Hong Kong markets made some major moves today despite being closed part of the day due to a typhoon warning. Tech giants such as Alibaba and JD.com were buoyed by the news of government stimulus and rumors of an audit deal being reached between the U.S. and China, carrying markets to a strong close, reported CNBC.
The Hang Seng index which trades in Hong Kong and is separate from the Mainland Shanghai and Shenzhen exchanges was up 3.63% at closing. Alibaba gained 8.75%, JD.com jumped 11%, and Tencent rose 4.84%. The Hang Seng Tech index overall was up 6.01% at the close.
Premier Li and the State Council announced another $146 billion (1 trillion yuan) in economic stimulus yesterday that focuses primarily on infrastructure spending alongside a 19-point policy plan. State banks will have another 300 billion yuan ($43.8 billion USD) coming to them for infrastructure projects and local governments will be given 500 billion yuan ($73 billion USD) in special bonds that are rolling over from quotas that went unused in previous years, reported Bloomberg.
Image source: Bloomberg
Rumors of an Audit Deal
However, the strong rally in tech and growth stocks in China today is being largely attributed to rumors that the U.S. and China are edging close to finalizing an audit deal that would prevent the de-listing of Chinese companies from U.S. markets.
The Wall Street Journal reported that sources close to the matter have said securities regulators in China are working with Chinese companies that have U.S. listings to move their audit papers from the Mainland over to Hong Kong. This would allow regulators from the Public Company Accounting Oversight Board in the U.S. to travel over to Hong Kong to conduct the required onsite inspections to maintain listing status in the U.S.
“Could it be true? Sure, the recent five State Owned Enterprises (SOEs) delisting from the US is a positive due to the sensitive information potentially contained in their audit reviews. The rumors could be false,” wrote Brendan Ahern, CIO of KraneShares, on the China Last Night blog today. “The key is the rumor was the spark for a fire that has been waiting to be lit.“
It’s a move that has squeezed short-sellers of Chinese tech hard, even with just a half-day of trading. Short sale turnover made up a full 19% of the total turnover in Hong Kong stocks. Short sellers of China and China tech have pressed their positions all summer in the wake of negative headlines and lighter summer volumes, according to Ahern.
“The problem for the shorts is that doing so has made them vulnerable to moves like today’s. It is worth noting that shorts increased their bets today. Meituan had 28% of its total volume short, with Tencent having 20%, Alibaba HK 14%, and JD.com HK 25%,” explained Ahern. “Today’s move could have some legs for this reason as momentum gets in on the fun of running the shorts over.”
Investing in Chinese Tech with KWEB
The KraneShares CSI China Internet ETF (KWEB) tracks the CSI Overseas China Internet Index and measures the performance of publicly traded companies outside of mainland China that operate within China’s internet and internet-related sectors. This includes companies that develop and market internet software and services, provide retail or commercial services via the internet, develop and market mobile software, and manufacture entertainment and educational software for home use.
Even those who believe KWEB is showing indicators of being overbought, such as Nadine Terman, CEO, CIO, and founder of Solstein Capital, have cautioned against short-selling the space.
“With Chinese stimulus measures in play before the fall election, we would not be shorting here… trimming maybe, but not shorting,” Terman tweeted.
KWEB provides exposure to the Chinese internet equivalents of Google, Facebook, Amazon, eBay, and the like, all companies that benefit from a growing user base within China, and a growing middle class. The fund has worked to convert all possible share classes over to Hong Kong shares instead of ADRs to protect investors in case of a Chinese company delisting within U.S. markets.
The ETF has an annual expense ratio of 0.69% and has $6.19 billion in AUM.
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