Politburo Emphasizes Domestic Consumption As China Trade Data Gives Global Economy Thumbs Down

Key News

While not a day that will live in infamy, Asian equities had a rough outing following the Nasdaq’s -2% drop yesterday, with the Goldman Sachs CEO’s pessimistic outlook on the US economy weighing on sentiment.

The Shenzhen Stock Exchange was the only positive market regionally as Hong Kong was hit with profit taking in a classic buy the rumor sell the news as the National Health Commission outlined ten measures that dial back COVID rules further. The State Council also outlined six measures to be taken by local governments. Mainland Chinese investors weren’t as negative as foreign investors were overnight as reopening plays such as travel and restaurant stocks had a strong day on the Mainland versus Hong Kong’s drop. It has been a very strong five weeks, so a pullback should surprise no one.

Mainland investors took profits in Hong Kong stocks, as evidenced by Southbound Stock Connect’s net sell today. However, CNY gained versus the US dollar, indicating this is not a major freak out. Also, Hong Kong short volumes were in line with Hong Kong internet stocks, not seeing an uptick in short activity. One would suspect/hope that the vast majority of investors who missed the move would buy the dip. Why should they? Not receiving attention was today’s Politburo meeting in advance of next week’s CEWC, the big 2023 economic strategy meeting which will determine the 2023 GDP target. The release spoke to high quality growth, raising domestic demand, and “prevent and resolve major risks”. Chinese media stated “…external demand will weaken, the contribution of exports to China’s economic growth will decline marginally, the growth rate of infrastructure investment will fall from a high level, and real estate investment will still be a drag economic growth. In this context, the recovery of consumer demand is particularly critical to economic growth, and consumption is directly related to epidemic prevention policies.”

Overnight, November export/import data was released which missed expectations badly. The government understands the global economy in 2023 is not going to do well as China’s exports indicate how weak the global economy is already. This should concern you about the US economy, not China’s economy! How do you offset export weakness? Raise domestic consumption which requires removing the overhang from COVID policies. Remember Alibaba’s Head of Investor Relations Robert Lin’s comments at our investor conference on this topic? We are apt to see a 5% GDP target out of the CEWC which means a big consumption push. Real stocks had an awful day in Hong Kong down -7.54% and in China -1.35% as Country Garden fell -15.46% after announcing it will issue more shares to bolster its balance sheet. We will reiterate our idea of long Chinese real estate bonds which benefit from stock issuance which hurts the real estate stocks as more shares are issued. Hong Kong’s most heavily traded by value were Tencent -3.72%, Meituan -3.62%, and Alibaba HK -5.34%. Worth pointing out that foreign investors are gravitating toward Mainland Chinese growth stocks.

The Hang Seng and Hang Seng Tech fell -3.22% and -3.77% on volume +25.7% from yesterday which is 168% of the 1-year average. 71 stocks advanced while 440 fell. Main Board short turnover increased +19.25% from yesterday which is 142% of the 1-year average as 15% of turnover was short turnover. Growth and value factors were mixed as large caps “outperformed”/fell less than small caps. All sectors were negative with real estate down -7.56%, tech down -5.03%, and materials down -4.38%. All sub-sectors were down with retailers, insurance, and tech hardware down the worst. Southbound Stock Connect volumes were high/2X the average as Mainland investors sold -$304 million of Hong Kong stocks today with Meituan a moderate net sell, Xpeng and Country Garden small net buys, while Tencent and Kuiashou were small net sells.

Shanghai, Shenzhen, and STAR Board were mixed -0.4%, +0.15%, and -0.27% respectively on volume -4.88% from yesterday which is 100% of the 1-year average. 1,939 stocks advanced while 2,640 stocks declined. Growth factors outpaced value factors as small caps edged out large caps. Top sectors were communication gaining +1.1%, discretionary up +1.06%, and healthcare finishing higher +0.91%, while energy fell -1.57%, real estate closed down -1.36%, and utilities fell -1.14%. Top sub-sectors were aviation, pharma, and restaurants while motorcycles, coal, and insurance were among the worst. Northbound Stock Connect volumes were moderate/high as foreign investors bought a net $39 million of Mainland stocks with a preference for growth stocks over value. CNY appreciated versus the US dollar +0.22% closing at 6.97 while Treasury bonds rallied and copper -0.06%.

Major Chinese City Mobility Tracker

A nice upswing in traffic less Beijing which as the capital will see slower covid dial backs. Subway usage seeing a pick up from a low base in Guangzhou, Wuhan, Beijing and Xian.

Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 6.97 versus 6.99 yesterday
• CNY per EUR 7.33 versus 7.35 yesterday
• Yield on 10-Year Government Bond 2.87% versus 2.92% yesterday
• Yield on 10-Year China Development Bank Bond 3.02% versus 3.04% yesterday
• Copper Price -0.06% overnight