Currency/China ADR Weakness As Hong Kong Sees Massive Buying From Mainland Investors

Key News

Asian equities were broadly lower overnight except for Indonesia and Malaysia posting +1% returns. US-listed Chinese stocks (ADRs) were off significantly yesterday on little tangible news. After the US stock market opened, online real estate company KE Holdings (BEKE US) had a 14mm share block trade at a -8% discount to the previous day’s close. BEKE’s 1-year average volume is almost 14mm shares, so this was a significant sale leading to speculation that an asset manager was forced to sell or have redemptions leading to potential future sales in the China ADR space. The selloff hit all China ADRs, not just electric vehicles or internet stocks. Very hard to know for sure though it shows how fragile the market is. Other rumors pointed to speculation China will not stray from the hard line on zero covid, recent covid outbreaks in China, and potential hard-liners filling key government roles post-Party Congress.

China’s offshore renminbi (CNH) was off -0.61%/$0.04 versus the US dollar closing at 7.269 in US trading hours versus onshore China’s renminbi (CNY) close of 7.228 at the end of China’s trading day. US 10 Year Treasury yield rose as the US dollar had a solid day versus other currencies. This unspoken culprit very likely was a significant contributor to the weakness in China ADRs yesterday though somewhat surprising US equities weren’t off more. This morning CNH has appreciated versus the US dollar to 7.24 from 7.26 as CNH is quoted in renminbi per dollar so confusingly, down means appreciation for renminbi and vice versa.

Yes, Hong Kong stocks were off but not nearly as much as US-China ADRs. Mainland investors had one of the largest net buy days of Hong Kong stocks today via Southbound Stock Connect, to the tune of US $900 million as they bought the dip in size. Tencent had one of its largest net buying days ever. Interesting investors closest to the stocks were buyers.

Hong Kong Main Board short turnover increased by +63% from yesterday as 21% of turnover was short. Once again, onshore Chinese investors (Shanghai/Shenzhen/STAR Board) weren’t nearly as pessimistic as offshore (Hong Kong) investors. Hong Kong came off its intra-day low on talk China will shorten its inbound visitor quarantine. STAR Board outperformed, led by semiconductor stocks, as the Ministry of Industry and Information Technology called companies to understand the impact of US semiconductor export controls. A local broker noted today’s weakness in Japanese stocks was lowered by Japanese semiconductor companies doing significant business in China and the US. I don’t think the market has appreciated these sanctions’ repercussions for US and global semiconductor companies though maybe they are a negotiating tool. Sad to see the distraction technique of looking over there and not in the mirror has become common for US politicians especially heading into the mid-terms.

The Hang Seng and Hang Seng Index fell -1.4% and -2.37% on volume +49.59% from yesterday, which is 103% of the 1-year average. 139 stocks advanced, while 345 declined. Main Board short sale turnover increased +63% from yesterday, which is 126% of the 1-year average, as 21% of turnover was short today. Value factors outperformed growth factors as large caps outperformed small caps. Tech and financials were positive +0.71% and +0.21% while communication -5.49%, healthcare -2.83% and discretionary -2.8%. Top sub-sectors included healthcare equipment, semis, and banks, while software, retailers, and auto parts were among the worst. Southbound Stock Connect volumes were moderate as Mainland investors bought $800mm of Mainland stocks today, with Tencent a very large net buy, Meituan a large buy, Kuaishou, BYD, Li Auto, and Wuxi were small net buys.

Shanghai, Shenzhen, and STAR Board were mixed -0.31%, -0.51%, and +1.52% on volume +4.52% from yesterday, which is 80% of the 1-year average. 2,198 stocks advanced, while 2,273 stocks declined. Value and growth factors were mixed as small caps outpaced large caps. Top sectors were tech +0.96%, communication +0.68% and healthcare +0.29% while industrials -1.71%, energy -1.63% and discretionary -1.27%. The top sub-sectors were hardware, semis, and energy equipment, while marine/shipping, motorcycle manufacturing, and power grid stocks were among the worst. Northbound Stock Connect volumes were moderate/light as foreign investors sold -$890mm of Mainland stocks today. Treasury bond prices fell today. CNY declined -0.04% versus the US dollar to 7.226 from 7.227 and copper -0.06%.

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.23 versus 7.23 Yesterday
• CNY per EUR 7.07 versus 7.06 Yesterday
• Yield on 10-Year Government Bond 2.72% versus 2.71% Yesterday
• Yield on 10-Year China Development Bank Bond 2.87% versus 2.86% Yesterday
• Copper Price -0.06% overnight