Key News
Asian equities experienced another deep drawdown, except for Hong Kong, Mainland China, and Thailand, as the Philippines missed the fun due to “Araw ng Kagitingan,” which celebrates the heroism of Filipino and American soldiers in World War II.
This morning, China’s government reciprocated the U.S. government’s tariff increase by increasing tariffs on U.S. goods to a whopping 84%. Is not being at the U.S.’ level of 104% a sign of willingness to cooperate? The offshore Renminbi (CNH), which trades during U.S. hours, is stable this morning at 7.37 CNH per USD, after rising to 7.42 yesterday and from last Monday’s 7.26. Is China devaluing its currency to offset U.S. tariffs? No, as the U.S. 10-year Treasury Yield has risen from Friday’s 52-week low of 3.99% to 4.45% this morning, which causes the U.S. dollar to strengthen, especially versus Asian currencies, which are export-dependent. To offset the 104% tariffs would require devaluing the CNY by 104%. Making the Chinese people poorer is counterintuitive. Remember, less than 3% of China’s GDP is comprised of U.S. exports to China.
Hong Kong and Mainland China opened significantly lower, with morning lows in the Hang Seng of -4.31%, Hang Seng Tech of -5.96%, Shanghai Composite of -2.4%, Shenzhen Composite of -4.41%, and the STAR Board of -2.42%. All indexes rallied into the close. The close for these indexes showed a significant reversal of initial losses: the Hang Seng closed up +0.91%, Hang Seng Tech closed up +2.88%, the Shanghai Composite closed up +1.18%, the Shenzhen Composite closed up +1.44 %, and the STAR Board closed up +4.31%.
What happened? There is a rumor that China’s government will announce significant domestic consumption stimulus as early as Friday to offset U.S. tariff impacts on exporters. A mid-day Reuters article alluding to the stimulus helped fuel the market’s rebound into the close. Premier Li gave credence to the stimulus rumor, stating during a State Council meeting today, held with economists and entrepreneurs, that “We should make the domestic circulation bigger and stronger, take expanding domestic demand as a long-term strategy…”
The National Team appeared to be buying following yesterday’s RMB 111.78 billion net inflow into Mainland listed ETFs, as their five favorite China equity ETFs all had above-average volume, though not as high as yesterday’s. Hong Kong-listed stocks were the recipient of the strongest day ever for Southbound Stock Connect inflows, as Mainland investors bought a net of $4.6 billion worth, including Alibaba and Tencent, which saw significant inflows. In both markets, brokers, automobiles, software, and semiconductors had good days, while banks were off. The State Council released a 28,000-word white paper titled “China’s Position on Several Issues Concerning China-US Economic and Trade Relations,” followed by a Ministry of Commerce press conference. The press conference had a very gracious tone on the U.S. relationship.
Key points from the press conference:
- “Since the establishment of diplomatic relations between China and the United States 46 years ago, bilateral economic and trade relations have developed rapidly. The trade volume between China and the United States rose from less than USD 2.5 billion in 1979 to nearly USD 688.3 billion in 2024. The investment in both directions exceeds USD 260 billion.”
- “Taking into account three factors: Goods trade, service trade and local sales of domestic enterprises in each other’s country branches, the economic and trade exchanges between China and the United States are roughly balanced.” This highlights what we mentioned yesterday: the U.S. is the largest exporter of services globally, and the U.S. trade argument doesn’t include U.S. companies that manufacture in China. We have long argued this is a major issue between how the U.S. and China view trade. Arguably, this doesn’t matter as the U.S. wants to manufacture everything here.
- Yesterday early morning, CNBC’s Frank Holland interviewed Emily Ley, CEO and founder of Simplified, a small business reliant on Chinese imports, who has filed a complaint in the U.S. District Court for the Northern District of Florida that the tariffs are unlawful and unconstitutional. My understanding is the lawsuit challenges the executive powers control of tariffs, which, based on the interview, are not explicit. The court might tap the brakes on the implementation of tariffs, which would give time for further negotiations. We’ll see, as it could provide an off-ramp.
China Last Night reader Ashish pointed out that I incorrectly stated yesterday that exports were RMB 15 trillion. I failed to correctly identify the RMB 15.433 trillion as the value of export-oriented manufacturing versus total China exports, which are worth RMB 25 trillion. Total exports include both goods and services, which include goods that are not manufactured, such as commodities, raw materials, food, etc. My bad. As my wife is more than willing to tell you, I am far from infallible. I am excited to answer all of your questions on tomorrow’s webinar we are hosting. Please click here to sign up.
The Hang Seng and Hang Seng Tech indexes gained +0.68% and +2.64%, respectively, on volume that declined -4.80% from yesterday, which is 239% of the 1-year average. 348 stocks advanced, while 133 stocks declined. Main Board short turnover decreased by -0.44% from yesterday, which is 319% of the 1-year average, as 21% of turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). Growth, momentum, and small capitalization stocks outperformed value and large capitalization stocks. Energy was the only negative sector, down -1.62%, while the top-performing sectors were Information Technology, which gained +6.28%, Real Estate, which gained +4.45%, and Consumer Staples, which gained +3.52%. The top-performing subsectors were semiconductors, aerospace, and technology hardware. Meanwhile, petroleum & petrochemicals, real estate investment trusts (REITs), and banks were among the worst-performing subsectors. Southbound Stock Connect volumes were 7X pre-stimulus levels, as Mainland investors bought a net $4.586 billion worth of Hong Kong-listed stocks and ETFs, including Alibaba, Tencent, Meituan, Semiconductor Manufacturing International (SMIC), Kuaishou, Xiaomi, and Pop Mart.
Shanghai, Shenzhen, and the STAR Board indexes all closed higher by +1.31%, +1.77%, and +4.31%, respectively, on volume that increased +4.34% from yesterday, which is 140% of the 1-year average. 4,157 stocks advanced, while 887 stocks fell. Growth, momentum, and small capitalization stocks outperformed value and large capitalization stocks. The top-performing sectors were Real Estate, which gained +4.53%; Information Technology, which gained +2.89%; and Communication Services, which gained +1.49%. Meanwhile, the worst-performing sectors were Financials, which fell -0.06% and Energy, which fell -0.51%. The top-performing subsectors were aerospace, catering, tourism, and real estate. Meanwhile, petroleum & petrochemicals, banking, and oil & gas were among the worst-performing subsectors. Northbound Stock Connect volumes were above average. CNY and the Asia Dollar Index both fell versus the US dollar. Treasury bonds rallied. Copper and steel fell.
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Last Night’s Performance
Last Night’s Exchange Rates, Prices, & Yields
- CNY per USD 7.34 versus 7.33 yesterday
- CNY per EUR 8.10 versus 8.02 yesterday
- Yield on 10-Year Government Bond 1.65% versus 1.66% yesterday
- Yield on 10-Year China Development Bank Bond 1.71% versus 1.71% yesterday
- Copper Price -1.28%
- Steel Price -1.72%