Evergrande makes bond payment, Hong Kong-listed internet stocks rise again, weekly review

Weekly review

  • China’s GDP grew + 4.9% year-on-year in the third quarter, from around 5.1%, according to an official statement on Monday, as covid lockdowns dampened economic activity. But, consumers have moved online as retail sales in September rose + 4.4% yoy in September versus and estimated at 2.7%
  • Hong Kong internet stocks rallied this week, particularly in trading on Tuesday, as the Chinese currency appreciated against the US dollar, with a particularly large move on Tuesday.
  • Jack Ma was reportedly on vacation in Spain on Wednesday as Hong Kong internet stocks continued to rebound.
  • Alibaba’s Singles Day sales event began on Thursday. Demand was so high that Alibaba’s systems went down for twenty minutes.

Key Friday news

Asian stocks were broadly higher on lower volumes, with mainland China and India not both affected.

“It’s the end of the world (and I feel good)” is a great song by the band REM. I remembered the song today when, contrary to media accounts, Evergrande posted $ 83.5 million bail. While the common narrative is that international / non-Chinese investors will get the short end of the stick compared to mainland bondholders, the payoff was to international investors. That being said, Evergrande is not out of the woods just yet, as this problem will continue to crop up in the short term. However, it is quite clear that Chinese regulators and policymakers are aware of the situation and want to prevent the company’s problems from escalating into a financial crisis, which they are more than capable of provoking. Evergrande will complete its ongoing projects to ensure that apartment buyers and investors are safe and that construction companies, plumbers, electricians, etc. are paid for their work. After that, Evergrande will likely be geographically split. Bond investors will face a haircut, but outright default is unlikely.

Contagion fears weighed on the Chinese high yield bond market denominated in US dollars, as real estate accounts for a significant portion of issuance in the market. Spreads in the Asian high yield bond market are expected to tighten after widening 49 basis points in September. Meanwhile, US high yield spreads are at their lowest level in 5 years. It sounds like an opportunity for me!

Hong Kong posted a slight gain led by internet companies including Tencent, which gained + 0.79%, Alibaba HK, which gained + 0.29%, and Meituan, which gained + 0.28%. The head of the China Banking and Insurance Regulatory Commission (CBIRC) told Chinese TV that “substantial progress” has been made in Internet surveillance, an indication that the worst may be behind us. Fingers crossed, even though we haven’t had any “bad” news in weeks.

Tencent and Kuaishou, which gained + 5.74% overnight, were net buys from mainland investors through Southbound Stock Connect. However, Meituan recorded a small net sale.

MSCI China beats MSCI India this week by more than + 6%, which is likely to attract more active managers to Chinese internet stocks due to their recent dip in India and the significant underweighting of the space.

The clean tech ecosystem, which includes the electric vehicle (EV), wind, solar and metals ecosystem, was significantly higher in Hong Kong and mainland China. Semiconductors also had a good day on the continent.

Foreign investors bought $ 2.06 billion net of mainland stocks through Northbound Stock Connect, following yesterday’s $ 1.59 billion. This brings the weekly total to $ 3.65 billion in net purchases from foreign investors.

MSCI’s Hong Kong-listed China A 50 index futures were launched on Monday as volumes and open interest increased throughout the week. It is the first approved China A futures product to be listed outside of China, as Singapore’s FTSE A50 has not been approved by Chinese regulators. The notional value of the futures contract traded exceeded $ 1 billion for the week. Having a futures contract was an issue preventing the MSCI China A inclusion factor from being increased from the current level of 20%.

China’s currency, the renminbi, closed at 6.39 today as bonds and copper were down.

Last night’s exchange rates, prices and yields

  • CNY / USD 6.39 vs. 6.39 yesterday
  • CNY / EUR 7.43 vs. 7.44 yesterday
  • 1-day government bond yield 1.50% vs. 1.65% yesterday
  • Yield on 10-year government bonds 3.00% vs. 2.97% yesterday
  • 10-year Development Bank of China bond yield 3.33% vs. 3.31% yesterday
  • Copper price -2.41% overnight

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Elaine R. Knight