Shanghai Breaks Out As “Competition Fears” & Strong Dollar Sink JD.com

Key News

Asian equities were mixed overnight with Hong Kong underperforming on weakness in internet stocks.

Worth pointing out that the Hang Seng and Hang Seng Tech gained +0.81% and +1.27% Monday though fell -1.71% and -3.56% today. South China Morning Post’s article that JD.com will spend $1.5 billion to counter e-commerce rival Pinduoduo sent internet shares south on competition fears. The article was written based on insights from “two people with knowledge of the matter”. The company is in its quiet period so it can’t respond! Remember we get Baidu’s earnings tomorrow, Alibaba and NetEase on Thursday.

Hong Kong’s most heavily traded today, with yesterday’s stock move in parenthesis, were Tencent -4.03% (+0.86%), Alibaba HK -4.23% (-0.05%), Meituan-4.12% (+1.11%) despite announcing a push into the Hong Kong market, JD.com HK -8.53% (-1.52%), HSBC -1.96% (+0.95%), and Kuiashou -6.26% (+1.33%). The real culprit today was not the SCMP article but the strong US dollar as the Asia dollar index fell -0.32% and China’s renminbi CNY -0.37%. Risk assets globally are recognizing the Fed is serious about raising rates.

Yes, there is some profit taking after a big move in offshore China (HK and US China ADRs). Onshore China (Shanghai and Shenzhen) didn’t care as Shanghai and Shenzhen gained +0.49% and +0.19% respectively after Monday’s big move of +2.13% and +1.79%. What gives? Investors in China focused on the CSRC while China’s SEC focused on providing more policy support for distressed real estate makers via private investors. China’s REIT market will likely continue to pick up. We also had the PBOC state that the Loan Prime Rates were not cut due to the recent big liquidity injections. This has led some to speculate we’ll see interest rate easing in the not-so-distant future.

Foreign investors bought $269 million of Mainland stocks via Northbound Stock Connect after a healthy $875 million of net buying yesterday. Year to date we have had nearly $21 billion of net buying from foreign investors in onshore China. The Shanghai Composite closed at 3,306 above the 3,300 level but also breaking out of its February range to the upside.

Random thought: What if China’s Foreign Minister negotiates a truce in Ukraine while visiting Russia?

A client recently mentioned podcaster Joe Rogan’s interview of Peter Zeihan who wrote a book with the cheery title “The End of the World Is Just the Beginning”. As the title alludes, the author has a pessimistic view of the future less the United States due to global demographic, trade, and economic trends. I’ve not read the book in full disclosure. On the podcast, he had some interesting insights on Russia’s invasion of Ukraine. He is predicting the collapse of China within the next 10 years based on demographics, China’s dependence on foreign food and oil, and the fragmentation of world into regional trade zones.

On demographics, I believe we’ll see significant policies this year to address this issue. The US and Middle East sell food and oil to China so why would they stop? Who is going to fill the void? Regional trade zones sound highly inflationary to me. If this thesis were to play out, you should be very worried about the US economy and stock market due to how intertwined our economies are. I write this as Australia’s mega-miner BHP CEO stated overnight, they are seeing “green shoots” in their China business and Walmart noted a pickup in Walmart International revenues as “Walmex, China, and Canada led the way.”

Here is my main dissenting view: politicians don’t want to lose their jobs. How do politicians lose their job? There are a variety of culprits such as wars, famines, and misfortunes but also economic collapse/recessions. Can you think of a political leader that has survived an economic collapse/recession? Me neither. Herbert Hoover: not reelected. 1970s: plenty of one term Presidents. George H.W. Bush (41): 1990 recession not reelected. This pattern occurs internationally as well. Late 1990s Asian Tiger crisis: governments collapsed or voted out. So, I would say no I’m not buying the thesis that we tear up globalization and free trade simply because a global economic collapse that would occur with voters blaming Washington DC. Zeihan is speaking at a conference I’m attending in three weeks and will ask him as much.

The Hang Seng and Hang Seng Tech fell -1.71% and -3.56% on volume -0.79% from yesterday which is 88% of the 1-year average. 141 stocks advanced while 336 stocks declined. Main Board short turnover increased +0.74% which is 72% of the 1-year average as 14% of turnover was short turnover. Value factors outperformed growth factors as large caps edged out small caps. Top sectors were materials +1.32%, energy +0.77%, and real estate +0.72% while communication -4.16%, discretionary -4.01%, and healthcare -2.53%. Top sub-sectors were energy, materials, and semis while retailing, food, and software underperformed. Southbound Stock Connect volumes were light as Mainland investors bought $58 million of Hong Kong stocks though Tencent was a large/moderate sell, Meituan and Kuaishou were small net sells.

Shanghai, Shenzhen, and STAR Board diverged +0.49%, +0.19%, and -0.31% on volume -2.92% from yesterday which is 102% of the 1-year average. 2,845 stocks advanced while 1,738 declined. Value and growth factors were mixed as small caps outpaced large caps. Top sectors were energy +1.47%, materials +1.17%, and discretionary +0.55% while communication -1%, staples -0.8%, and healthcare -0.78%. Top sub-sectors were coal, precious metals, and steel while airports, office supplies, and daily chemicals. Northbound Stock Connect volumes were moderate as foreign investors bought $269 million of Mainland stocks. CNY fell -0.33% overnight to 6.87, Treasury bonds were off, while copper and steel rallied.

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Major Chinese City Mobility Tracker

Groundhog Day.

Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 6.87 versus 6.87 Friday
• CNY per EUR 7.32 versus 7.33 Friday
• Yield on 10-Year Government Bond 2.91% versus 2.89% Friday
• Yield on 10-Year China Development Bank Bond 3.09% versus 3.06% Friday
• Copper Price +1.14% overnight
• Steel Price +1.56% overnight