Week in Review
- JD.com reported Monday morning that its revenues grew by +26% year over year to RMB 254 billion versus an estimated RMB 248 billion, though net income came in at RMB 4.6 billion versus an estimated 5.9 billion. The positive release led to a rebound in Hong Kong-listed internet stocks.
- A key benchmark for China’s internet stocks surged over +10% on Tuesday as investors began to see the light at the end of the tunnel regarding regulatory uncertainty for the sector and E-Commerce giant Pinduoduo reported its first-ever quarterly profit in the second quarter.
- Video platform Kuaishou reported Q2 earnings after the close in Hong Kong on Wednesday that beat analyst expectations. Revenues came in at RMB 19.1 billion versus an estimated RMB 18.73 billion. However, the company continues to post a net income loss as it is still in the growth phase.
- Han Wenxiu, who is among the officials that have been charged with implementing “common prosperity”, said in a press conference that the policy is not about direct wealth re-distribution. Rather, the policy is about tackling the issue of growing income inequality in China in a rational way without sacrificing economic growth.
Friday’s Key News
Asian equities managed small gains overnight as volumes plummeted from yesterday. Investors are waiting for guidance on rates and inflation from the Fed’s Jackson Hole virtual summit. To taper or not to taper, that is the question! I will have to ask our friend and resident fixed income guru Nancy Davis what her thoughts are.
The Wall Street Journal came out with a note saying tech companies with access to significant data will not be allowed to list in the US based on an “unnamed source”. I kindly disagree based on what we’ve seen from Chinese regulators about US listings over the last few weeks. I do not anticipate a Chinese IPO in the US anytime soon due to sentiment.
Sentiment driven by the implementation of internet regulations has also weighed on institutional investors as financial data firms are aggregating position data from 13Fs (holdings submitted to the SEC on a quarterly basis) by funds that managed more than $100 million. Nasdaq.com provides such data for free. If you pull up a quote, there is an institutional holder button. In the case of Alibaba, 997 institutions increased their position by 63 million shares though 804 decreased their position by 282 million shares in the 2nd quarter. 201 institutional investors established a position buying 14 million shares, while 170 sold out by 26 million shares, skewing toward sells. I am not surprised as we have commented about the headline risk for these professional investors holding the names. At the same time, this is the dry powder that can come back into the names. What they need is confidence that the regulation has a finish line, which we believe we are starting to see.
Overnight, the Cyberspace Administration of China released algorithm recommendation management regulations in advance of the November 1st release of the Personal Information Protection Law. If you have seen the great documentary The Social Dilemma, you are familiar with how internet companies’ algorithms “push” users to websites, media stories, or goods being sold. The rules will limit such activity, which does not sound like the end of the world to me.
Meanwhile, a court said recently that internet companies’ grueling 996 work schedule (9 am to 9 pm, six days a week) might violate worker rights.
Alibaba HK, Meituan, and Tencent were off overnight though JD.com HK and Kuaishou Technology were up. Tencent was sold by a small amount by Mainland investors though the company bought back 220,000 shares overnight.
The Mainland market cheered chatter that we could see bank reserve requirement ratio (RRR) cut, i.e. how much cash banks need to hold on their books. A RRR cut allows them to lend more, which drives economic activity and is like a rate cut.
The clean technology sector, which is comprised of the electric vehicles (EV) ecosystem, solar, and wind did well overnight. There was some chatter on supporting EVs as the Ministry of Industrial and Information Technology (MIIT) reported that EVs were 5.4% of all autos in 2020. Interesting that STAR Board was off as less clean tech, value sectors outperformed, as indicated by Shanghai outperforming Shenzhen.
Foreign investors bought $957 million worth of Mainland stocks today via Northbound Stock Connect, bringing the weekly total to $2.776 billion worth of foreign purchases and the year-to-date total to $40.581 billion. Foreign ownership of Shanghai and Shenzen is at an all-time high while internet stocks ownership is likely at an all-time low.
KraTrip.com (TCOM US, formerly C-Trip.com) will report after the US close today. Next week, we have MSCI’s rebalance occurring along with the release of PMI data, NetEase, and Meituan earnings.
The Hang Seng bounced around the room fading in the afternoon to close -0.03% on volume that -7% lower than yesterday, which is just 76% of the 1-year average. The 209 Chinese companies listed in Hong Kong and within the MSCI China All Shares Index eased -0.47% with real estate +1.45%, financials +1.23%, energy +1.22%, utilities +1.08%, tech +0.92%, materials +0.66%. Meanwhile, discretionary -1.72%, healthcare -1.44%, and communication -1.23%. Hong Kong’s most heavily traded stocks by value were Tencent, which fell -1.14%, Alibaba HK, which fell -3.88%, Meituan, which fell -0.79%, Xiaomi, which gained +1.64%, JD.com HK, which gained +2.76%, Wuxi Biologics, which fell -0.77%, Anta Sports, which fell -0.45%, Ping An Insurance, which gained +4.03%, BYD, which gained +2.34%, and Geely Auto, which gained +2.58%. Southbound Stock Connect volumes were light.
Shanghai, Shenzhen, and the STAR Board diverged closing +0.59%, +0.1%, and -1.14%, respectively, as volume declined -1.76% from yesterday, which is still 145% of the 1-year average. The 522 Mainland stocks within the MSCI China All Shares Index gained +0.53% led by materials +1.6%, tech +1.11%, discretionary +0.96%, energy +0.59%, utilities +0.48% and financials +0.47% while communication -2.56% and real estate -0.59%. Northbound Stock Connect volumes were moderate as foreign investors bought +$957 billion worth of Mainland stocks.
Last Night’s Exchange Rates, Prices, & Yields
- CNY/USD 6.48 versus 6.47 yesterday
- CNY/EUR 7.61 versus 7.60 yesterday
- Yield on 1-Day Government Bond 1.49% versus 1.52% yesterday
- Yield on 10-Year Government Bond 2.85% versus 2.85% yesterday
- Yield on 10-Year China Development Bank Bond 3.21% versus 3.18% yesterday
- Copper Price -0.33% overnight
Krane Funds Advisors, LLC is the investment manager for KraneShares ETFs. Our suite of China focused ETFs provide investors with solutions to capture China’s importance as an essential element of a well-designed investment portfolio. We strive to provide innovative, first to market strategies that have been developed based on our strong partnerships and our deep knowledge of investing. We help investors stay up to date on global market trends and aim to provide meaningful diversification. Krane Funds Advisors, LLC is majority owned by China International Capital Corporation (CICC).