Hang Seng Tentative as Markets Monitor Encouraging Data & US AI Chip Restrictions

Encouraging Data

China's post pandemic recovery has been sluggish after the initial boom, with weak consumer spending, subdued factory activity, suppressed trade, high youth unemployment and a battered property sector. Authorities have taken measures to support the economy and looks like their actions are starting to have an impact, with some encouraging releases recently and today's data were better than expected.

Factory activity expanded in September for the first time in months, as manufacturing PMI came in at 50.2, while today's data showed that industrial production steadied at 4.5% y/y. China stays on the verge of deflation as CPI was at 0.0%, but retail sales rose 5.5% y/y and the highest since May, pointing to strong consumer demand. Furthermore, the economy grew by 1.3% q/q in the third quarter, accelerating from the 0.8% expansion in Q2.

BYD Strong Profit Expectations

Auto giant BYD Co. meanwhile, one of the hang Seng's biggest constituents, announced today strong earnings guidance, with its stock surging more than 7%. The company expects its Q3 net profit to soar up to 101.99 compared to a year ago, to approximately RMB 9.55-11.55 billion (roughly 1.3-1.6 bln USD). ^[1]

The company said it expects these profits to materialize, despite the "increasingly intensified competition" in the auto industry. BYD reached record sales of electrified cars in the third quarter and delivered 431,603 pure battery electric vehicles (BEVs). Tesla's deliveries dropped to 435,059 units in the same period, which kept it ahead of its Chinese rival in pure EVs, but they are now neck and neck. Tesla recently launched a refreshed Model 3 in China and has been cutting prices to prop demand.

US Chip Export Ban

The Sino-Western relations have deteriorated this year, creating additional headwinds to the recovery of the world's second largest economy. Electric vehicles have emerged as the new friction point, as the European Commission launched an anti-subsidy probe into Chinese EVs.

The main area of conflict though is advanced tech, with the US imposing a series of restrictions, as it tries to reassert its chip supremacy in the ear of artificial intelligence (AI). On Tuesday, the Biden administration announced further export restrictions of AI chips to the People's Republic of China (PRC) and other countries. ^[2]

Nvidia who has enabled the AI revolution, said yesterday that the new action by the US government would restrict shipments of integrated circuits such as the A800 and the H800, which were previously allowed ^[3]. NVDA.us shed nearly 5% on the news. The stocks of Chinese tech giants Baidu and Tencent Holdings that use Nvidia's semiconductors, dropped today in Hong Kong.

HKG33 Analysis

Hong Kong's main index has managed to contain the fall of the past two months, as the economy shows signs of stabilization, finding some support today from the better than expected releases and BYD's rise. HKG33 may get the opportunity to return above the EMA200 (black line), but does not inspire confidence for sustained recovery and the upside is unfriendly.

Beijing has acted to support the economy, but has refrained from bold stimulus and this piecemeal approach does not look forceful enough to lead the stock market to a meaningful recovery. Although today's economic data were encouraging, they remain underwhelming and the important real estate market is in a bad shape. Furthermore, Sino-Western fraught relations also create headwinds.

Below the EMA200 bears are in control and HKG33 remains exposed to the 2023 lows (17,064-16,977), but steeper losses may prove elusive, at least in the near term.