Hong Kong and Mainland China shrug off US sell-off as profits take center stage

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Important news

Asian equities underperformed yesterday’s US sell-off, clearly showing relative strength. The Hang Seng Index opened at -1.69% but clawed back to close just -0.49% lower. However, it is worth noting that the broader Hang Seng Composite Index gained +0.23% after opening -1.5% lower. The narrow 50-stock Hang Seng Index has a 44% weighting for financials, which fell -0.93%. Today was a big day for Hong Kong earnings as Yum China Hong Kong rose +3% after reporting Q3 gains ahead of the market open. Hong Kong’s volume leaders were Tencent, up +0.67% on another very strong day on Southbound connect inflows, Meituan Dianping, also up +6.14% on very strong Southbound connect inflows, Alibaba

BABA
HK down -1.56%, Ping An Insurance down -1.83%, BYD up +5.03% and Hong Kong Exchanges up +1.54%.

Alibaba’s overnight weakness came as a bit of a surprise given that Ant Group’s Shanghai listing is 872 times oversubscribed and Alibaba’s Singles Day pre-sale began with estimated sales of $7.5 billion.

Southbound Connect, the trading platform that gives mainland investors access to Hong Kong stocks, was strongly inclined to buy Hong Kong stocks as mainlanders net-purchased $1.458 billion in shares.

Shanghai and Shenzhen in the morning lost -0.49% and -0.8% respectively but rebounded +0.11% and +0.68%. Policy meetings to draft the 14th five-year plan concluded today and the winning sectors are expected to be domestic consumption, electric vehicles/clean energy, semiconductor/5G/cloud/data and healthcare. However, fossil fuels are likely to fall out of favor as China plans to be carbon neutral by 2050. The mainland’s most actively traded stock was BYD, which rose +4.47% after strong gains. The electric vehicle (EV) maker was followed by liquor company Wuliangye Yibin, which surged +4.18% after an equally strong earnings release, and Kweichow Moutai, which rose +0.67%. Foreign investors today bought a net $266 million worth of mainland stocks. The CNY appreciated slightly against the US dollar.

An Asian media source noted that Australia’s government super-pension plan will make a dedicated all-China investment for the first time, meaning without adding China to the emerging markets bucket. China is emerging as an asset class distinct from emerging markets due to China’s sheer size within emerging markets as well as its differentiated performance characteristics.

In the early 2000s, many US institutional investors adopted the Yale endowment model and as a result, some of the private equity allocation flowed to China, with tremendous results. Bytedance’s dispute with the US is a particularly interesting case given that two US private equity firms are the company’s largest shareholders. Your alma mater is probably one of their customers! US institutional investors have had to build dedicated China allocations due to the success of their private equity portfolios there, which should lead to growth for public equity portfolios. For retail investors, we haven’t had the tremendous returns that have been achieved with Chinese private equity. China’s definition of publicly traded stocks focused on sectors of the legacy economy such as finance, energy, industrials, materials and real estate. The past decade has been dominated by growth stocks, but that’s a global phenomenon.

The listing of US-listed New Orient (EDU US) in Hong Kong has sparked much conversation among brokers as the company seeks to raise $1.4 billion on the city’s stock exchange.

One institutional broker noted that nearly 50% of US high yield bonds have been downgraded year-to-date. I’m worried about US credit driven by a less than V-shaped recovery. Where do investors go for income? Stock Connect’s sister company, Bond Connect, is the trading platform that allows foreign investors to invest in mainland China bonds. Inflows have been very strong, with $438 billion worth of mainland stocks held by foreign investors. I believe this was mainly driven by European and Asian investors who are attracted to China’s relatively high yields.

H-Share update

The Hang Seng index opened significantly lower but managed to pull back to close just -0.49%/-122 at 24,586. Volume was up slightly +0.4% from yesterday, putting last night’s level above the 1-year moving average. In the meantime, the width had failed with 15 climbers and 34 relegated. The 204 Hong Kong and MSCI listed Chinese companies

MSCI
The China All Shares Index was up +0.58%, led by discretionary +3.74%, technology +1.69%, staples +1.03%, while financials -1.12%, energy -1.05 % and Healthcare -0.93% up. Southbound Connect volumes were moderate/high as mainland investors were net buyers of Hong Kong stocks.

A-Share update

Shanghai and Shenzhen opened lower but rallied +0.11% and +0.47% to close at 3272 and 2249 respectively. Volume was up +6.5%, just below the 1-year average, while breadth was down with 1,443 up and 2,260 down. The 518 mainland stocks in the MSCI China All Shares Index gained +0.64%, led by Health Care +2.35%, Consumer Goods +2.14% and Staples +1.83%. Meanwhile, Energy -0.82%, Materials -0.66 and Utilities -0.66%. Northbound Connect’s volume was moderate as foreign investors bought mainland shares for a net US$266 million.

Exchange rates and yields from last night

  • CNY/USD 6.71 vs 6.73 yesterday
  • CNY/EUR 7.84 vs. 7.90% yesterday
  • 1-year Treasury yield 1.70% vs. 1.70% yesterday
  • 10-year Treasury yield 3.19% vs. 3.18% yesterday
  • China Development Bank 10-year bond yield 3.67% vs. 3.67% yesterday

About KraneShares

Krane Funds Advisors, LLC is the Investment Manager for KraneShares ETFs. Our suite of China-focused ETFs offers investors solutions to grasp the importance of China as an essential element of a well-designed investment portfolio. We strive to provide innovative first-to-market strategies built on our strong partnerships and deep investment expertise. We help investors stay abreast of global market trends and seek meaningful diversification. Krane Funds Advisors, LLC is majority owned by China International Capital Corporation (CICC).

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