Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Hang Seng Indexes has increased the number of index shares and free float for <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> in the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a>, <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> and <a href="https://www.smartkarma.com/entities/hang-seng-tech-index" target="_blank" data-smartkarma-citation="entities:31367:1" rel="noopener">Hang Seng Tech Index (HSTECH INDEX)</a>, with no change made to the capping factor.This will lead to an increase in the index weight for <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> and passive funds benchmarked to the indices will need to buy the stock at the close of trading on 16 July while selling the other index constituents.For July, we estimate passive funds will need to buy 45.52m shares (HK$9.34bn; 2 days of ADV) of <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a>. The largest impact of passive selling in terms of days of ADV will be on <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc" target="_blank" data-smartkarma-citation="entities:516:1" rel="noopener">HSBC Holdings (5 HK)</a>, <a href="https://www.smartkarma.com/entities/clp-holdings-ltd" target="_blank" data-smartkarma-citation="entities:14433:1" rel="noopener">CLP Holdings (2 HK)</a>, <a href="https://www.smartkarma.com/entities/china-construction-bank-h" target="_blank" data-smartkarma-citation="entities:45:1" rel="noopener">China Construction Bank H (939 HK)</a>, <a href="https://www.smartkarma.com/entities/hang-lung-properties-ltd" target="_blank" data-smartkarma-citation="entities:49:1" rel="noopener">Hang Lung Properties (101 HK)</a> and <a href="https://www.smartkarma.com/entities/country-garden-holdings-co" target="_blank" data-smartkarma-citation="entities:5225:1" rel="noopener">Country Garden Holdings Co (2007 HK)</a>.However, passive funds will need to sell <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> at the implementation of the quarterly rebalance in September when the capping factor will be lowered to cap the weight of the stock at 8% in the three indices.

Hang Seng Indexes has increased the number of index shares and free float for Alibaba Group (9988 HK) in the Hong Kong Hang Seng Index (HSI INDEX), Hang Seng China Enterprises Index (HSCEI INDEX) and Hang Seng Tech Index (HSTECH INDEX), with no change made to the capping factor.This will lead to an increase in the index weight for Alibaba Group (9988 HK) and passive funds benchmarked to the indices will need to buy the stock at the close of trading on 16 July while selling the other index constituents.For July, we estimate passive funds will need to buy 45.52m shares (HK$9.34bn; 2 days of ADV) of Alibaba Group (9988 HK). The largest impact of passive selling in terms of days of ADV will be on HSBC Holdings (5 HK), CLP Holdings (2 HK), China Construction Bank H (939 HK), Hang Lung Properties (101 HK) and Country Garden Holdings Co (2007 HK).However, passive funds will need to sell Alibaba Group (9988 HK) at the implementation of the quarterly rebalance in September when the capping factor will be lowered to cap the weight of the stock at 8% in the three indices.

Alibaba (9988 HK): Passive Inflow from HSI, HSCEI, HSTECH Trackers in July

Founder of Antler Capital

Stanley Tsai, CFA

Macroeconomics

Monthly Newsletter | Jul 2021
The PBOC's decision to relax required reserve requirements was a bit of a surprise to us in terms of the cross-section of the banking system it covered. The move came on the heels of a set of TSF numbers that were weaker than what the headlines suggest. But we believe the impact of the RRR cut is somewhat limited and we shouldn't expect the central bank to loosen again any time soon.  
The RRR cut is only mildly positive in view of the expected uses of liquidity.  A significant portion of the ~CNY1tn released will likely be used to pay down medium-term lending facilities that will fall due in 2H21. The mini-peak in tax payment in July - along with the strong pipeline of local government bond issuance - will also put a damper on new financing and crowd out funding sources available to the private sector.
Headline TSF beat expectations thanks to strong loan growth. However, net of the contraction in off-balance sheet credit - of which trust loans to property developers are a substantial part - the growth in debt financing was just around 10% y/y. The underlying trend is more or less in line with the central bank's guidance for credit expansion to match nominal GDP growth (Exhibit 1).
Robust loan data were buoyed by a surge in bills financing. Renewed demand for short-term liquidity may be attributable to the impact of elevated factory gate prices on small and medium-sized companies. The growth in long-term corporate loans that will drive capital investments and productivity gains is much less pronounced. At the same time, mortgage loans saw a significant contraction y/y as regulators try to rein in the property market boom (Exhibit 2).
Overall, we believe the PBOC's rhetoric remains unchanged. In our view, Beijing will continue to push through deleveraging measures in the real estate market and ratchet up its efforts to tame commodities prices. On the other hand, more funding will be channeled to small businesses and the services sector. That should provide some support to the next leg of the recovery, as capital-intensive industries face progressively tighter funding conditions.
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 373.003px;">Exhibit 1: Key Components of New TSF (CNY bn)</td>
<td style="width: 373.003px;">Exhibit 2: Key Components of New CNY Loans (CNY bn)</td>
</tr>
<tr>
<td style="width: 373.003px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/218/092/original/image_681652188101626125722784.png?1626125723" class="editor-image img-responsive" data-smartkarma-image-id="218092"></figure>
Note: Off b/s items include trust loans, entrusted loans and undiscounted bills; TSF shown excludes ABS and balancing items, which are yet to be available

Source: PBOC, Our analysis
</td>
<td style="width: 373.003px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/218/087/original/image_2669466651626120112187.png?1626120112" class="editor-image img-responsive" data-smartkarma-image-id="218087"></figure>




Source: PBOC, Our analysis
</td>
</tr>
</tbody>
</table>
Related Insights
<ul>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-ppi-and-cpi-have-reached-inflection-points" target="_blank" data-smartkarma-citation="insights:54261" rel="noopener">China Macro: PPI and CPI Have Reached Inflection Points</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/pork-price-rebound-what-it-means-for-china-s-inflation" target="_blank" data-smartkarma-citation="insights:54187" rel="noopener">Pork Price Rebound: What It Means for China's Inflation</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-profits-flowing-gently-down-the-stream" target="_blank" data-smartkarma-citation="insights:53726" rel="noopener">China Macro: Profits Flowing Gently Down the Stream</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-operation-twist-the-deposit-version" target="_blank" data-smartkarma-citation="insights:53435" rel="noopener">China Macro: Operation Twist | The Deposit Version</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-financials-silver-linings-playbook" target="_blank" data-smartkarma-citation="insights:53013" rel="noopener">China Financials: Silver Linings Playbook</a> </li>
</ul>

Monthly Newsletter | Jul 2021
The PBOC's decision to relax required reserve requirements was a bit of a surprise to us in terms of the cross-section of the banking system it covered. The move came on the heels of a set of TSF numbers that were weaker than what the headlines suggest. But we believe the impact of the RRR cut is somewhat limited and we shouldn't expect the central bank to loosen again any time soon.  
The RRR cut is only mildly positive in view of the expected uses of liquidity.  A significant portion of the ~CNY1tn released will likely be used to pay down medium-term lending facilities that will fall due in 2H21. The mini-peak in tax payment in July - along with the strong pipeline of local government bond issuance - will also put a damper on new financing and crowd out funding sources available to the private sector.
Headline TSF beat expectations thanks to strong loan growth. However, net of the contraction in off-balance sheet credit - of which trust loans to property developers are a substantial part - the growth in debt financing was just around 10% y/y. The underlying trend is more or less in line with the central bank's guidance for credit expansion to match nominal GDP growth (Exhibit 1).
Robust loan data were buoyed by a surge in bills financing. Renewed demand for short-term liquidity may be attributable to the impact of elevated factory gate prices on small and medium-sized companies. The growth in long-term corporate loans that will drive capital investments and productivity gains is much less pronounced. At the same time, mortgage loans saw a significant contraction y/y as regulators try to rein in the property market boom (Exhibit 2).
Overall, we believe the PBOC's rhetoric remains unchanged. In our view, Beijing will continue to push through deleveraging measures in the real estate market and ratchet up its efforts to tame commodities prices. On the other hand, more funding will be channeled to small businesses and the services sector. That should provide some support to the next leg of the recovery, as capital-intensive industries face progressively tighter funding conditions.



Exhibit 1: Key Components of New TSF (CNY bn)
Exhibit 2: Key Components of New CNY Loans (CNY bn)




Note: Off b/s items include trust loans, entrusted loans and undiscounted bills; TSF shown excludes ABS and balancing items, which are yet to be available

Source: PBOC, Our analysis







Source: PBOC, Our analysis




Related Insights


China Macro: PPI and CPI Have Reached Inflection Points 

Pork Price Rebound: What It Means for China's Inflation 

China Macro: Profits Flowing Gently Down the Stream 

China Macro: Operation Twist | The Deposit Version 

China Financials: Silver Linings Playbook 


Glut and Famine: Jul '21 | Don't Expect a Bazooka from the PBOC

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

The Hang Seng, EURO STOXX 50, MSCI ACWI ex-US, and MSCI EAFE display bearish short-term inflections. Additionally, 10-year yields in the US and Germany are breaking down below key support. These deteriorating market dynamics raise concerns of a deeper pullback, however other indicators remain largely positive. As a result, we continue to see a mixed, but overall constructive market. Actionable themes highlighted in today's report include Health Care and Real Estate.

The Hang Seng, EURO STOXX 50, MSCI ACWI ex-US, and MSCI EAFE display bearish short-term inflections. Additionally, 10-year yields in the US and Germany are breaking down below key support. These deteriorating market dynamics raise concerns of a deeper pullback, however other indicators remain largely positive. As a result, we continue to see a mixed, but overall constructive market. Actionable themes highlighted in today's report include Health Care and Real Estate.

Global Equity Strategy: Mixed Market Environment Continues As Yields Break Down

China's inflation moderated in June, but there was still a significant gap between the PPI and CPI. This has prompted the central bank to ease earlier than the market expected, in a bid to shore up small businesses that have suffered from a margin squeeze amid relatively weak consumer demand.
The PPI has come off its peak, as we anticipated last month. However, the differentials between resource extraction, materials and processing PPIs remained uncomfortably wide. Factory gate prices for coal and ferrous metals continued to accelerate, while midstream price volatilities were less pronounced. Downstream sectors saw a much more benign environment, with the exception of metal products.
The CPI was a touch lower than our expectation. Lower pork prices drove the food CPI basket back into negative territory. In contrast, non-food CPI's upward trend gained further traction, as prices begin to normalize from a low base. 
Looking ahead, we expect the gap between the PPI and CPI to narrow. From a record high of 7.7%, the spread will likely start to mean-revert as commodities prices soften and consumer demand strengthens towards the end of the year.
We would watch pork prices closely in the coming months. The NDRC's recent intervention in the pork market may have been a symbolic gesture, but we believe conditions are ripe for a recovery in live hog prices. If they overshoot the CNY18-20/kg level in the near term, CPI may rise faster than what the market would like to see.
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 100%;">Exhibit 1: PPI and CPI (%)</td>
</tr>
<tr>
<td style="width: 100%;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/217/755/original/image_12185335121625973064817.png?1625973065" class="editor-image img-responsive" data-smartkarma-image-id="217755"></figure>
Source: National Bureau of Statistics, Our analysis
</td>
</tr>
</tbody>
</table>
Related Insights
<ul>
<li><a href="https://www.smartkarma.com/insights/pork-price-rebound-what-it-means-for-china-s-inflation" target="_blank" data-smartkarma-citation="insights:54187" rel="noopener">Pork Price Rebound: What It Means for China's Inflation</a></li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-profits-flowing-gently-down-the-stream" target="_blank" data-smartkarma-citation="insights:53726" rel="noopener">China Macro: Profits Flowing Gently Down the Stream</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-ppi-peaks-while-cpi-eases-tightening-fears" target="_blank" data-smartkarma-citation="insights:52778" rel="noopener">China Macro: PPI Peaks, while CPI Eases Tightening Fears</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-financials-silver-linings-playbook" target="_blank" data-smartkarma-citation="insights:53013" rel="noopener">China Financials: Silver Linings Playbook</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-consumers-remain-on-the-sidelines-as-their-home-equity-grows" target="_blank" data-smartkarma-citation="insights:53210" rel="noopener">China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows</a> </li>
</ul>

China's inflation moderated in June, but there was still a significant gap between the PPI and CPI. This has prompted the central bank to ease earlier than the market expected, in a bid to shore up small businesses that have suffered from a margin squeeze amid relatively weak consumer demand.
The PPI has come off its peak, as we anticipated last month. However, the differentials between resource extraction, materials and processing PPIs remained uncomfortably wide. Factory gate prices for coal and ferrous metals continued to accelerate, while midstream price volatilities were less pronounced. Downstream sectors saw a much more benign environment, with the exception of metal products.
The CPI was a touch lower than our expectation. Lower pork prices drove the food CPI basket back into negative territory. In contrast, non-food CPI's upward trend gained further traction, as prices begin to normalize from a low base. 
Looking ahead, we expect the gap between the PPI and CPI to narrow. From a record high of 7.7%, the spread will likely start to mean-revert as commodities prices soften and consumer demand strengthens towards the end of the year.
We would watch pork prices closely in the coming months. The NDRC's recent intervention in the pork market may have been a symbolic gesture, but we believe conditions are ripe for a recovery in live hog prices. If they overshoot the CNY18-20/kg level in the near term, CPI may rise faster than what the market would like to see.



Exhibit 1: PPI and CPI (%)




Source: National Bureau of Statistics, Our analysis




Related Insights

Pork Price Rebound: What It Means for China's Inflation

China Macro: Profits Flowing Gently Down the Stream 

China Macro: PPI Peaks, while CPI Eases Tightening Fears 

China Financials: Silver Linings Playbook 

China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows 


China Macro: PPI and CPI Have Reached Inflection Points

The NDRC launched its latest round of price stabilization campaign on July 7 by purchasing 20K metric tonnes (mt) of frozen pork for the country's strategic reserves. This may have been a symbolic gesture, but independently of regulatory intervention, pork prices appear to have hit a cyclical bottom. This may have longer-term implications for investors.
Pork prices still matter. We estimate that food accounts for around 30% of China's CPI. Pork's contribution fell from 4.6% in 2020 to 2.1% through May this year. However, wild price swings mean that pork remains a critical determinant of the PBOC's ability to pivot towards an easing stance in 2H21.
The capacity ramp-up post-swine flu has led to a precipitous price decline. The fall ytd has been much sharper than expected. Demand still seems to be on the weak side, but the increase in production has been the driving factor. The replenishment of live sow stock suggests that supply will likely remain abundant in the near future.
The ratio of live hog to feed prices fell below 5x for the first time since 2015. This triggered a tier-1 alert under the NDRC's three-tier warning system and prompted the recent reserve acquisition. The amount purchased was immaterial relative to the market's inventory level. The signaling effect is perhaps more significant.
We expect that live hog prices will recover to the CNY18-20 / kg level in 2H21 as demand catches up. This should gradually take monthly CPI towards the 2% y/y level as we approach December. The tail risk lies in China's heavy reliance on feed imports. Any significant disruptions to the global supply chain may drive pork prices up faster than expected.
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 100%;">Exhibit 1: Ratio of Live Hog to Feed Prices (x)</td>
</tr>
<tr>
<td style="width: 100%;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/217/518/original/image_33697793581625765176358.png?1625765177" class="editor-image img-responsive" data-smartkarma-image-id="217518"></figure>
Source: China Animal and Agriculture Association, Our analysis
</td>
</tr>
</tbody>
</table>
Related Insights
<ul>
<li><a href="https://www.smartkarma.com/insights/china-macro-ppi-peaks-while-cpi-eases-tightening-fears" target="_blank" data-smartkarma-citation="insights:52778" rel="noopener">China Macro: PPI Peaks, while CPI Eases Tightening Fears</a></li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-profits-flowing-gently-down-the-stream" target="_blank" data-smartkarma-citation="insights:53726" rel="noopener">China Macro: Profits Flowing Gently Down the Stream</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-financials-silver-linings-playbook" target="_blank" data-smartkarma-citation="insights:53013" rel="noopener">China Financials: Silver Linings Playbook</a> </li>
</ul>

The NDRC launched its latest round of price stabilization campaign on July 7 by purchasing 20K metric tonnes (mt) of frozen pork for the country's strategic reserves. This may have been a symbolic gesture, but independently of regulatory intervention, pork prices appear to have hit a cyclical bottom. This may have longer-term implications for investors.
Pork prices still matter. We estimate that food accounts for around 30% of China's CPI. Pork's contribution fell from 4.6% in 2020 to 2.1% through May this year. However, wild price swings mean that pork remains a critical determinant of the PBOC's ability to pivot towards an easing stance in 2H21.
The capacity ramp-up post-swine flu has led to a precipitous price decline. The fall ytd has been much sharper than expected. Demand still seems to be on the weak side, but the increase in production has been the driving factor. The replenishment of live sow stock suggests that supply will likely remain abundant in the near future.
The ratio of live hog to feed prices fell below 5x for the first time since 2015. This triggered a tier-1 alert under the NDRC's three-tier warning system and prompted the recent reserve acquisition. The amount purchased was immaterial relative to the market's inventory level. The signaling effect is perhaps more significant.
We expect that live hog prices will recover to the CNY18-20 / kg level in 2H21 as demand catches up. This should gradually take monthly CPI towards the 2% y/y level as we approach December. The tail risk lies in China's heavy reliance on feed imports. Any significant disruptions to the global supply chain may drive pork prices up faster than expected.



Exhibit 1: Ratio of Live Hog to Feed Prices (x)




Source: China Animal and Agriculture Association, Our analysis




Related Insights

China Macro: PPI Peaks, while CPI Eases Tightening Fears

China Macro: Profits Flowing Gently Down the Stream 

China Financials: Silver Linings Playbook 


Pork Price Rebound: What It Means for China's Inflation

Hong Kong

The Hang Seng Index is a free-float capitalization-weighted index of a selection of companies from the Stock Exchange of Hong Kong. The components of the index are divided into four subindices: Commerce and Industry, Finance, Utilities, and Properties. The index was developed with a base level of 100 as of July 31, 1964.

Hang Seng Index (HSI INDEX)

Alibaba (9988 HK): Passive Inflow from HSI, HSCEI, HSTECH Trackers in July

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The RRR cut was a bit of a surprise, but its impact is limited. The PBOC’s rhetoric is unchanged and the June aggregate financing data continue to...

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Pork Price Rebound: What It Means for China's Inflation

China’s pork prices appear to have hit a cyclical bottom. The PBOC’s ability to pursue targeted easing in 2H21 will depend on their steady trajectory.

Stanley Tsai, CFA