CNY Gains Versus US Dollar, Week In Review

Week in Review

• Asian equities ended a positive week mostly higher as Hong Kong outperformed after the US Fed’s pivot to indicating rate cuts in 2024, the Year of the Dragon.
• Economic releases this week included China’s CPI inflation, which came in at -0.5% versus an expected -0.2%, and the Producer Price Index (PPI), which fell -3% versus an expected -3% on lower oil prices.
• The Central Economic Work Conference (CEWC) was held this week and resulted in policymakers making commitments to stimulate domestic demand in 2024, which lifted Hong Kong overnight.
• Developers rebounded in both Hong Kong and Mainland China on the lowering of downpayment requirements in Beijing and Shanghai.

Friday’s Key News

Overnight, we saw Quad Witching (stock and index futures and options expiring) and FTSE Russell and S&P Dow Jones index rebalances raise volumes as Hong Kong and India outperformed and Mainland China underperformed.

The Renminbi (CNY) managed a small gain versus the US dollar overnight to close at 7.10 CNY per USD from 7.31 just a few weeks ago. Historically, CNY’s appreciation versus the US dollar has led to stock gains, which could be starting to play out. Certainly, unloved stocks in the US, such as small caps (Russell 2000, though I prefer the S&P 600), have rocketed. Shouldn’t non-US equities like EM and China benefit too?

Real estate was the top sector in Hong Kong, where it gained +4.69%, and Mainland China, where it gained +1.49%, following Beijing and Shanghai’s lowering of downpayment requirements, announced after yesterday’s close.

I read some great research on Asia and China high-yield US dollar-denominated bond market last night. Chinese property developers have fallen from 50% of the benchmark to 20% within China’s High Yield US dollar-denominated index. Meanwhile, their spread versus US high yield has blown out, as evidenced by the 2X yield in the Asia High Yield bonds versus US High Yield, while the market has stopped going down, stabilized, and then gained some ground over the last few weeks.

After yesterday’s close, the medium-term lending facility (MLF) rate remained unchanged at 2.5%, though the volume beat expectations after remaining flat month-over-month.

Notice the month-over-month improvements? 2023 has seen a slow, incremental rebound. Fixed Asset Investment was in line, while property investment and residential property sales were off, surprising no one.

Treasury Secretary Janet Yellen spoke at the US-China Business Council, stating she would visit China again in 2024, while both President Biden and Xi sent letters that were read with Xi’s letter, stating the importance of the US-China economic relationship.

The PBOC implemented a healthy liquidity injection as we near year-end and cash needs rise. Following the Central Economic Work Conference (CEWC), several government agencies have started releasing how they will implement the outlined measures.

Hong Kong had a good day as all sectors were positive. Meanwhile, high volumes and advancers beat decliners handily by 4 to 1. The most heavily traded stocks by value were Tencent, which gained +2.61%, Meituan, which gained +3.91%, Alibaba, which gained +3.69%, AIA, which gained +6.98%, and JD.com, which gained +6.98%. Mainland investors sold the Hong Kong market via Southbound Stock Connect to the tune of -$507 million.

Shanghai and Shenzhen opened higher but slid in afternoon trading to close lower. Foreign investors sold Mainland stocks via Northbound Stock Connect, though Kweichow Moutai saw net buying. Brokers outperformed as regulators highlighted their importance.

Another interesting Bloomberg research piece I read last night discussed how much of a higher yield Alibaba and Tencent’s bond trades at versus their US technology counterparts, despite Alibaba’s strong credit rating of A1/A+/A+, little debt, and $86 billion in cash. Given its financials, Meituan was also highlighted as trading at a much greater discount than expected.

The Hang Seng and Hang Seng Tech indexes gained +2.38% and +2.22%, respectively, on volume that increased +33% from yesterday, 130% of the 1-year average. 414 stocks advanced, while 80 declined. The Main Board short turnover increased 43% from yesterday which is 107% of the 1-year average as 14% of turnover was short turnover (remember Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). The growth factor and small caps outperformed the value factor and small caps. All sectors were positive, led by Real Estate, which gained +4.69%, Materials, which gained +4.09%, and Consumer Discretionary, which gained +3.09%. The top-performing subsectors were retail, materials, and real estate. Meanwhile, telecommunication services were the only negative industry. Southbound Stock Connect volumes were moderate as Mainland investors sold a net -$507 million worth of Hong Kong-listed stocks and ETFs, including energy giant CNOOC and Meituan. Meanwhile, Tencent, China Construction Bank, and Xiaomi were all sold.

Shanghai, Shenzhen, and the STAR Board all closed lower by -0.56%, -0.38%, and -0.98%, respectively, on volume that decreased -0.6% from yesterday, which is 84% of the 1-year average. 1,470 stocks advanced while 3,339 declined. The growth factor and small caps “outperformed” (i.e. fell less than) the value factor and large caps. The top-performing sectors were Real Estate, which gained +1.55%, Consumer Staples, which gained +0.66%, and Material, which gained +0.45%. Meanwhile, Health Care fell -1.19%, Utilities fell -0.83%, and Energy fell -0.30%. The top-performing subsectors were motorcycles, leisure products, and cultural media. Meanwhile, biotech, computer hardware, and pharmaceuticals were the worst-performing. Northbound Stock Connect volumes were moderate/high, as foreign investors sold a net -$586 million worth of Mainland stocks, including Kweichow Moutai, which was a moderate net buy, and BYD and Mindray, which were small net buys. Meanwhile, foreign investors sold ZTE, CATL, and Ping An Insurance. CNY and the Asia Dollar Index gained versus the US dollar. Treasury bonds rallied along with copper while steel fell.

Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.11 versus 7.13 yesterday
• CNY per EUR 7.77 versus 7.81 yesterday
• Yield on 1-Day Government Bond 1.22% versus 1.25% yesterday
• Yield on 10-Year Government Bond 2.62% versus 2.64% yesterday
• Yield on 10-Year China Development Bank Bond 2.75% versus 2.76% yesterday
• Copper Price +0.97% overnight
• Steel Price -0.38% overnight

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