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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Contemporary Amperex Technology (CATL) / Event-Driven

<div>The <a href="https://www.smartkarma.com/entities/shanghai-shenzhen-csi-300-index" target="_blank" data-smartkarma-citation="entities:22906:1" rel="noopener">Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX)</a> consists of stocks from the Shanghai Stock Exchange and the Shenzhen Stock Exchange and is one of the most widely tracked A-share indices with passive tracking products listed in multiple markets globally. There are CFFEX listed futures that trade actively as well.</div><div>
China Securities Index Co (CSI) will most likely announce the changes for the December rebalance after market close on 26 November and the changes will be effective after the close of trading on 10 December.
With over 90% of the review period complete, we see 26 potential changes at the upcoming December 2021 review. Estimated one-way turnover at the rebalance is 9.30% and will result in a one-way trade of slightly less than US$3bn.
The potential inclusions have outperformed the potential exclusions over the last 3 months but have given up a large part of the gains over the last couple of weeks. Given the trading history of past rebalances, we recommend buying the potential inclusions and selling the potential exclusions over the next couple of weeks and unwinding the positions post the end of the review period. There will then be more trading opportunities as we near the announcement date and implementation date.
</div>

The Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX) consists of stocks from the Shanghai Stock Exchange and the Shenzhen Stock Exchange and is one of the most widely tracked A-share indices with passive tracking products listed in multiple markets globally. There are CFFEX listed futures that trade actively as well.
China Securities Index Co (CSI) will most likely announce the changes for the December rebalance after market close on 26 November and the changes will be effective after the close of trading on 10 December.
With over 90% of the review period complete, we see 26 potential changes at the upcoming December 2021 review. Estimated one-way turnover at the rebalance is 9.30% and will result in a one-way trade of slightly less than US$3bn.
The potential inclusions have outperformed the potential exclusions over the last 3 months but have given up a large part of the gains over the last couple of weeks. Given the trading history of past rebalances, we recommend buying the potential inclusions and selling the potential exclusions over the next couple of weeks and unwinding the positions post the end of the review period. There will then be more trading opportunities as we near the announcement date and implementation date.


CSI300 Index Rebalance Preview (Dec 2021): Pullback Provides Entry Point

<div>The <a href="https://www.smartkarma.com/entities/shanghai-shenzhen-csi-300-index" target="_blank" data-smartkarma-citation="entities:22906:1" rel="noopener">Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX)</a> consists of stocks from the Shanghai Stock Exchange and the Shenzhen Stock Exchange and is one of the most widely tracked A-share indices with passive tracking products listed in multiple markets globally. There are CFFEX listed futures that trade actively as well.</div><div>
China Securities Index Co (CSI) will announce the changes for the December rebalance at the end of  November or beginning December and the changes will be effective after the close of trading on 10 December.
Half way through the review period that runs from May to October, we see 26 changes at the upcoming December 2021 review. Estimated one-way turnover at the rebalance is 9.24% and will result in a one-way trade of just shy of US$3bn.
The Information Technology and Materials sectors gain 4 spots each in the index while Financials are the biggest losers with 7 spots gone.
The potential inclusions have outperformed the potential exclusions and the <a href="https://www.smartkarma.com/entities/shanghai-shenzhen-csi-300-index" target="_blank" data-smartkarma-citation="entities:22906:1" rel="noopener">Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX)</a> by a wide margin on a year to date basis. We recommend building up positions gradually and scaling in on a correction.
</div>

The Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX) consists of stocks from the Shanghai Stock Exchange and the Shenzhen Stock Exchange and is one of the most widely tracked A-share indices with passive tracking products listed in multiple markets globally. There are CFFEX listed futures that trade actively as well.
China Securities Index Co (CSI) will announce the changes for the December rebalance at the end of  November or beginning December and the changes will be effective after the close of trading on 10 December.
Half way through the review period that runs from May to October, we see 26 changes at the upcoming December 2021 review. Estimated one-way turnover at the rebalance is 9.24% and will result in a one-way trade of just shy of US$3bn.
The Information Technology and Materials sectors gain 4 spots each in the index while Financials are the biggest losers with 7 spots gone.
The potential inclusions have outperformed the potential exclusions and the Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX) by a wide margin on a year to date basis. We recommend building up positions gradually and scaling in on a correction.


CSI300 Index Rebalance Preview: Large Turnover as Potential Inclusions Keep Rallying

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

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

China

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Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX EQUITY)

CSI300 Index Rebalance Preview (Dec 2021): Pullback Provides Entry Point

With 90% of the review period complete, we see 26 changes to the CSI300 at the Dec rebal. One-way turnover is 9.3% and the one-way trade is US$3bn....

Brian Freitas

CSI300 Index Rebalance Preview: Large Turnover as Potential Inclusions Keep Rallying

Half way through the review period, we see 26 changes to the CSI300 Index. Estimated one-way turnover is 9%+ & would result in a one way trade of...

Brian Freitas

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

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...

Stanley Tsai, CFA

China Macro: PPI and CPI Have Reached Inflection Points

The spread between China’s PPI and CPI will likely begin to mean-revert, following a steep rise over the past 12 months. The shape of this...

Stanley Tsai, CFA

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

Price Gauge

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