PBOC Cuts Loan Prime Rate, Hong Kong Outperforms

Key News

Asian equities had a mixed day as Hong Kong and Japan outperformed and India underperformed. Remember Hong Kong internet outperforming and India underperforming is the active manager pain trade due to their overweight to India and underweight to China.

The PBOC cut the 1 Year Loan Prime Rate (LPR) to 3.7% from 3.8% and the 5 Year LPR to 4.6% from 4.65%. Banks use the 1-year rate for lending to households and businesses while the 5 Year is used as a reference rate for mortgages. This follows Monday’s move to cutting the medium-term lending facility (MLF) to 3.7% from 3.8%.

Hong Kong real estate stocks ripped +3.01% on the news as policymakers are looking to walk a fine line between disincentivizing further investment in real estate without destroying the sector. An understated but significant catalyst was the Cyberspace Administration of China’s denial of the Reuters article stating platform companies would have to receive approval to make investments or raise funds. The market has been worried that bigger platform companies (i.e., Alibaba, Tencent) would have to divest their investment holdings putting selling pressure on the stocks.

The Cyberspace Administration of China, before the US market open, stated they had “never issued this document, and the content of the information is false.” They also stated, “the relevant rumor makers will be strictly held accountable in accordance with the law.” Worth noting that Bloomberg News ran the headline “China to Slap New Curbs on Tech Giants’ Deal” all day even after they amended the article acknowledging the denial. The constantly China bad headline approach by Western media should lead to skepticism by readers. Today’s WSJ article that “China-Based Auditors Pose Risk for U.S. Companies, Study Shows” is almost laughable as the article barely mentions the “China-Based Auditors” are the China arms of the Big Four Accounting Firms!

Anyway, Hong Kong internet names had a strong day with Hong Kong’s most heavily traded by value Tencent +6.6%, Meituan +11.01%, and Alibaba HK +5.88%. Ping An Insurance gained +7.7% because like the internet companies the insurance company has made many investments in private and public companies. The move was supported by a very strong day of buying by Mainland investors via Southbound Stock Connect with Tencent and Meituan significant beneficiaries. Hong Kong volumes had their strongest day since October 15th increasing 55% from yesterday which is 110% of the 1-year average.

Interesting that Mainland investors took the LPR news in stride as it was well telegraphed as the Shanghai -0.09%, Shenzhen -0.92%, and STAR Board -1.36%. Volume increased 5.82% from yesterday which is 107% of the 1-year average. Large/Mega caps outperformed significantly as financials, liquor stocks and appliance makers outperformed. Banks benefited from the increase in loan activity while consumption plays benefited.

Worth noting we also had Premier Li stating the policy would be needed to support the economy in 2022. It is anticipated we will see further LPR cuts and chatter about a bank reserve requirement ratio cut coming. Foreign investors bought a healthy $1.983B of Mainland stocks today via Northbound Stock Connect which is the biggest inflow day since October 22nd. Since 12/31/2019, foreign investors have purchased more than $100B of Mainland stocks. Chinese bonds rallied, CNY was flat versus the dollar and copper rallied.

I don’t Tweet often but I do on occasion. I can be followed on Twitter at @ahern_brendan.

President Biden said he wouldn’t lift China tariffs because they haven’t fulfilled their trade deal fulfillments. First, if you are worried about inflation, removing tariffs would help as merchants pass along higher costs to consumers. Second, China considers the goods sold in China from US companies that manufacture in China to be “trade” since all of that revenue flows back to the US. Think about Apple, Nike, or GM who have factories in China that produce goods sold in China and across Asia. Those profits flow back to Cupertino, Beaverton, and Detroit. If one adds these goods to US’ exports to China, there is no trade deficit.

Yicai Global had a good piece of reporting as the State Council extended “…tax and fee cuts covering areas including technology companies and startups that were due to expire at the end of the year.” Stealth stimulus measure.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.35 versus 6.35 yesterday
• CNY/EUR 7.19 versus 7.22 yesterday
• Yield on 10-Year Government Bond 2.73% versus 2.73% yesterday
• Yield on 10-Year China Development Bank Bond 3.03% versus 3.03% yesterday
• Copper Price +1.20% overnight