Post Close Stimulus As Country Garden Follows Sunac To Restructuring

Key News

Asian equities had a positive day as Malaysia outperformed, Mainland China and South Korea underperformed, and Taiwan has closed again for Double Ten day.

After the Asia close, Bloomberg reported that the Chinese government will spend $137B on infrastructure, pushing the budget deficit above the 3% level. The source for the story was “people familiar with the matter,” though I have not seen this reported in Mainland China thus far.

Senate Majority Leader Chuck Schumer and five Senators had a constructive meeting with President Xi in China as the Biden administration looks to stabilize the relationship. The odds for a Biden-Xi summit at the APEC meeting this November in San Francisco are increasing.

There was a bizarre incident at the Chinese consulate in San Francisco where a car drove through the front door, and the driver was shot and killed by the police.

Headlines are flashing on distressed real estate developer Country Garden’s bankruptcy, which isn’t entirely true. Like Sunac last week, Country Garden will attempt to restructure its offshore debt held by foreign investors in court. It takes time to negotiate a deal, as Sunac had 2,000 foreign bondholders. A restructuring is better than an outright default, as getting something back is better than a zero.

Hong Kong and China opened higher though faded from the morning highs, with Hong Kong, led by internet stocks, holding gains though China slipped into negative territory. Hong Kong’s most heavily traded stocks by value were Tencent +0.39%, Meituan +3.12%, and Alibaba +1.58%. XPeng’s Hong Kong share class was off -4.59% versus their US ADR, off -10.3% after CNBC reported a supply chain VP was suspended on corruption charges—interesting divergence between Hong Kong and the US stock reaction.

Mainland investors bought Hong Kong’s largest ETF in size, which likely explains the spike in Hong Kong short volume as market makers would need to hedge the big buys. Shanghai broke below the 3,100 level while Shenzhen closed above 1,900 as foreign investors were net sellers (again) of Mainland investors. All sectors were lower, though Huawei’s ecosystem had another strong day.

The WSJ had an interesting article from a commodities journalist on iron ore’s strong move versus other metals. Iron ore is an input in steel making, and China is the world leader (also explains the pollution problem). The article quotes Daria Efanova of Sucden Financial: “Iron-ore prices act as a gauge of market sentiment toward China’s recovery…resilience above $110 a ton indicates that the market remains hopeful about the Chinese economy’s recover from the pandemic lows, despite the rest of the world continuing to weaken.” Something to think about.

Would you believe Chinese growth stocks beat the S&P 500 by nearly 6% in Q3 2023? The China names were up about +3%, while the S&P 500 was down almost -3%. They beat MSCI
MSCI
Emerging Markets and MSCI China, which were negative for the quarter. Yes, it is one quarter, but it could be the start of something bigger. Fingers crossed.

The Hang Seng and Hang Seng Tech gained +0.84% and +1.29% on volume +69% from yesterday, which is 70% of the 1-year average. 265 stocks advanced while 224. Main Board short turnover increased +94% from yesterday, 82% of the 1-year average, as 20% of turnover was short turnover (remember Hong Kong short turnover includes ETF short volume, driven by market makers’ ETF hedging). Growth and value factors were off, while large caps outpaced small caps. Top sectors were tech +2.09%, discretionary +1.53%, and communication +0.98%, while industrials -0.87%, healthcare -0.61% and energy -0.16%. The top sub-sectors were online education, liquor, and smart appliances, while security monitoring, intelligent transportation, and high-speed rail were the worst. Southbound Stock Connect volumes were moderate/light as Mainland visitors bought $796mm of Hong Kong listed ETFs and stocks, with the Hong Kong Tracker ETF seeing a considerable net buy, Meituan a large net buy, Hang Seng H ETF and Hang Seng Tech had moderate/net buys. At the same time, Tencent was a moderate net sell, and China Mobile was a small net sell.

Shanghai, Shenzhen, and STAR Board were off -0.7%, -0.38%, and -0.58% on volume +0.68% from yesterday, which is 89% of the 1-year average. 1,821 stocks advanced, while 2,942 stocks declined. Growth and value factors were off, while small caps outpaced large caps. All sectors were down: energy -1.77%, industrials -1.65%, and healthcare -1.64%. The top sub-sectors were Huawei ecosystem and memory chips, while gold stocks, infrastructure, and engineering were the worst. Northbound Stock Connect volumes were moderate as foreign investors sold -$749mm of Mainland stocks, with Tianqi Lithium, JAC, Changan Auto, and Mindray small net buys, while Longi, Iflytek, Ping An, and CTG Duty-Free were moderate net sells. CNY was off small versus the US dollar, while the Asia dollar index gained minor. Treasury bonds sold off along with copper and steel.

Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.29 versus 7.29 yesterday
• CNY per EUR 7.73 versus 7.68 yesterday
• Yield on 10-Year Government Bond 2.68% versus 2.67% yesterday
• Yield on 10-Year China Development Bank Bond 2.75% versus 2.74% yesterday
• Copper Price -0.65%
• Steel Price -0.47%