Week in Review
- Asian equities traded largely lower this week on currency weakness, slowing GDP growth, and short selling in Hong Kong.
- On Monday, the People’s Bank of China (PBOC), China’s central bank, unexpectedly announced a cut to the medium-term lending facility, lowering the key lending rate to 2.75% from 2.85% and the seven-day repo rate to 2% from 2.1%, following lower-than-expected July loan data.
- A report Tuesday confirmed that many of the new bonds issued by property developers in China to underwrite the finishing of projects will be backed/guaranteed by state-owned enterprises, leading to strength in the real estate sector.
- Tencent reported mixed results despite low expectations as the company earned RMB 134 billion in the second quarter. Meanwhile, China-based gaming giant NetEase beat estimates across the board.
- Join Xiabing as she restores a Chinese masterpiece using Baidu’s artificial intelligence technology in this week’s video update.
Short Turnover Analysis
We have discussed how short sellers are taking advantage of light summer volumes by shorting Hong Kong-listed China internet stocks. By pushing their bets within a thin tape, the shorts can be aggressive as many asset managers are not defending the stocks due to light positioning. A major factor is an overhang related to the Holding Foreign Companies Accountable Act (HFCAA). I spent some time yesterday trying to quantify the impact of short selling this summer.
- Over the last ten years, short sale turnover as a percentage of total turnover in Hong Kong has averaged 12%.
- Over the last six months, that percentage has averaged 18%, representing a +50% increase in short sale turnover versus the 10-year average.
- Over the last decade (2,324 trading days from August 20, 2012, to January 24, 2022), there had never been a day when short turnover accounted for 20% or more total turnover.
- From January 25, 2022, to today, there have been 22 days in which short sale turnover accounted for more than 20% of total turnover.
Shocking right? At some point, the tide will turn, making for a sad day for the shorts. We will discuss this further during an upcoming September webinar. Stay tuned!
Asian equities ended an off week lower as Fed fears weighed on Asian currencies. The Bloomberg JP Morgan Asia Dollar Index hit a 52-week low today, closing below March 2020 COVID lows, the lowest level since the fall of 2004. Today is also the expiration date for a whole host of options, which could make for an interesting day in the US.
Hong Kong’s most heavily traded stocks by value were Tencent, which gained +0.77% as short turnover accounted for 21% of total trading, Meituan, which fell -0.7%, Alibaba, which gained +1.42%, and Kuaishou, which gained +4.67% as Tencent sale fears dissipated.
According to reports, Alibaba’s restaurant delivery service Ele.me will be partnering with ByteDance’s TikTok, which is called “Douyin” in China. This is big news and explains the weakness in Meituan, which saw moderate selling by Mainland investors via Southbound Stock Connect overnight. This is also another strong signal that China’s internet regulatory cycle is over as two large firms can partner with one another.
NetEase fell -6.34% despite positive financial results, demonstrating what an odd market we find ourselves in currently. Meanwhile, Baidu fell -0.47%, though, after the close, Hang Seng announced its intention to add the stock to its indexes on September 2nd.
Mainland China and Hong Kong EV ecosystem stocks were off overnight. However, after the close, Mainland media reported that the sales tax exemption on EV purchases will be extended again until year-end 2023.
The local trading desk of a global firm noted that 80% of Sichuan province’s electricity comes from hydroelectric power, which is being limited due to a heatwave-driven drought. A great insight! Heatwaves globally this year are drawing attention to climate change mitigation measures. With the Inflation Reduction Act passed in the United States, clean energy companies’ prospects have never been brighter.
Tencent reported mixed results yesterday. However, what stood out was management’s ability to control costs. Sales and marketing expenses fell by a whopping -21% year-over-year. Furthermore, the company outlined how exposed it will be to China’s recovery, with an estimated 46% of revenues reliant on consumer demand, such as advertising revenue. Investors are not valuing this company properly, as any recovery in consumer demand will lead to a significant revenue increase for the social media and gaming giant.
This weekend, the 1- and 5-year loan prime rates (LPRs) will be announced. Expectations are for a 10 basis point cut to 3.6% and 4.35%, respectively.
CNY was off -0.43% versus the US dollar, closing at 6.82 CNY/USD. The disparity between China’s easing cycle and the tightening cycle in the US weighs on CNY on a dollar basis.
Real estate was a top performing sector in both Hong Kong and Mainland China as the LPR cut will reduce mortgage rates, thereby stimulating demand, along with continued policy support for the sector.
Mainland China was off overnight with an emphasis on semiconductors despite good results from AMAT yesterday. In general, growth names were off overnight on the Mainland.
The Hang Seng and Hang Seng Tech indexes closed +0.05% and -0.01%, respectively, on volume that decreased -8% from yesterday, which is 62% of the 1-year average. 288 stocks advanced while 173 stocks declined. Hong Kong short sale turnover declined -1.74% from yesterday, which is 74% of the 1-year average, as short sale turnover accounted for 20% of total turnover. Value and growth factors performed well as large caps outperformed small caps. The top performing sectors were utilities, which gained +2.17%, energy, which gained +2.06%, and industrials, which gained +1.71%. Meanwhile, healthcare fell -2.67%, staples fell -0.59%, and information technology fell -0.33%. The top performing sub-sectors included nuclear, coal, and clean energy stocks, while liquor, CRO
Shanghai, Shenzhen, and the STAR
Last Night’s Exchange Rates, Prices, & Yields
- CNY/USD 6.82 versus 6.79 yesterday
- CNY/EUR 6.85 versus 6.88 yesterday
- Yield on 1-Day Government Bond 1.08% versus 1.08% yesterday
- Yield on 10-Year Government Bond 2.59% versus 2.58% yesterday
- Yield on 10-Year China Development Bank Bond 2.79% versus 2.78% yesterday
- Copper Price +1.15% overnight