Internet stocks rally, China weight to rise in MSCI EM, week in review

Review of the week

  • Asian stocks had another week of turbulent trading as the market continues to assess risk, although mainland China held up better than most Asian markets this week and some markets were closed earlier in the week. .
  • Mainland media source Yicai Global reported on Monday that Tiktok’s parent company, ByteDance, may list the Chinese version of TikTok in Hong Kong, renaming itself Douyin.
  • China’s April PPI and CPI came in at 8.0% and 2.1% respectively, slightly above expectations of 7.8% and 1.8%. However, the market expects inflation not to be high enough to stop further stimulus.
  • Tencent and Meituan saw strong net buying throughout the week by mainland investors via Southbound Stock Connect.
  • In this week video updateXiabing Su takes us to lunch at KFC in China to demonstrate the continued popularity of American fast food in the world’s second-largest economy.

Friday’s key news

Asian stocks were mixed but mostly higher overnight as Hong Kong outperformed, led by internet stocks with little news. Mainland investors have been strong buyers of Tencent, Meituan and other internet stocks throughout the week and we saw the outcome of their buying come to light on Friday.

The rally in internet stocks was interesting as the US market was down overnight and there was no major internet news in China. The CPPCC is expected to hold a forum next week, where it is expected to reaffirm that the Internet regulatory cycle is over. Private companies, including Baidu, will be present. It is possible that this is the underlying reason for the rally and the enthusiasm of mainland investors for Internet names this week.

The strength of the dollar continues to weigh on the renminbi, the Chinese currency, after the latter’s fantastic rise over the past two years. Overnight, the CNY traded at the psychologically important level of 6.8 to the US dollar for the first time in nearly three years. Some analysts expected it to go higher (depreciate more).

The Securities Times, a mainland financial newspaper, reported that China may introduce new lending and lending tools in a bid to provide targeted support to the real economy. In other words, raise!

Chinese property developer Sunac has defaulted on payment of a dollar bond worth $29.5 million. Bonds from troubled developers continued to trade lower overnight as fears of contagion among overseas investors abound. Not all developers are created equal, however, as Country Garden shares gained more than +6% overnight in Hong Kong. Clearly, there is a flight to quality in the real estate development space. While these defaults may have been unavoidable, we are seeing signs of cautious optimism in the real estate sector, including a slight rise in home prices in the first quarter and the easing of purchasing restrictions in several provinces.

After the close in the United States, MSCI published its pro-forma for June 1st Semi-annual review of the index. Within the MSCI Emerging Markets Index, the number of Chinese stocks fell by 11 stocks based on 33 additions and 44 deletions. However, the percentage weight of China in the index increases from 29.9% to 30.2%. China will represent 733 stocks out of the 1,162 stocks in MSCI Emerging Markets. Didi is removed from the index although its current weight is only 0.01%. Remarkably, the US stock market represents $44.86 trillion of the global free float market capitalization of $73.829 trillion, or 60.8% of the ACWI IMI Index.

MSCI is also migrating its exposure to Baidu and Bilibili to their Hong Kong share classes from US-listed ADRs. This has nothing to do with the Holding Foreign Companies Accountable Act, but rather their index methodology, which compares the value traded in local listings against ADRs one year after local listing.

China has issued guidelines for the development of “capitals”, which are halfway between rural and urban development. This could characterize China’s infrastructure development pattern in the coming years, as policymakers seek to bring rural areas more into the economic fold and better connect them to major metropolises. Although this type of development will require less than the previous style of massive urban development, expenditure and infrastructure investment will still be required.

The Hang Seng and Hang Seng Tech indexes closed +2.68% and +4.50%, respectively, on volume almost in line with yesterday, which is only 80% of the 1-year average. Mainland investors bought HKD 3.5 billion net worth of Hong Kong stocks through Southbound Stock Connect overnight.

Shanghai, Shenzhen and the STAR Board closed +0.96%, +0.51% and -0.22%, respectively, on -7% lower volume than yesterday, or 70% of the average on 1 year. Overseas investors bought RMB 2.1 billion net worth of domestic stocks today via Northbound Stock Connect. Chinese Treasuries were flat overnight, the CNY depreciated ever so slightly and copper was flat.

Last night’s exchange rates, prices and yields

  • CNY/USD 6.80 vs. 6.79 yesterday
  • CNY/EUR 7.05 vs. 7.06 yesterday
  • Overnight government bond yield 1.26% vs. 1.29% yesterday
  • 10-year government bond yield 2.81% vs. 2.81% yesterday
  • China Development Bank 10-year bond yield 3.00% vs. 2.99% yesterday
  • Copper price -0.00% overnight

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