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China Market Update: TAL Terrific As Hong Kong/Mainland China Work Off Their Overbought Weekly Distribution

October 25, 2024

CLN

KraneShares

Key News

Asian equities followed US stocks lower overnight despite the US dollar’s weakness.

With US tech stocks off yesterday, Chinese financial media heavily covered Tesla’s financial results and an Apple analyst’s lower iPhone 16 order estimate. Popular Hong Kong growth stocks and sectors underperformed as financial results from New Oriental Education, which fell -6.49% versus their US ADR -8.42% yesterday, and Topsports, which fell -2.81%, weighed on sentiment along, as the Horizon Robotics IPO only gained +2.76%, though it raised $696 million. Southbound Stock Connect was a very small (-$60 million) net sell after the past three days of heavy buying, totaling $3.57 billion, which brings the year-to-date total to $72.64 billion versus 2023’s total of $40.71 billion.

Before the US market open, TAL Education beat analyst expectations on the big three: revenue, adjusted net income, and adjusted EPS, with shares up +1.57% in pre-market trading. Mainland markets were also off, but not nearly as much as Hong Kong, as investors continue to wait for the date and agenda of the NPC and hope for further fiscal stimulus.

After the close, Mainland media reported auto subsidies appear to be working, as September passenger car sales increased +4.5% year-over-year and 10.6% month-over-month to 2.109mm. NEV (hybrid and EV) penetration rate is now 53.3%. There are reports that the Chinese government has asked EV makers to tap the brakes on EU expansion due to the escalating tit-for-tat tariff talk. Ford’s CEO states that he drives a Xiaomi car, which is interesting.

Mainland media reported that the “white list” of real estate projects local authorities have designated for support has secured RMB 1.77 trillion in financing, with the first batch of 404 projects securing RMB 135 billion. The key point is that the Chinese government knows Japan’s real estate bubble-driven deflationary death spiral. No sign of the National Team has their favored ETFs had below-average volumes. The largest foreign investor holding today through the QFII quota program is Zijin Mining—fairly quiet night.

Yesterday, I spoke with the technical analysis firm Nasdaq Dorsey Wright, having followed their point-and-figure technical analysis for over twenty years. We are a client in full disclosure. I learned that the Shanghai Index had its longest bear market by duration, lasting 875 days from September 13, 2021, until bottoming on February 5, 2024. I felt every one of those down days personally and professionally. Their indicators have turned more constructive on China recently. What about this pullback?

Our exposure to Hong Kong growth stocks and Mainland China mega-cap stocks went to extremely overbought conditions following the meteoric rise following the PBOC and government announcements the week of September 23. The weekly distribution for Hong Kong growth stocks went from 15% overbought to 194% overbought. Mainland Chinese mega-cap stocks went from 23% oversold to 257% overbought. The markets have simply got ahead of themselves. Time will tell, but it could be an opportunity to buy the dip as we still don’t have the complete fiscal stimulus package yet. If we continue to see strong policy support, which, based on what we’ve seen thus far, I assume will occur, this rally will still be in its very early stages. Maybe we are only in the top of the 1st inning. That reminds me, go Yankees!

The Hang Seng and Hang Seng Tech indexes fell -1.30% and -2.64%, respectively, on volume that declined -14.22% from yesterday, which is 137% of the 1-year average. 77 stocks advanced, while 425 declined. Main Board short turnover increased 0.55% from yesterday, which is 111% of the 1-year average, as 13% of turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). Value and large caps fell less than growth and small caps. All sectors were negative, led lower by real estate -3.1%, healthcare -2.85%, and discretionary -2.85%. The only positive sub-sectors were food/staples and energy, while retailing, semis, and pharmaceuticals were the worst. Southbound Stock Connect volumes were 1.5X the average as Mainland investors sold -$60mm of Hong Kong stocks and ETFs with Alibaba and GCL Tech small net buys while Meituan and Tencent were small net sells.

Shanghai, Shenzhen, and the STAR Board fell -0.68%, -0.91%, -0.16%, respectively, on volume that declined -21.17% from yesterday, which is 177% of the 1-year average. 1,762 stocks advanced, while 3,174 declined. The value factor and large caps fell less than the growth factor and small caps. All sectors were negative, led lower by Industrials, which fell -1.50%, Consumer Discretionary, which fell -2.85%, and Real Estate, which fell -1.45%. The top-performing subsectors were daily chemicals, communication services, and packaging. Meanwhile, power generation equipment, aerospace & military, and precious metals were among the worst-performing. Northbound Stock Connect volumes were high, 2X the average. CNY and the Asia Dollar Index gained versus the US dollar. Treasury bonds fell. Copper and steel fell.

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