Buyers Strike as CSRC Recommends Raising Equity Allocations

KraneShares

Contributor:
KraneShares
Visit: KraneShares

By:

Chief Investment Officer

Key News

Asian equities had a mixed day as Japan and India rebounded while Hong Kong, China, and the Philippines were down/underperformed. Going into today’s session, we knew things would be off as US ADRs, and China ETFs were down yesterday during US trading hours. A global investment bank released a research piece yesterday afternoon noting the under-allocation to China and internet plays from active managers. Overnight the lack of buyers was as much of an issue as shorts pressing their bets. Hong Kong volumes were still only 83% of the 1-year average though short selling volume was 105% of the 1-year volume. The reasons range from China’s lockdown/quarantine response to covid, i.e., Shanghai, investors’ expectations for stronger monetary easing as the PBOC prefers incremental easing, HFCAA/ADR delisting, and the broader US-China political relationship. Uncle! Today was one of the worst breadth (advancers versus decliner) days that I’ve ever seen. Post Tesla results, one would think Nio, Li, and Xpeng’s Hong Kong shares would have risen overnight though they were down.

There was little stock-specific news though a Bloomberg article noting shares outstanding in dual-listed stocks is picking up as US ADRs are converted to Hong Kong shares. The article misses one of the key points: companies are converting their Treasury stock (non-issued shares), management shares, and stock plans to the Hong Kong shares from the US shares as a precaution due to HFCAA.  The evidence: low relative volumes in the Hong Kong shares versus the US shares.  A Mainland broker called today’s price action “tragic” as domestic investors’ sentiment turns. This explains the post-close announcement that the CSRC held a meeting with “the principles of the National Council of Social Security Fund and some large banking and insurance institutions.” A key point was these investors should “increase the proportion of equity investment.” These investors tend to buy low so coming into the market makes sense. It was also announced that “person pension plans” would be launched with tax-deductible contributions. Details are scarce, but this sounds like IRA-like vehicles will be introduced. Bigger picture, we need action/catalysts such as a strong covid vaccine to prevent further lockdowns and a solution to the HFCAA.

According to a Mainland media source from the Boao Forum, Fang Xinghai, Vice Chairman of the CSRC, said that the audit and supervision issues between China and the United States are the core, and some arrangements need to be made. It’s not easy to find a reasonable arrangement, but the teams of both sides have held discussions every week, and I believe this uncertainty will be eliminated soon. 

Last Saturday, the period ended on removing the rule preventing PCAOB from doing onsite audit reviews. Where is the follow-up? Other factors include rising US interest rates and value/growth rotation. Overnight CNY weakened -0.48% to 6.45 from 6.41, driven by US and Chinese Treasury yields are now the same (US 10 Year 2.87% versus China 10 Year 2.82%). Net-net, today’s crisis in confidence, shall too pass.     

Significant chatter on Didi this morning as early headlines said Didi’s regulatory probe results would be delayed, followed by news regulators though its penalty was too late. A penalty might mean that the company has paid for its sins. The company has proposed a delisting vote on May 23rd with Didi executives’ shares allowing them to control the fate. A move to the pink sheets could be interesting as most investors would be shocked at how well Luckin Coffee did once it went to the pink sheets.

Charlie Munger has gotten a lot of grief for his purchase of Alibaba. What the Twittersphere misses is his time frame. Berkshire Hathaway bought BYD back in 2009. It did NOTHING for a decade before investors understood the EV opportunity. He’s an investor and not a trader with a time horizon, a key differentiator.

The Hang Seng Index and Hang Seng Tech Index lost -1.25% and -3.48% on volume +22.49% from yesterday, 83% of the 1-year average.  There were only 64 advancers versus 426 advancing stocks as financials was the only sector in the green +0.03%.  Hong Kong’s short-selling volume increased 33% from yesterday, 105% of the 1-year average. Tech/growth sectors were off led by healthcare -3.93%, communication 03.79%, discretionary -3.62% and tech -3.05%. Growth and volatility factors were the worst performers today as dividends and value held up better. Mainland investors were a net seller of Hong Kong stocks today though Meituan managed a strong net inflow day.  

Shanghai, Shenzhen, and STAR Board lost -2.26%, -3.11%, and -1.62% on volume +2.83% from yesterday, 78% of the 1-year average. Breadth had just 317 advancing stocks and 4,106 declining stocks. Every sector was down, with financials down the least -0.69% while materials -4.38%.  Dividends and value were the best-performing factors while volatility was the worst, with growth factors off. Foreign investors were net buyers of Mainland stocks via Northbound Stock Connect to the tune  of $141mm. Treasury bonds rallied, CNY was off -0.48% versus the US $, and copper was off -0.05%.

MSCI China All Shares Index
Country/Index Ticker/1-Day Change (%)
US & Hong Kong Dually Listed

Most Heavily Traded in Hong Kong (H-Shares)
Most Heavily Traded in Shanghai & Shenzhen (A-Shares)

Last Night’s Exchange Rates, Prices, & Yields

  • CNY/USD 6.45 versus 6.41 yesterday
  • CNY/EUR 7.02 versus 6.96 yesterday
  • Yield on 10-Year Government Bond 2.83% versus 2.83% yesterday
  • Yield on 10-Year China Development Bank Bond 3.06% versus 3.07% yesterday
  • Copper Price -0.05% overnight

Originally Posted on April 21, 2022 – Buyers Strike as CSRC Recommends Raising Equity Allocations

Author Positions as of 4/21/22 are KBA, KALL, KCNY, KFYP, KCNY, KEMQ, BZUN, HSBC, KWEB, KHYB, LI US

Charts Source: KraneShares

Disclosure: KraneShares

Content on China Last Night is for informational purposes only and should not be construed as investment advice. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results; material is as of the dates noted and is subject to change without notice. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities. Investing involves risk, including possible loss of principal.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

Forward-looking statements (including Krane’s opinions, expectations, beliefs, plans, objectives, assumptions, or projections regarding future events or future results) contained in this presentation are based on a variety of estimates and assumptions by Krane. These statements generally are identified by words such as “believes,” “expects,” “predicts,” “intends,” “projects,” “plans,” “estimates,” “aims,” “foresees,” “anticipates,” “targets,” “should,” “likely,” and similar expressions. These also include statements about the future, including what “will” happen, which reflect Krane’s current beliefs. These estimates and assumptions are inherently uncertain and are subject to numerous business, industry, market, regulatory, geo-political, competitive, and financial risks that are outside of Krane’s control. The inclusion of forward-looking statements herein should not be regarded as an indication that Krane considers forward-looking statements to be a reliable prediction of future events and forward-looking statements should not be relied upon as such. Neither Krane nor any of its representatives has made or makes any representation to any person regarding forward-looking statements and neither of them intends to update or otherwise revise such forward-looking statements to reflect circumstances existing after the date when made or to reflect the occurrence of future events, even in the event that any or all of the assumptions underlying such forward-looking statements are later shown to be in error. Any investment strategies discussed herein are as of the date of the writing of this presentation and may be changed, modified, or exited at any time without notice.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from KraneShares and is being posted with permission from KraneShares. The views expressed in this material are solely those of the author and/or KraneShares and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Disclosure: Forex

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.

Disclosure: Futures Trading

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.