Estate, which fell -4.08%, Technology, which fell -3.44%, and Materials, which fell -2.60%. Utilities were the only positive subsector. Meanwhile, semiconductors, technical hardware equipment, and food were down the most. Southbound Stock Connect volumes were high/moderate as Mainland investors bought $178 million worth of Hong Kong-listed stocks and ETFs, including Li Auto, CNOOC, and China Mobile, which were small net buys. Meanwhile, Tencent, Meituan, and XPeng were small net sells.
Shanghai, Shenzhen, and the STAR Board fell -1.91%, -3.79%, and -3.18%, respectively, on volume that increased +37.11% from yesterday, which is 157% of the 1-year average. 241 stocks advanced, while 4,783 stocks declined. All factors were negative, as the value factor and large caps “outperformed” (i.e. fell less than) the growth factor and small caps. Utilities formed the only positive sector, up +0.81%. Meanwhile, Technology fell -3.89%, Communication Services fell -3.14%, and Consumer Discretionary fell -2.58%. Diversified financials and the power industry were the only positive subsectors. Meanwhile, communication equipment, industrial machinery, and software were among the worst-performing. Northbound Stock Connect volumes were very high as foreign investors bought a net $186 million worth of Mainland-listed stocks, including Zhongji Innolight, which was a small/moderate net buy, Kweichow Moutai and Sokon, which were moderate net buys. Meanwhile, BYD, Kingsoft, and ZTE were small net sells. CNY and the Asia Dollar Index were off small versus the US dollar. Treasury bonds rallied. Copper and steel were positive.
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- CNY per USD 7.19 versus 7.19 yesterday
- CNY per EUR 7.78 versus 7.80 yesterday
- Yield on 10-Year Government Bond 2.33% versus 2.38% yesterday
- Yield on 10-Year China Development Bank Bond 2.47% versus 2.50% yesterday
- Copper Price +0.04%
- Steel Price +0.77%