China's Rally Fizzles As Goldman Finds Both Hedge Funds And Long Onlies Resume Selling

While China's mainland stock markets are closed until Monday for the Golden week holiday after an explosive move higher which included the biggest one-day jump since the Lehman disaster, Chinese stocks continued to trade in the US in the form of ETFs and also in Hong Kong which reopened from a briefer holiday, and soared higher.. but then the meltup fever finally broke on Thursday when the Hang Seng Closes down -1.47%, its first red close in 6 sessions (and first down day for the Hang Seng Enterprise Index in 13 days). That said, since Sept 13th, the market has rallied ~27%, so a pullback was inevitable.

With that in mind, here are some statistics on the latest China move excerpted from Goldman trader Saira Ansari (full note here available to pro subscribers) :

• HK Volume: Volume continues to be significant in HK with nearly 310 bn HKD trading. Although the volume is down 38% from Monday's record high, the volume today was still nearly 2.9X the yearly turnover for the HSI.
• Thematic Baskets: For the majority of the past week Goldman's Asia desk have seen every single thematic basket up on the day. Today we had a reversal with every thematic sector in the red: the largest reversion came in China H Real Estate -9.58%, Macau -4.38%, China Consumption -3.66%.
• Goldman Volume - Flows: GS volume was up 2.14X the recent 4 week run rate. Similar to the overall exchange volume, the volume fell but is still significantly ahead of where we have been previously. Today both Hedge Funds and Long Onlies emerged as sellers of the market around 1.35-1.78X Better to Sell. Similar to earlier in the week, the majority of Goldman's flow was concentrated in large cap tech and financial names.
•  Short Color on The Pad: After a 56% move since Sept 13th, Goldman's "most short" basket (GSHKTPSH) closed down today -6.57%. It is worth noting that overall, our GS Prime Short books are net covered in HK on a WoW and MoM basis, with shorts down 2.7% and 4.6% respectively.

Next, we share some key flows from Goldman's China desk:

1) PROFIT TAKING - Not just from HF but also LO today.

• HF are outright sellers in HK today while LO (which were still buying yesterday) have ALSO turned 1.26 x BETTER TO SELL

2) Shorts? Short have gotten SQUEEZED over the past week to say the least. HF were cautious on putting more on, but looks like that's getting pressed today:

• GS HK TOP SHORT -8.8%  hugely underperforming today

3) HK TURNOVER - SLOWER, but still active

• HK Turnover +89% now. in comparison, this number has been up over 100% - 250%. ie Investors are active on this sell down, but not overally aggressive

4) China H VIP basket  -3.4% trading inline with the index. Note that this basket has outperformed HSI by 7% since last Tuesday

Finally, here are some charts from the Goldman trading desk:

1) Classic Pullback

2) HSI back at average valuations, but still below average if you exclude the dreariness of the past 2 years

3) Over-exuberant pockets seeing some profit-booking – Goldman refrained from recommending on the way up, and believe this proves why you must position in more boring themes as well.

4) Next event to watch is MoF possibly meeting on Oct 4-5th, followed by Golden Week data to be released October 8th

• Media reports expect RMB 2-3tn fiscal stimulus whereas we expect 1-2tn
• Should the RMB 2-3tn additional govt bond issuance rumor materialize, this would widen China’s augmented fiscal deficit (AFD) by 1.5% of GDP, boosting AFD to 13% of GDP for this year (vs. 11.5% previous year).
• That would take China back to 22-23’ lows of ~14% so remains to be seen whether 3tn gets approved

5) Goldman's HK Tech, China Liquor, Trade-ins baskets still trade considerably cheaper than pre-2023 lows – fundamental as well as valuation tailwinds for TECH.

• All have some H share components in them so prices are not entirely 3 days old.

6) Goldman's China High Divs basket, aka sanity check basket, trades at 9x forward

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Finally, some thoughts from Goldman's Jack McFerran seeking to digest and unpicking the latest Chinese policy bazooka and its implications:

The implication of deflation became too great a weight on the economy and notably the personal balance sheet and acutely on the cashflows of local govts who had historically funded through land sales and were now forced to use tax revenue. The net is they are nationalizing the housing inventory not creating more supply, that reduces credit risk in the system and some equity multiples (Vanke went up 61% on Wednesday in HK), but what was new, and caught the mkt off guard, is the focus on the equity mkt, the message would appear to be that they want to reflate through the personal and corp balance sheets through the stock mkt.

Historically China has traded on 12x today we are 10x, given the economic weakness and the potential unlocking of animal spirits, I suspect we can travel through 12x. The net of this we may not see an immediate eps impact, but the forward multiple for China proxies is too low vs pre this policy, but for mkt operators I would focus on where you see multiple dislocations. One example has been the oil de-rating vs global peers, see charts, the other stand out where the equity listing location has driven multiple gap vs peers, e.g. Prudential in London, the valuation gap vs other UK based insurance or AIA is ludicrous and does not reflect fundamentals, or a reverse of that is Samsonite in HK, this is one of the world premier consumer brands, in fact that is not brand in any category with such global dominance in its subsector, but its multiple reflects its listing location, hk.

Finally for our professional subscribers, here is the link to a must-read Goldman presentation from the bank's best China analyst, Kinger Lau, who shares some 98 charts including...

• China stimulus and equity mkt responses
• Sector performance since news
• PB flows: H-share, A-share and ADRs
• PB Nets
• HK turnover/A-share mgn buying
• Policy details in table format
• Macro heat map/indicators

More in the Goldman notes available to pro subs (here, and here ).