Hong Kong investor panic selling leads to more mainland buying

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Asian stocks suffered another decline led by Hong Kong and China while Japan and the Philippines managed to gain overnight. The market action is despite a lengthy meeting between National Security Advisor Jake Sullivan and China’s Yang Jiechi in Rome yesterday. Finding a solution to the Ukrainian crisis was undoubtedly one of the main topics on the agenda, as it is in China’s economic interest to do so. Ukraine is a major wheat exporter, which will lead to higher food inflation/CPI, while Russia is a major exporter of natural resources/PPI for China and the global economy.

China has denied the claim that Russia requested military equipment in a separate call yesterday, despite the highly unlikely accusation as well as the false account from Sino-Russian friends. Even Russia has denied asking China for military equipment. The United States is trying to pressure China to find a solution to Ukraine even though China does not control Putin. The US is hesitating/leaking, applying Russian-like sanctions on China, leading to blind/price-insensitive selling by investors. The reason the US will not go/very unlikely to go this route is that it would lead to a US stock market crash and a global depression leading politicians who implement such a strategy to be fired/rejected .

The Hang Seng fell -5.72% in volume +28.34% from yesterday on the 2n/a highest volume day in a year. High volumes can be a sign of capitulation (fingers crossed) as the width only had 12 advances and 501 declines. The large Hong Kong structured products market continues to exacerbate weakness as knock-out levels are reached, leading to more blind selling.

Mainland investors were significant buyers of Tencent and, to a lesser extent, Meituan through Southbound Stock Connect.

There are other factors at play as Shenzhen, parts of Shanghai and Hong Kong are suffering from covid lockdowns. This was a major contributor to mainland weakness as Shanghai -4.95%, Shenzhen -4.56% and STAR Board -2.92% on volume +15.96% while only 293 stocks rose and 4,126 shares fell. The market action is despite the release of positive data in February.

The PBOC held the medium-term lending facility rate steady at 2.85%, which some expected to see lowered. Foreign investors sold -$2.512 billion today via Northbound Stock Connect. The CNY was down against the US dollar as Chinese Treasuries were sold and copper was down.

Boeing’s first 737MAX is en route to China via refueling in Hawaii. If the next 139 ordered planes are delivered, it would reduce China’s trade surplus.

Rumors of hedge fund liquidations may swirl, but such a simple explanation for market weakness is naïve. I am convinced that leveraged investors get executed.

Last night’s exchange rates, prices and yields

  • CNY/USD 6.38 vs. 6.37 yesterday
  • CNY/EUR 7.00 vs. 6.97 yesterday
  • 10-year government bond yield 2.82% vs. 2.77% yesterday
  • China Development Bank 10-year bond yield 3.07% vs. 3.01% yesterday
  • Copper price -0.74% overnight

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