Liu He’s Speech Lifts Hong Kong

Key News

Asian equities performed well overnight as the Hang Seng’s gained +7.04%, led by the strong performance of internet stocks following Vice Premier Liu He’s Wednesday speech release addressing multiple investor concerns. We saw follow-up comments from the CSRC, China’s SEC, and the PBOC reiterating his key points yesterday while overnight the Ministry of Commerce did the same. We want to see all regulators do the same including the MIIT, NDRC, SAMR, etc as ultimately investors will want to see follow through on the points made yesterday.

Remember Liu He is an exceedingly important person so there is a clear indication from China to resolve the HFCAA. His speech mentioned real estate which lifted those stocks in both Hong Kong and China overnight. The HFCAA ball is firmly on the US side to help resolve the issue.

Hot off the press, a Biden-Xi meeting is scheduled for Friday night. We will be following this closely and sharing our takeaways on Monday.

Yesterday was without question the most “interesting” day I’ve ever experienced. Was it real money getting involved or an epic short covering? Without question, short-sellers had a rough day though volumes indicate there were buyers. Remember Liu He’s speech was released at around 1pm Wednesday locally which would explain Hong Kong short-sellers scrambling. Hong Kong’s short sale volume went up Wednesday to its highest level in the last year though that volume was off -2.23% overnight. Interesting to see skepticism from the shorts though they took another lump of pain overnight. If we see more catalysts, the upside will only be magnified by short covering.

During US trading hours, there were indications of buyers based on the volumes. Alibaba had 44mm shares short as of the end of February but traded 159mm shares yesterday. Today’s pullback in US-China ADRs was expected as Hong Kong stocks didn’t rise as much as the US stocks anticipated yesterday. Markets are a probability machine encompassing a multitude of potential outcomes. US-China ADR prices have represented the worst possible outcomes totally distinct from their fundamentals: HFCAA, the US applying Russia like sanctions on China, year-end tax-loss selling, etc. Yesterday, the probability machine recalibrated the worst possible outcome to represent a potential solution to HFCAA. This recalibration can continue! Another factor is we are approaching quarter end when active managers have to disclose their holdings. Many of these managers have been underweight the China ADRs, so a continued rally could force them back into the space.

The Hang Seng Index was +7.04% on volume -2.81% from yesterday though still 202% of the 1-year average as the Hang Seng Tech jumped +7.76%. Breadth was strong with 486 advancers and just 28 decliners as growth sectors led the market higher including internet, EV, healthcare, and real estate. Real estate jumped as investors noticed the Liu He speech’s focus on keeping overleveraged developers from creating a financial crisis. Mainland investors sold Tencent and Meituan following the strong two-day rally though the size of sale was not significant.

Shanghai, Shenzhen, and STAR Board gained +1.4%, +2.24%, and +1.53% on volume +7.16% from yesterday which is 121% of the 1-year average. Always good to see an up move on strong volume. Breadth was also strong with 3,405 advancers and 891 decliners. Similar to HK, real estate and healthcare were the best performers +3.97% and +3.77% while solar was weak leading utilities to be the only down sector -0.81% on weaker oil prices. Northbound Stock turned positive as foreign investors bought $844mm of Mainland stocks. Bonds were up slightly/flat while CNY rallied versus the US $ and copper gained +0.85%.

PBOC statement

“…steadily advance and complete the rectification work of large platform companies as soon as possible, promote the healthy and stable development of the platform economy, and improve international competitiveness

CSRC statement

steadily advance and complete the rectification work of large platform companies through standardized, transparent, and predictable supervision

CSRC’s 2^nd statement

Continue to strengthen communication with U.S. regulatory agencies, and strive to reach an agreement on China-U.S. audit supervision cooperation as soon as possible.

Hot off the press, Biden-Xi meeting scheduled for Friday night. We will be following this closely and sharing our take always on Monday.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.35 versus 6.35 yesterday
• CNY/EUR 7.02 versus 7.00 yesterday
• Yield on 10-Year Government Bond 2.79% versus 2.80% yesterday
• Yield on 10-Year China Development Bank Bond 3.05% versus 3.05% yesterday
• Copper Price +0.85% overnight