Third Plenum Overview
“Communique of the Third Plenary Session of the 20th Central Committee of the Communist Party of China” was released after the market’s close. Expectations for major policy reform to be announced were low as the four-day, every five-year Third Plenum is a high-level meeting discussing the big picture as the task of implementing falls on underlying departments. The Plenum provides an insight into the government’s understanding of the economic situation.
The current Hong Kong rally has slipped since mid-May due to lackluster economic data. In our recent piece, several positive catalysts are on the horizon specific to the internet space (August Q2 earnings, buybacks, Southbound Stock Connect inflows, etc.). However, recent tepid economic data (last Friday’s credit data, Monday’s June data, and yesterday’s youth unemployment number) only reinforces the necessity of monetary policy support. Do the 199 members of the Central Committee understand the economic situation? The communique is a universal yes.
In the first real paragraph, the communique states, “…it is agreed that in the face of severe and complex international environment and arduous domestic reform…”.
What are they going to do about it? Below are a few highlights:
- “The Central Committee made systematic plans for further deepening reform comprehensively.”
- “Guide the development of the non-public sector.”
- “High-quality development is our primary task.”
- “Pursue coordinated reforms in the fiscal, tax, financial, and other major sectors.”
- “Actively expand domestic consumption”
- “Implement various measures to prevent and resolve risks in key areas such as real estate, local government debt…”
We had the usual “opening up” comments, as anticipated. I’m unsure how US-China ADRs will react, though I suspect Asian investors will view the release as positive. Tomorrow, there will be a press conference with further details provided.
Key News
Asian equities were largely higher except for Japan, South Korea, and Taiwan following yesterday’s AI and semiconductor meltdown.
TSMC’s post-close beat is apt to breathe life back into the space during US trading hours. Light news day in advance of today’s Third Plenum communique as Hong Kong and China opened lower but grinded higher to post small gains. Virtually all sectors were positive and had good breadth, though Hong Kong internet stocks underperformed following yesterday’s US-China ADR downdraft. Some pointed to the Financial Times article about the Chinese government regulating AI as a culprit. I found the article useless as Baidu has spoken about involving the regulator in developing its ERNIE Bot for months.
Mainland investors used the Hong Kong dip as a buying opportunity via Southbound Stock Connect with $306mm of net buying, with Tencent a large net buy for the third day in a row. Hong Kong’s most heavily traded by value were Tencent -0.7%, Alibaba -0.66%, Meituan +0.25%, energy giant CNOOC +1.89%, and China Construction Bank +0.37%. Internet names and discretionary struggled, though not nearly as much as their US ADRs yesterday, with Baidu -2.4%, Trip.com -3.13%, NetEase -0.27%, Kuaishou -0.75%, and JD.com -0.47%.
Mainland China had a good day, with all sectors positive except for the tech sector, which was off with electronic equipment and communication equipment and computers lower. Cleantech had a good day with CATL +4.12%. A Mainland media article questioned who was behind the “mysterious funds continue to buy ETFs at low prices.” It doesn’t take Sherlock Holmes to figure out that the National Team’s favored ETFs had another strong day of very high volumes (1.9mm versus a 30-day average of 1mm, 2.2mm versus 726k, 1.3mm versus 867k, 642k versus 267k and 567k versus 359k). Elementary Watson!
The Hang Seng and Hang Seng Tech diverged +0.22% and -0.76% on volume -16.6% from yesterday, which is 85% of the 1-year average. 265 stocks advanced, while 191 declined. Main Board short turnover fell -14.29% from yesterday which is 80% of the 1-year average as 16% of turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). Value outperformed growth, while large and small were up almost the same amount. The top sectors were utilities +1.65%, staples +1.34%, and real estate +1.12%, while communication -0.75% and discretionary -0.58%. The top sub-sectors were food/beverage, healthcare equipment, and food/staples, while software, consumer services, and media were the worst. Southbound Stock Connect volumes were light as Mainland investors bought $306mm of Hong Kong stocks and ETFs, with Tencent a large net buy, the Hong Kong Tracker ETF a moderate net sell, and Meituan a small net sell.
Shanghai, Shenzhen, and STAR Board gained +0.48%, +0.33%, and +0.88% on volume -0.64% from yesterday, 82% of the 1-year average. 2,070 stocks advanced, while 1,725 declined. Growth and large caps outperformed value and small caps. All sectors were positive, less tech -0.46%, with the market led higher by utilities +1.84%, industrials +1.76%, and real estate +1.49%. The top sub-sectors were education, motorcycles, and electric power, while electronic components, internet, and communication equipment were the worst. Northbound Stock Connect volumes were moderate as Mainland investors were net buyers of Mainland stocks with Goertek, Eoptolink, and Zijin Mining small net buys while Zhongji Innolight was a moderate net sell, LXJM small/moderate net sell and Wuliangye a small net sell. Treasury bonds fell. CNY and the Asia dollar index were off versus the US dollar. Copper and steel fell.
Upcoming Webinar
Join us on July 24th, 2024 at 10 am EDT for:
China Q2 Review: Insights From On The Ground
Please click here to register
Join us on Thursday, August 8th at 1 pm EDT for:
Overview of Hedgeye’s Proprietary Risk Range™ Signals & A New ETF To Help Manage Risk In US Equities
Please click here to register
New Content
Read our latest article:
Revisiting Hong Kong: Optimism Still Improving Even As Rally Gets Tested
Please click here to read
Last Night’s Performance
Last Night’s Exchange Rates, Prices, & Yields
- CNY per USD 7.25 versus 7.25 yesterday
- CNY per EUR 7.93 versus 7.93 yesterday
- Yield on 10-Year Government Bond 2.26% versus 2.26% yesterday
- Yield on 10-Year China Development Bank Bond 2.34% versus 2.33% yesterday
- Copper Price -0.52%
- Steel Price -1.31%
Read the full article here
