China Market Update: Internet Stocks Lead Hong Kong Higher

Key News

Asian equities had a strong day, with Japan, Hong Kong, South Korea, and Taiwan posting +2% returns, with Australia the only market down overnight.

Hong Kong had a strong night led higher by internet stocks on a strong volume of 133% of the 1-year average and strong breadth with 410 advancers versus 78 decliners. The Hang Seng closed above 17K at 17,201 with the 200-day moving average at 17,305. The sentiment was boosted by yesterday’s UBS upgrade of China (really focused on internet and consumer names), and Goldman Sachs
GS
’ “re-rating” of Mainland stocks helped, though Hong Kong Exchanges and Ping An financial results both beat analyst expectations. Another positive was that SenseTime Group soared +31.15% after releasing their SenseNova AI/ChatGPT-like model.

Hong Kong’s most heavily traded by value were Tencent +3.55%, Meituan +4.06%, Alibaba +3.87%, Kuaishou +8.15%, HK Exchanges +3.55%, and Ping An +4.24%. Right outside of the top ten volume leaders were JD.com +4.32%, NetEease +1.58%, Bilibili +8.8%, Baidu +1.61%, and Trip.com +2.15%. Many trading desks noted “regional” sentiment has improved with Exhibit A being the $26.1B of net buying year to date of Hong Kong stocks via Southbound Stock versus $40B in 2023. Chinese investors clearly see the shareholder friendly reforms as a catalyst in addition to low valuations and an improving Chinese economy that should flow through to corporate balance sheets. Asia investors will be the next to notice followed. If the rally continues, will it pull money from historical outstanding warrants to Japan and India, or does it come from US tech stocks? We shall see!

Apple’s
AAPL
struggles weighed on the financial results of suppliers Sunny Optical, which fell -3.64%, and after the close, Mainland listed GoerTek. Mainland China overcame a morning loss to grind higher all day, posting a small gain, though not on very high volumes like Hong Kong. Real estate was down slightly despite Shenzhen’s relaxing housing purchase restrictions. Foreign investors bought $635mm of Mainland stocks today. Secretary of State Blinken lands in Beijing today for meetings. Lots of US media coverage of the TikTok ban, which will be challenged in court and likely thrown out (again), though as our trading buddy Dave says “market no care, you no care”. Regardless, it is amazing to me the lack of US media coverage of US private equity firms’ ownership of TikTok owner Bytedance, who invests in US pension funds, endowments, and foundations.

Mainland China’s asset management industry is heavily skewed to money market funds RMB 12.4T/43% of industry AUM and bond funds RMB 9.4T/32% of industry AUM, while equity funds are just RMB 2.8T/10% of industry AUM. China lacks social safety like in the West, which explains citizens’ high savings rate. Active portfolio managers are widely followed with star/famous managers’ stock positions and changes widely followed as experienced recently with funds releasing their top holdings. The top mainland listed stocks held by active funds were Kweichow Moutai, CATL, Wuliangye Luzhou Lao Jiao, Zijin Mining, Midea, HengRui, and Shanxi Fen Wine. It kind of looks like the top ten largest index weights. Not exactly the top ten but not massively different. Herd mentality with Chinese characteristics!

The Hang Seng and Hang Seng Tech gained +2.21% and +3.61% on volume +11.7% from yesterday, which is 133% of the 1-year average. 410 stocks advanced, while 78 declined. Main Board short turnover increased by +14.96% from yesterday, which is 144% of the 1-year average, as 19% of turnover was short turnover (remember HK short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). The growth factor and large caps outpaced the value facto and small caps. All sectors were positive, led by communication +3.45%, discretionary +3.24%, and materials +3.23%. The top sub-sectors were media, retailing, and software, while household products and food/staples were the worst. Southbound Stock Connect volumes were high as mainland investors bought $254mm of HK stocks and ETFs with Bank of China, Kuaishou, and HK Exchanges large net buys, while Meituan was a very large net sell.

Shanghai, Shenzhen, and STAR Board gained +0.76%, +1.18%, and +1.48% on volume +2.55% from yesterday, which is 93% of the 1-year average. 3,821 stocks advanced, while 1,100 declined. The growth factor outperformed the value factor. The top sectors were tech +2.22%, utilities +1.3%, and communication +0.82%, while healthcare -0.5%, energy -0.09%, and real estate -0.05%. The top sub-sectors were computer hardware, software, and communication equipment, while agricultural, education, and coal were the worst. Northbound Stock Connect volumes were light as foreign investors bought $635mm of mainland stocks, with Ping An a moderate net buy, Wuliangye, and Agriculture Bank small net buys, while CATL, Midea, and Inovance were small net sells. CNY and the Asia dollar index were basically flat overnight. Treasury bonds sold off. Copper fell while steel gained.

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Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.24 versus 7.24 yesterday
• CNY Per EUR 7.74 versus 7.72 yesterday
• Yield on 10-Year Government Bond 2.27% versus 2.22% yesterday
• Yield on 10-Year China Development Bank Bond 2.35% versus 2.29% yesterday
• Copper Price -0.27%
• Steel Price +0.11%