NDRC confirms support for Ministry of Finance policy

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Asian stocks were mixed overnight on escalating tensions in the Middle East. Taiwan outperformed on strong second-quarter growth in the U.S. technology and semiconductor sectors, while Japan was hit hard by a BOJ rate hike and a strengthening yen.

Hong Kong and mainland China were hit by profit-taking after yesterday’s strong rally following the Finance Ministry’s press conference on stimulus plans after the Third Plenum. Sentiment was also boosted by July’s Caixin Manufacturing PMI at 49.8, compared with expectations of 51.5 and June’s 51.8. The data suggest the global economy is slowing, underscoring the US Federal Reserve’s interest-rate cut incentives and China’s need to boost domestic consumption.

Yesterday’s press conference of the National Development and Reform Commission (NDRC) led by Deputy Secretary General Yuan Da attracted very little attention as some elements of the conference have not been disclosed until today. He stated that “the next step is to actively boost domestic demand” by “promoting consumption… such as cars and household appliances” financed by government special purpose bonds. Does this mean a cannonball is coming?

Hong Kong had a better day than expected as the Hang Seng Index, HSBC’s powerhouse, fell -2.43%, although the bank’s shares are not part of the MSCI China due to its London headquarters, accounting for 60% of the index’s decline. Meanwhile, JD.com fell -3.89%, accounting for almost half of the Hang Seng Tech Index’s decline. There was very little news on JD’s decline, apart from a mainland media source saying the company was prioritising revenue growth over profitability in Q2 due to increased competition from PDD. However, JD should benefit from a subsidy for home appliances. JD’s Q2 financial results will be released on 15 August^t.

TAL Education (TAL US) beat revenue, adjusted net income and adjusted earnings per share (EPS) this morning before the market opened. Yesterday, online car retailer Autohome (ATHM US) reported Q2 earnings that also beat the big three, although the US-listed ADR was only up +2.34%. New Orient Education (EDU US) looks to be in the red. BYD fell -0.52% despite announcing a global partnership outside the US with Uber to deliver 100,000 electric vehicles (EVs) to drivers worldwide. After the close, the company announced that new energy vehicle (NEV) sales in July totaled 342,383 NEVs (EVs and hybrids), up +30.6% year over year and +0.21% from June. Did anyone catch President Trump’s comment about allowing Chinese EV manufacturers to produce in the US if they build factories here?

Hong Kong-listed ETFs saw a very strong buying today from mainland investors, totaling $1.07 billion. What are they seeing that is driving them to buy? Mainland markets had a weak day, with the exception of mega-oil and banks, while overseas growth stock favorites including Kweichow Moutai, down -2.47%, and CATL, down -3.23% in net selling via the Northbound Stock Connect. Despite the growing economic stimulus, stock markets are failing to stoke the animal spirits as Treasuries rose (again), although copper and steel rose.

Reuters cited a Goldman Sachs report that said global hedge fund allocations to China fell from 15% to 6.6%, a five-year low, while Japan was heavily overweighted, although the allocation was not disclosed. We believe that reversal of investors’ low positioning could help fuel another rally in Chinese stocks. In addition to the weak economic data that has weighed on Chinese markets since mid-May, MSCI’s quarterly pro forma rebalancing is due out next Tuesday evening. China’s weighting in the indices is likely to fall on weakness in China’s stock market and strength in India. China’s weighting could fall in Asia-Pacific on strength in Japanese stocks, barring today’s results. Could MSCI’s weighting in India and Japan rise on the back of a second-half stimulus spike in China? We’ll see!

The Hang Seng and Hang Seng Tech indices closed lower by -0.23% and -1.15% respectively, on volume that was down -20.88% from yesterday, which is 92% of the yearly average. 162 stocks rose, while 309 fell. Main Board short volume was up +12.29% from yesterday, which is 96% of the yearly average, as 17% of volume was short volume (Hong Kong short volume includes ETF short volume, which is driven by market maker ETF hedges). Value and large-caps “outperformed,” i.e. fell less than small-caps and growth. The top performing sectors were Industrials, up +1.10%, Materials, up +0.58%, and Communication Services, up +0.35%. Meanwhile, Real Estate fell -3.18%, Consumer Discretionary fell -1.59% and Consumer Discretionary fell -1.06%. The best performing sub-sectors were Utilities, Telecom and Transportation. Meanwhile, Food & Drinks, Tobacco and Estate were among the worst performers. Southbound Stock Connect volumes were light as Mainland investors bought $1.071 billion worth of Hong Kong stocks, with Hong Kong Tracker ETF being a very large net buy, HS China Enterprise ETF, HS Tech ETF and Tencent large net buys.

Shanghai, Shenzhen and STAR Board fell -0.22%, -0.53% and -0.61% respectively on volume that was down -13.49% since yesterday, 96% of the yearly average. 2,083 stocks rose, while 2,674 fell. Value and large-cap “outperformed,” i.e. fell less than small-caps and growth factor. The only positive sector was utilities +0.09%, while real estate -2.85%, consumer staples -2.56% and discretionary -1.52%. Top subsectors were education, highways and land transportation, while chemicals, alcohol and construction machinery were the worst performers. Northbound Stock Connect volumes were moderate as foreign investors sold Mainland shares with Wuxi AppTec, Citic and Cambricon in small net buys, while BYD, Wanha and SCC saw moderate net selling. CNY and the Asian dollar index fell 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 7.24 vs 7.22 yesterday
• CNY per EUR 7.81 compared to 7.81 yesterday
• Yield on 10-year government bond 2.13% vs. 2.15% yesterday
• China Development Bank’s 10-year bond yield 2.20%, up from 2.22% yesterday
• Copper price: +1.83%
• Steel price: +1.02%