China Market Update: China & Asia Diverge

Key News

Asian equities were largely off with global trade proxies Japan off over 2%, Korea and Singapore over 1%. Indonesia was off nearly 3%, Taiwan off over 1%, India -50bps, and Australia not quite 1%. Hong Kong was off all day until a very late rally pushed the market into positive territory.

What drove the late-day rally? Sentiment was poor during the trading day in Hong Kong on news that new coronavirus cases in South Korea (505) exceeded China’s new cases (ex Hubei province 5 cases, 409 in Hubei). Brokers had mixed views as on the late day surge though news of further China stimulus may have been a contributor. MSCI’s Quarterly Index Review trading day is tomorrow, which might be a factor. One broker heard that Italy’s cases have been overstated.

Today saw a rebound from yesterday’s steep decline in small caps though the rotation to large/value from small/growth continued to some degree. There is chatter that small cap valuations are leading to this reversal. Time will tell!

H-Share Update

The Hang Seng was down all day reaching a low of -1.04% before a last hour surge led to a closing gain of +0.31%/+82.1 index points at 26,778. Turnover was off -7% day over day but well over the 1-year average while 32 stocks advanced and 15 declined. Index heavyweight HSBC was off -2.16%/-53 index points, China Construction Bank +1.9%/+40 index points and AIA Group +1.1%/28.7 index points. Real estate China Resource was the day’s best performer +3.45%/+10.7 index points quickly followed by Sino Biopharmaceutical +3.44%/+8.2 index points while Wharf Real Estate was off -6.22%/-8.6 index points. Chinese companies listed in Hong Kong outperformed their Hong Kong-domiciled counterparts +0.87% and +0.38% using HS China Enterprise and HS HK 35 indexes as proxies.

The Chinese companies within the MSCI China All Shares Index +0.71% led by materials +3.23%, industrials +1.76%, health care +1.51%, financials +1.35%, real estate +0.88%, tech +0.85%, utilities +0.53% and staples +0.36%. Energy and discretionary were off -0.47% and -0.42%. Southbound Connect volumes were lighter though Mainland investors were active buyers of Hong Kong-listed stocks. Mainland investors bought $560mm of Mainland stocks with volume leaders CCB 20 to 1 buying, Tencent 3 to 2 buying and ICBC nearly 7 to 1 buying. Southbound Connect trading accounted for just over 7% of Hong Kong’s turnover.

A-Share Update

Shanghai and Shenzhen had a choppy day closing +0.11% and +0.24%, respectively, though volume was off -20% day over day though still well above the 1-year average. Volume in China have been running at over 2X the one year average the last week. Breadth was mixed with 1,870 advancers and 1,732 decliners as mega and large caps slightly outperformed mid and small caps. The Mainland stocks within the MSCI China All Shares Index +0.36% led higher staples +1.46%, health care +1.08%, utilities +1%, materials +0.7%, financials +0.42%, industrials +0.37%, and communication +0.33%. Real estate was off -1.12%, tech +0.6%, discretionary +0.44% and energy -0.28%. Northbound Connect volumes were elevated as foreign investors sold Mainland stocks to the tune of $562mm. For the week, foreign investors have sold $3.445 billion worth of Mainland stocks. Foreign trading accounted for 4.6% of mainland turnover.

Passive investment managers will busy as tomorrow’s market close requires the implementation of MSCI’s February Quarterly Index Review (QIR). QIR is a mini-version of MSCI’s Semi-Annual Index Review (SAIR) as it focuses on float increases. For those based in the US, watch Zai Lab (ZLAB US) and to a lesser extent Luckin Coffee (LK US). The power of passive will be on fully display at 3:59 PM EST. I am not predicting these stocks will go up as passive managers have their brokers buy the stocks in advance and then execute at the close. Volumes will go up though!

Baidu (BIDU US) and Weibo (WB US) report after today’s close.

Last Night’s Prices & Yields

·        CNY/USD 7.01 versus 7.02 yesterday

·        CNY/EUR 7.69 versus 7.64 yesterday

·        Yield on 1-Day Government Bond 1.35% versus 1.76% yesterday

·        Yield on 10-Year Government Bond 2.77% versus 2.80% yesterday              

·        Yield on 10-Year China Development Bank Bond 3.23% versus 3.24% yesterday

·        Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper were off -0.31%

About KraneShares

Krane Funds Advisors, LLC is the investment manager for KraneShares ETFs. Our suite of China focused ETFs provide investors with solutions to capture China’s importance as an essential element of a well-designed investment portfolio. We strive to provide innovative, first to market strategies that have been developed based on our strong partnerships and our deep knowledge of investing. We help investors stay up to date on global market trends and aim to provide meaningful diversification. Krane Funds Advisors, LLC is majority owned by China International Capital Corporation (CICC).