Notes From Hong Kong: 'H' Shares on the Rebound

Includes: BYDDF, EWH, YZC
by: L. Desjardins

Oversold Hong Kong “H” shares (mainland Chinese companies listed on the HK stock exchange) surged 4.2% on the week and outpaced the Hang Seng Index and the Shanghai listed “A” shares. The move was fueled by rumours that Beijing would relax its moves to slow down the economy in the face of the Euro crisis.

HSCEI rose 2.7% on Friday on good volume led by BYD (OTCPK:BYDDF) and Yanzhou Coal (NYSE:YZC) up more than 9% each. The rise reflects renewed overseas interests in the Chinese market and one has to see if the surge in interest will last more than a few days. In China the week has been mildly positive with the “A” shares rising 1.5%.

Monday trading in Hong Kong will be subdued and reflect the drop on Friday in NY. The same themes are likely to play again this week with the addition to the monthly unemployment report in the US to be released on Friday. HSCEI next target is its 50MA, less than 5% away.

Despite hopes that Beijing will move slowly or reverse some of its recent tightening moves, the local medias still report that Shanghai may introduce on a trial basis a new property tax in June. On Saturday May 29, the China Daily was quoting a municipal spokesperson that the authorities were working on detailed rules to cool down the property market. Earlier reports mentioned that Beijing, Shanghai, Chongqing and Shenzhen will be the first batch of cities to collect property tax on a trial basis. Two weeks ago, UBS and the Conference Board warned that property developers have been frontloading projects in anticipation of new controls. This may result in a slowdown by year end which would be reflected in a lower GDP.

The renewed optimism in China spread to the Hang Seng Index with the property sector up 1.9% on the week and recovering most of its losses of the previous week. Tuesday and Thursday the index visited its lowest level since July 2009 rebounding both times at the 19000 mark. The HSI finally closed the week above its February low. Turnover improved as the week progressed with a daily average of HK$69b compared to $63.5b the previous week. Technically the momentum is turning positive but sentiments remain fragile particularly in regards to Beijing's intentions about the economy.

On Tuesday June 1, retail sales in Hong Kong are expected to show a slight slowdown to 15.5% y/y.

At the G20 finance ministers meeting in South Korea on June 3-4 focus on the global economy may be overshadowed by the current tension between North and South Korea. The meeting is to be held in Busan, only about 500km from the DMZ. In fact that may help focus the minds.

PERFORMANCE 1 week 4 weeks YTD
Hang Seng Index 1.1% -6.4% -9.6%
HS Finance 1.2% -6.0% -12.2%
HS Utilities -2.2% -0.1% 2.9%
HS Properties 1.9% -5.3% -11.7%
HS Comm&Indust 1.3% -7.9% -6.8%
HS China Enterprises 4.2% -5.5% -10.0%
FTSE/Xinhua A50 1.5% -8.2% -23.8%
S&P 500 0.2% -8.2% -2.3%
Europe 350 2.8% -6.1% -4.4%
Nikkei 225 -0.2% -11.7% -7.4%
India Sensex 2.5% -4.0% -3.4%
Bovespa 2.8% -8.3% -9.7%
US DJ REITS 2.4% -5.8% 8.3%
DJ Global Ex-US REITS 1.5% -10.8% -10.0%
CRB 1.3% -8.2% -10.1%
Oil (WTIC) 8.7% -14.1% -6.8%
Gold (Spot) 3.2% 3.0% 10.7%
GSCI Agriculture -2.9% -6.0% -17.6%
GSCI Industrial Metals 0.6% -10.2% -7.8%
Global Bond Index -0.3% 1.2% 3.1%
Emerging Mkts Bonds 0.6% -2.1% 3.3%
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FTSE Xinhua A50 is a market capitalization weighted index comprising the 50 largest “A” (domestic) shares listed in China. In Hong Kong the ETF 2823:HK tracks the index; in the US, FXI tracks a sister index including only the 25 largest companies. The Hang Seng China Enterprises Index covers 40 “H” shares issued by mainland companies listed in Hong Kong. In Hong Kong the ETF 2828:HK tracks the index. The Hang Seng Index currently covers the 43 largest Hong Kong listed companies by capitalization. These HK listed companies include a number of Chinese companies. In Hong Kong the ETF 2800:HK tracks the index. In the US, EWH tracks the MSCI Hong Kong Index which is substantially different from the Hang Seng Index.

Disclosure: Long HSCEI, CRB, DBA, GLD