HFCAA Phase 1 Audit Contract Reached

This morning, the SEC, PCAOB, and CSRC issued a statement announcing that they, in collaboration with the Treasury Department, have signed a protocol allowing the PCAOB to conduct a full audit review of U.S.-listed Chinese companies. The deal is the first step, as the audit review still needs to take place. Given that all companies are audited by the Chinese divisions of the “big four” accounting firms, this shouldn’t be a big deal.

The voluntary delisting of the US ADRs of five state-owned enterprises (SOEs) was a key sign of the deal, as these companies have sensitive information that could be verified in audit reviews. On the other hand, as many have publicly stated, non-SOEs have nothing to hide. This is important news, as the Holding Foreign Companies Accountable Act (HFCAA) overhangs the space.

Active emerging market mutual funds are averaging a 2% underweight to China as they are hesitant to buy Chinese internet stocks due to possible HFCAA bad news. These managers are at significant risk of underperforming should their stock prices rebound.

Given the significant HFCAA valuation discount, we should expect a significant recovery in re-ratings. Hong Kong short sellers have stepped up bets on stocks as evidenced by Hong Kong short trading volume up +50% compared to his 10-year average over the past six months. Today, Hong Kong short sales increased +8% from yesterday. This was 83% of his yearly average, and total sales were just 78% of his yearly average. 23% of Tencent’s deals were short today, 24% of Meituan’s deals, 15% of Alibaba’s deals and 21% of’s deals. 47% of the largest ETFs listed in Hong Kong had short volume today. Shorts based its bet on low summer trading volumes, knowing that many investors were on vacation or unwilling to step in and protect their stocks for the HFCAA. A strong short squeeze with institutional buying should be a powerful catalyst. Good luck!

We salute the SEC, PCAOB, CSRC and MoF for their hard work and efforts. HFCAA put his $2 trillion savings of US investors at risk.

main news

Asian stocks ended the week slightly lower with a modest rally ahead of Chairman Powell’s Jackson Hole press conference. Hong Kong’s most heavily traded stocks were all internet stocks, with Tencent down -0.25%, Meituan up +2.59%, Alibaba HK up +2.13% and HK up +0.89. %, Kuaishou fell -4.07%. The name was coming up, but not as much as its US-listed counterpart.

This is what the South China Morning Post said at the time of the market’s opening that “China’s securities regulator could be amended to allow foreign inspectors access to redacted audit data and use Hong Kong as a neutral position.” It is…” despite the fact that Reuters also said: “Beijing has asked U.S.-listed Chinese companies and audit firms to prepare for U.S. inspections in Hong Kong, three of his sources familiar with the matter told Reuters.” published an article stating The big clue came two days ago on Friday when five state-owned companies announced they would voluntarily delist from the US.

Hong Kong short sellers beat the bets today as short sale volume increased +8% from yesterday. This morning’s announcement puts these positions at significant risk.

After the close of trading in Hong Kong, Meituan announced its second quarter financial results. This represented a 1.4% year-on-year (YoY) revenue increase from RMB 43.8 billion to RMB 50.9 billion against expectations of RMB 48.58 billion. Adjusted net income was RMB 2.1 billion after a loss of -3.6 billion and an expected loss of -2.2 billion. Adjusted EPS was RMB0.33 with a projected loss of RMB0.38.

Mainland China fell ahead of today’s Fed’s announcement. Yes, Chinese investors are very sensitive to this issue, but weak house prices have left sentiment volatile. Recall that a significant portion of household wealth is in housing. New sales have dropped significantly while prices have fallen. While this sentiment weighs heavily on investors, it is clear that there is significant policy support to stabilize home sales and prices. Hopefully, we should see Animal Spirit return! Foreign investors bought $750 million worth of mainland Chinese stocks today.

The Hang Seng and Hang Seng Tech Indexes rose +1.01% and +0.79% respectively, with volume up +13.4% from yesterday. That’s 78% of his yearly average. 364 stocks rose and 102 stocks fell. Hong Kong’s short trading volume increased +8.11% from yesterday, which is 83% of the one-year average, with short trading accounting for 18% of trading volume. Growth factors outperformed value, but both performed well as large caps outperformed small caps. The top performing sectors were Healthcare +3.47%, Real Estate +2.5%, Technology +2.38% and Staples +2.02. Meanwhile, telecom services and utilities were both down -0.05%. Today, the best-performing subsectors included automobiles, electric vehicles, and healthcare-related subsectors such as contract research organizations (CROs) and biotech, while utilities, online video, e-cigarettes was the worst. Southbound Stock Connect low/medium volume as mainland investors sold -$146 million worth of Hong Kong shares as Meituan and Kuiashou showed moderate selling and Tencent showed moderate net buying was.

Shanghai, Shenzhen and STAR Board fell -0.31%, -0.42% and -0.94% respectively, with volume down -5.94% from yesterday. That’s 97% of his yearly average. 1,978 stocks rose and 2,522 stocks fell. The value factor outperformed growth as large-cap stocks outperformed small-cap stocks. The only positive sectors today were Consumer Goods, up +0.72% and Discretionary, up +0.44%. On the other hand, Energy -3.04%, Technology -0.96% and Industry -0.84%. The mainland’s best-performing subsectors included lithium, electric vehicles and dairy, while shipping, semiconductors and software were the worst. Northbound His Stock His Connect traded modestly as foreign investors bought his $750 million worth of mainland shares. The government bond yield curve steepened, the renminbi fell -0.2% against the US dollar to 6.86 and copper rose +1.15%.

Last night’s exchange rates, prices and yields

  • CNY/USD 6.86 vs Yesterday’s 6.85
  • CNY/EUR 6.89 vs Yesterday’s 6.83
  • 1-day Treasury yields 1.15% vs yesterday’s 1.13%
  • 10-Year Treasury Yield 2.64% vs Yesterday’s 2.64%
  • China Development Bank 10-Year Bond Yields 2.84% vs. 2.83% Yesterday
  • Copper price +1.15% overnight

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