Paragraph 1: Mixed Asian Equities and a Strong Day for US-Listed Chinese Assets
Asian equities experienced mixed performance overnight, with South Korea rebounding after a recent 52-week low. US-listed Chinese ADRs and ETFs saw a significant surge following a strongly worded statement from China’s Politburo, which emphasized "proactive fiscal policy" and "loose monetary policy." The timing of the release, after the Mainland market close, allowed Hong Kong markets a brief period of strong rally. However, Mainland Chinese futures remained relatively flat, leading to speculation that the US rally was fueled by short-covering rather than substantial new investments. This initial enthusiasm waned, with both Hong Kong and Mainland markets opening higher but ultimately fading throughout the trading day.
Paragraph 2: Skepticism and the Grind Higher
The muted response in Asian markets reflects a degree of skepticism and "scar tissue" from previous China rallies that have experienced pullbacks. While these rallies have generally resulted in higher highs and higher lows, a short-term trading mentality focused on quick profits has contributed to this cautious sentiment. The lack of sustained momentum suggests that the anticipated market recovery will be a gradual climb rather than a rapid surge. The performance of Wuxi Biologics and Wuxi AppTec, which experienced declines after strong gains the previous day, exemplifies this cautious approach.
Paragraph 3: Geopolitical Concerns and Trade War 2.0
The evolving geopolitical landscape and the potential for escalating US-China trade tensions present challenges for investors considering allocations to Chinese assets. The negative narrative surrounding China in Western media makes it difficult for investors to advocate for investment in Chinese stocks, despite their attractive valuations. Ironically, many investors are heavily invested in US companies with significant China revenue exposure. The sensitivity of US-listed Chinese ADRs to US tariff and geopolitical headlines underscores the preference for holding Hong Kong-listed shares. The hope remains that negotiation and diplomacy will prevail over economically damaging policies. Recent trade data highlights the deep interconnectedness of the US and Chinese economies.
Paragraph 4: Seasonality, Missing Expectations, and Domestic Consumption
Investor behavior is also influenced by year-end seasonality, with many having already "closed the books" for the year and reluctant to make significant portfolio adjustments. This, coupled with a general lack of awareness of China’s relatively strong performance year-to-date compared to other markets, further contributes to the muted enthusiasm. November trade data, which missed expectations, added to the cautious sentiment. Exports grew less than anticipated, while imports declined, highlighting the need to boost domestic consumption regardless of the trade war outcome. The Hang Seng and Hang Seng Tech indices, despite opening sharply higher, ultimately closed lower on high trading volumes, reflecting the underlying uncertainty.
Paragraph 5: Policy Support, Index Rebalance, and International Dialogue
Mainland investors responded positively to the Politburo’s mention of consumption and real estate, with those sectors experiencing gains. Expectations are high for further policy support to be announced at the upcoming China Economic Work Conference. The upcoming CSI semi-annual index rebalance is expected to generate record trading activity, driven by the significant growth in Mainland Chinese ETF assets under management. High-level meetings between Chinese leadership and representatives from international organizations like the World Bank, IMF, and WTO, further emphasize the focus on macroeconomic policy adjustments and efforts to expand domestic demand and stimulate consumption.
Paragraph 6: Nvidia Investigation and Book Recommendations
An investigation by China’s State Administration of Market Regulation (SAMR) into Nvidia for potential anti-monopoly violations related to its acquisition of Mellanox Technologies has also attracted attention. This investigation, which centers on alleged bundling practices, appears to contradict the Politburo’s recent pronouncements about continued opening up to foreign companies. While it is difficult to determine the precise motivations behind the investigation, it adds another layer of complexity to the US-China relationship. Finally, two book recommendations are offered: "The Wide Wide Sea" by Hampton Sides, chronicling Captain Cook’s voyages, and "Sapiens" by Yuval Noah Harari, a thought-provoking exploration of human history.
