Key News

Asian equities were largely higher as China outperformed while Japan, India, and Indonesia were off slightly.

Nike founder Phil Knight’s book Shoe Dog speaks to the determination of settlers to endure the Oregon Trail to reach the Pacific. Walter Isaacson’s book Steve Jobs speaks to the counter culture of Silicon Valley tech entrepreneurs that led them to rebel against established standards to build the technology world we now live in. These inspiring tales suggest that Americans are optimists by nature. However, the performance dispersion between the US and Hong Kong share classes of the exact same internet companies suggests that we have become pessimists.

US-listed China internet stocks fell yesterday despite strong results from Kuaishou and NetEase. Given the exact same information, US investors sold NetEase’s ADR, which fell by -1.68% yesterday. However, NetEase’s Hong Kong shares gained +3.05% overnight. Kuaishou (1024 HK) gained +2.6% after the company released positive financial results.

Yes, we had a sharp US equity decline yesterday. Yes, we had a Wall Street Journal article quoting the PCAOB on efforts to resolve the long running audit issue. We also had the SEC’s YJ Fischer, the Director of the Office of International Affairs, give a speech yesterday afternoon reiterating the efforts they are making to solve the issue.

Overnight, Hong Kong internet stocks saw mixed performance. However, they were not down as much as their US-listed peers were yesterday. Tencent fell -1.18%, Meituan gained +0.06%, Alibaba HK fell -1.5% (versus Alibaba’s US-listed shares, which fell -5.46%), Kuaishou, which gained +5.37%, and, which fell -0.49% (versus JD’s US-listed shares, which fell -7.03%). These are all good reasons for an investor to prefer the Hong Kong shares over the US shares.

The key to yesterday’s weakness was the lack of buyers in these stocks as professional mutual fund managers will likely continue to underweight the space until a solution to avoid delisting is at hand. In the meantime, shorts can keep pressing their bets knowing no one is stepping in to defend to buy the stocks.

It is worth noting that NetEase’s value traded in Hong Kong is now 59% of the value traded in its US listing.

One factor that led to gains in Hong Kong and Mainland China overnight were the 33 fiscal and monetary policy points made after the close yesterday.

Traditional autos were strong performers in both Hong Kong and Mainland China after the announcement of a sales tax rebate for purchases of automobiles, whether electric or internal combustion.

Today’s breadth in China was very strong though we’d like to see volumes go somewhat higher, which would indicate investor conviction.

Alibaba and Baidu will report tomorrow morning following the close in Hong Kong and prior to the market opening in New York.

The SEC’s Fischer noted two interesting points in a speech delivered yesterday. First, he stated that “any claim of national concerns to justify a refusal to provide the PCAOB with audit work papers should be viewed with skepticism.” Translation: there is unlikely to be “sensitive information pertaining to national security” included in an audit. She then says that a small number of State-Owned Enterprises might have “sensitive information” so “…some China-based issuers may opt to delist preemptively from US exchanges.” Removing the SOEs from the issue would allow the private companies to comply as they have nothing to hide.

Both Fischer and the Wall Street Journal article noted the likelihood that the delisting window will be shortened to next year as, according to one of the HFCAA architects, shortening the timeline “will lead to faster negotiations.” I disagree with that statement as shortening the window is akin to shortening the fuse on a bomb. It is worth noting that in Davos, there was a panel including NYSE’s John Tuttle, who stated that he believes there will be more China ADRs listing in the future, rather than fewer. Interesting! Our very own CEO Jonathan Krane also made several strong points. The full panel discussion can be viewed here.

The Hang Seng and Hang Seng Tech Indexes gained +0.29% and +0.28%, respectively, on volume that was -9% lower than yesterday, which is just 72% of the 1-year average. 267 stocks advanced while 197 declined. Hong Kong short sale turnover declined by -14.08% from yesterday which is 74% of the 1-year average. Value factors outperformed today as large caps outpaced small caps. Today’s best performers were energy +2.26%, utilities +1.44% and staples +1.16% while communication (i.e. Tencent) -0.56% and discretionary (ie Alibaba despite autos outperformed) -0.37%. Mainland investors were net buyers of Hong Kong stocks today on light Southbound Stock Connect volumes with Tencent and Meituan seeing net buying. China Mobile has seen very strong buying via Southbound Stock Connect yesterday and today.


Shanghai, Shenzhen, and the STAR Board gained +1.19%, +1.17%, and a Wayne Gretzky +0.99%, respectively, on volume that was -23.24% lower than yesterday, which is 70% of the 1-year average. There were 3,835 advancing stocks and 598 declining stocks. Factor performance was mixed across growth and value factors though small caps outperformed large caps. Top sectors were utilities +2.14%, energy +2.03% and discretionary +1.72% (autos) while materials and staples were off -0.12%. Foreign investors bought +$509mm of mainland stocks via Northbound Stock Connect though Kweichow Moutai saw some net outflow while non-SOE bank China Merchants saw a small net inflow. Treasury bonds rallied, CNY depreciated versus the US $ -0.61% to 6.69 while copper eased -0.43%.

Belated happy 14th and 12th birthday to my Mac & Addie!

My condolences to all those affected by the horrific events in Uvalde Texas. Our thoughts, prayers, and sympathies are with you.

Last Night’s Exchange Rates, Prices, & Yields

  • CNY/USD 6.69 versus 6.67 yesterday
  • CNY/EUR 7.14 versus 7.14 yesterday
  • Yield on 10-Year Government Bond 2.76% versus 2.77% yesterday
  • Yield on 10-Year China Development Bank Bond 2.96% versus 2.98% yesterday
  • Copper Price -0.43% overnight

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