The dragon of politics awakens as mainland China and Hong Kong unite

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Asian stock markets were mixed overnight as mainland China outperformed and South Korea underperformed.

Hong Kong and mainland China opened higher after yesterday’s monetary policy bazooka. However, they weakened during the trading day, although both managed to post gains, especially the latter, on very strong volumes of 244% and 148% of the yearly average respectively.

Skeptics point to the lack of fiscal support, although yesterday’s monetary policy moves were completely unexpected and caught investors by surprise. The 0.50% cut in the reserve requirement ratio (RRR) with a subsequent cut of 0.25% to 0.50% was not a shock, but we also had a 0.20% cut in the 7-day reverse repo rate, which led to a 0.20% drop in the lending rate (LPR) and deposit rates. We also had a 0.50% cut in the mortgage interest rate, a reduction in the minimum down payment ratio from 25% to 15%, and RMB 300 billion in support for affordable housing.

Overnight, the medium-term lending rate was cut to 2% from 2.30%. Investors were most shocked by the RMB 500 billion fund to support investment in mainland stocks, which could be expanded if necessary, and the RMB 300 billion fund to support corporate share buybacks, which is unprecedented.

Overnight, the China Securities Regulatory Commission (CSRC) announced that it intends to reform the rules governing mergers and acquisitions of listed companies. After the session closed, the State Council announced that it intends to “implement a priority employment strategy to promote high-quality full employment,” especially for college graduates. How this would be done was somewhat unclear, with less focus on job training, although we can assume more policies will emerge.

All sectors were positive in Mainland China as Northbound Stock Connect volumes were very strong, indicating that foreign money has returned to Mainland China stocks. Has money flowed out of Japan and South Korea and back to “cheap” China? It’s hard to tell. Mainland China money flowed out of Hong Kong via the Southbound Stock Connect with -$690 million in net selling as Tencent and Meituan were net sellers, although Alibaba had $336 million in net buying. Is Mainland China money leaving Hong Kong and back to China a concern? No, as global investors are extremely underweight and the end-of-month/quarter rally is problematic for managers who have to disclose their holdings.

Hong Kong growth stocks are where foreign investors will gravitate to in my opinion, aside from the internet names that are actually rising fundamentally, unlike most of the MSCI China. One factor in today’s fade from the highs is the start of next Tuesday. Mainland China is closed for a week for a national holiday. I would suspect that there may be some selling of Hong Kong from Mainland China as profit taking ahead of the holiday by Mainland investors. Hong Kong is closed until next Tuesday. Regardless, the dragon is waking up!

The Hang Seng and Hang Seng Tech indices gained +0.68% and +0.23% respectively on volume that was up +5% from yesterday, which is 244% of the annual average. 286 stocks rose, while 194 fell. Main Board short turnover fell -1.95% from yesterday, which is 270% of the annual average, as 19% of turnover was short turnover (Hong Kong short turnover includes short ETF volume, which is driven by market maker ETF hedges). Value factor and large-cap stocks outpaced growth and small-cap stocks. The best performing sectors were financials, up +2.28%, energy, up +1.49%, and materials, up +1.17%, while information technology fell -2.07% and real estate fell -0.93%. The best performing sub-sectors were media, insurance and capital goods. Meanwhile, tech equipment, food and beverages and consumer services were among the worst performers. Southbound Stock Connect volumes were very strong as mainland investors sold Hong Kong-listed stocks and ETFs to a net amount of -$690 million, including Alibaba, which was a large net buy, Kuaishou, which was a small net buy, and Tencent and Meituan, which were large net sells.

Shanghai, Shenzhen and STAR Board gained +1.16%, +1.24% and +0.04% respectively on volume that was up +19% since yesterday, which is 148% of the yearly average. 4,257 stocks rose while 727 stocks fell. Value factor and large-cap stocks outpaced growth factor and small-cap stocks. All sectors were positive, led by industrials up +2.19%, financials up +2.11% and communication services up +1.82%. Diversified financials, construction and heavy machinery were the top performers. Meanwhile, oil and gas and computer equipment were among the few negative subsectors. Northbound Stock Connect volumes were very strong. CNY and the Asian dollar index gained against the US dollar. Treasuries rose. Copper and steel gained.

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Yesterday’s performance

Yesterday’s exchange rates, prices and yields

• CNY per USD 7.02 vs 7.03 yesterday
• CNY per EUR 7.87 vs 7.83 yesterday
• Yield on 10-year government bond 2.04% vs. 2.07% yesterday
• China Development Bank’s 10-year bond yield 2.12% vs. 2.15% yesterday
• Copper price +1.73%
• Steel price +3.05%