In this week’s issue European gloom, a new chip fund and foreign law firms flee Shanghai. On a scale of 1 to 100, we give the week a 45 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Manufacturing Déjà Vu

This year is shaping up quite like 2023, which started with an economic bang that quickly fizzled in the second half of the year. The latest signs that China’s improving economy was losing steam came in the latest PMI, which surprised observers by slipping into contraction territory in May. Specifically, the official PMI dipped to 49.5 last month from 50.4 in April.

At the same time, another quasi-indicator showed that China’s export machine is charging ahead, providing one of the economy’s few bright spots. That indicator is the large containers used to ship goods, which fell into short supply last month as manufacturers raced to export things like EVs and medical goods to the U.S. before recently announced U.S. protective tariffs are set to kick in.

European Business Leaders Glum Over China Ties

Meantime, the recent parade of gloomy business surveys continued last week with the latest poll from the European Round Table for Industry, which found a majority of respondents believed China-EU relations will worsen over the next three years. Some 54% of those surveyed said relations were likely to get worse, while only 7% expected improvement.

Europe and the U.S. are increasingly worried that China is using government subsidies to flood global markets with cheap goods in important emerging areas like electric vehicles and solar panels, to the detriment of their own companies. The EU has launched investigations into Chinese EVs over the topic, and any resulting penalties would almost certainly cast a chill over bilateral relations.

China Stocks Sag Some More

What goes up must come down, or so the saying goes. That was certainly the case for offshore-listed Chinese stocks, which fell for a second consecutive week after four weeks of solid gains that put them into bull territory. The Hang Seng China Enterprises Index fell 3.2% for the week, while the iShares MSCI China ETF and broader Hang Seng Index lost 2.6% and 2.8%, respectively.

Last week’s declines were a little smaller than a week earlier, indicating they may have been the tail end of a needed correction after the strong rally from the previous four weeks. We’ll need to wait to see if that rally is really sustainable or if the selloff continues. Despite the two weak weeks, the Hang Seng China Enterprises Index is still up 22% from its low in late January.

Industry

China Launches Third Mega Chip Fund

Chips anyone? We’re guessing the answer will be a resounding “yes,” as China set up its third massive fund to supporting its young semiconductor sector. This fund has a hefty 344 billion yuan in registered capital, equal to nearly $50 billion. Its top two contributors are China’s Finance Ministry and China Development Bank, a major policy bank.

This kind of huge money, combined with the previous two funds, makes recent U.S. efforts to boost its local chip industry look tiny by comparison. Then again, the U.S. support is far more targeted and likely to yield results than China’s efforts, which typically attract all kinds of fraudsters and wannabes who do whatever it takes to get their hands on these easy government funds.

Foreign Law Firms Rush for the Exit Door

A growing number of foreign law firms in China are heading for the exits, starved for business as the multinational companies that were their main clients slash their Chinese operations. The flight is most acute in Shanghai, China’s commercial capital, where the likes of Sidley Austin, Perkins Coie, Latham & Watkins and Orrick have all recently closed or said they will close their offices.

Law firms aren’t the only ones headed for the doors. We’ve also heard stories of global PR agencies, as well as business consultants scaling back or shutting down their China operations. All of these typically catered to foreign multinationals who were willing to pay their hefty fees, unlike Chinese companies that tend to go for cheaper local alternatives.

EU Delays Decision on Unfair Chinese EV Subsidies

The EU won’t announce results of its probe into unfair state support for China’s new energy vehicles (NEVs) until after upcoming EU Parliament elections on June 6-9. Many were expecting results next week, following an investigation that officially launched on Oct. 4. It was unclear if the delay was related to the election, or was perhaps due to technical issues.

While we’ll have to wait another week for the results, the commission seems all but certain to find against Chinese EVs, which have recently flooded Europe after a huge government-backed buildup of the industry in China. Local Chinese governments even went so far as to demand that one EV failure backed by bankrupt developer Evergrande repay $262 million it received in such support.

Company

Apple Bounces Back

Are they or aren’t they? That’s the question everyone’s asking about Apple in China, which is trying to fend off a challenge from a rebounding Huawei. Reports earlier this year indicated Apple was losing significant market share to Huawei in the latter’s home China market. But now new data are showing Apple’s China smartphone sales jumped in April, extending a rebound from March.

The government data didn’t cite Apple by name, saying only that shipments of foreign-brand phones rose by 52% in China in April year-on-year. But as the only foreign company among leading brands in the market, many assume that most of the increase came from higher iPhone sales. The rise seems quite large, and could reflect recent discounting by Apple to claw back market share.

China Clients Flee PwC

We wrote earlier how big foreign law firms are fleeing China for lack of business. But global accounting powerhouse PwC is seeing a similar flight of some of its major clients in China for different reasons. The company has lost more than a dozen such clients for its auditing services, as it comes under the microscope for its role as auditor for bankrupt developer Evergrande.

PwC has been in an uneasy situation since regulators launched their investigation into any potential role it may have played in deceiving investors about Evergrande’s financial health. The case looks similar to a U.S.-based investigation in the early 2000s that ultimately led to the collapse of former auditing giant Arthur Andersen, though the results are unlikely to be as dire this time.

Vanke Sells Headquarters Project to Raise Cash

Evergrande wasn’t the only struggling developer making headlines last week. Vanke, also from South China’s Guangdong province, made news with word that it was selling a plot of land previously earmarked to become a sprawling new commercial complex including its own new headquarters in Shenzhen for 2.24 billion yuan, or about $300 million.

The price was nearly 30% less than the 3.1 billion yuan Vanke paid for the land back in 2017 when the real estate market was still booming. Unlike Evergrande, which has lost all its friends as its offshore assets get liquidated in a Hong Kong court, Vanke is a bit more financially stable, counting big government agencies in its hometown of Shenzhen as major shareholders.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue we bring you British bears, a chatbot price war and the end of the road for Didi’s president. On a scale of 1 to 100, we give the week a 50 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Fiscal Revenue, Land Sales Fall in April

The latest economic signals continue to show a slumping economy whose only saving grace is China’s export machine. The Finance Ministry reported that its fiscal revenue dropped 3.7% in April, accelerating from a 2.4% decline in March and down 2.7% in the first four months of the year. Meantime, revenue from the sale of land use rights tanked 21.2% year-on-year in April.

The fiscal revenue decline is worrisome for the central government, because its fiscal spending is moving in just the opposite direction, up 6.1% in April, as Beijing spends more to try and jumpstart the economy. The diving land sales aren’t unexpected, but also spell bad news for debt-strapped local governments that depend heavily on such sales to raise money.

Brits Bearish on China Business Outlook

Foreign business associations that once could find no wrong with China have done a complete turnaround these past few years, with the latest negative voice coming from the British Chamber of Commerce in China. The chamber’s latest survey found that its members believe the 48 measures China has announced to restore foreign confidence since last August are mostly lip service.

Barely a week goes by when China doesn’t announce its intent to keep opening up and create a more level playing field for foreign companies doing business in the country. Despite that, foreign companies are voting with their wallets, with foreign direct investment that once used to only rise suddenly sagging 8% last year.

Markets Take a Break. But Is This the End of the Rally?

It was only a matter of time before the latest rally for offshore-listed China stocks came to an end, and that’s exactly what happened last week. After four straight weeks of strong gains that sent all the indexes we follow into bull territory, the Hang Seng China Enterprises Index and Hang Seng Index both fell 4.8% last week, while the iShares MSCI China ETF lost 5.2%.

Meantime, another report showed that not all foreigners are necessarily bullish on China stocks these days. It detailed how a similar rally on China’s domestic stock markets is being driven mostly by domestic investors, with foreigners staying on the sidelines. That seems to show the rally in the U.S. and Hong Kong is mostly a valuation play, and not over bullishness on the Chinese economy.

Industry

Solar Association Admits to Overcapacity, Sort Of

Despite repeated accusations by the West that China is artificially spurring huge oversupply in emerging industries like EVs and solar panels through strong government support, Beijing repeatedly denies it is doing any such thing. But its main solar industry association is finally admitting that something isn’t right, even if it’s avoiding using the word “oversupply.”

The China Photovoltaic Industry Association last week called on its members, which produce the vast majority of the world’s solar panels, to halt their price wars that have ravaged the sector due to major oversupply. It added that while markets are often best at solving this kind of problem, the “government’s visible hand” can also play an important role.

Cities Cut Home Downpayment, Mortgage Rates

As often happens in China, the central government makes major policy announcements one week, and then local governments follow with supporting measures. That’s what happened last week when a number of cities across the country lowered downpayment and mortgage rates for home buyers, after Beijing announced a similar plan the previous week.

In a separate but related step, a top financial regulator said last week that Chinese banks had approved 935 billion yuan in new loans under a “whitelist” program to help developers complete select properties that had stalled due to lack of funds. All this shows Beijing is taking the property downturn increasingly seriously, realizing the huge drag it is creating on the economy.

Chatbots Overheat with New Price War

China is the land of the price war, with new battles regularly breaking out due to Beijing’s tendency to encourage investment in emerging areas, often resulting in overcapacity. This time it’s chatbots that are experiencing their first-ever price war, as tech giants Alibaba and Baidu both slashed prices last week for their large language models (LLMs).

Alibaba threw down the gauntlet by announcing cuts of up to 97% for its Tongyi Qwen LLMs. Baidu quickly followed hours later by saying that two LLMs from its Ernie series would be free for all business users. Both Alibaba and Baidu have plenty of cash, so it’s quite possible this price war could go on for some time. That would be bad news for smaller rivals.

Company

Evergrande EV Unit Asked to Repay Government Subsidies

Talk about hitting someone when they’re down. That’s exactly what China is doing to the electric vehicle-making unit of bankrupt developer Evergrande. Media reported last week that Evergrande New Energy Vehicle said it received a letter from local Chinese administrative bodies demanding it repay 1.9 billion yuan, or more than $250 million, in government subsidies it had received.

Such a demand looks quite difficult for a company that has yet to record any meaningful revenue from EV sales, and whose entry to the sector looked mostly like a “me-too” stunt to try to get its hands on generous government subsidies going out to startups. This particular request seems a bit unusual and shows just how far Evergrande has fallen out of government favor.

Chinese Owner Defaults on Inter Milan Loan

It seems quite distant now, but it wasn’t so long ago that Chinese companies were snapping up global sports teams left and right, rushing to heed Beijing’s call to improve the country’s sports prowess. Now, at least one of those owners is coughing up its club, Inter Milan, after defaulting on a 395 million euro loan it used to fund the purchase.

The storied club’s former owner is Suning, once a retailing giant that has been in sorry shape for quite some time. Suning’s majority stake was seized by Oaktree Capital, which said it was committed to the club’s long-term success. We haven’t heard much about the fate of other similar purchases during the buying spree, but we suspect many have also been sold or forfeited by now.

Ride Ends for Didi President

It was the end of the road last week for Jean Liu, who stepped down as president of Didi Global after nearly a decade in the position at a company once called the “Uber of China.” Despite relinquishing the president’s role, Liu will stay on as Didi’s chief people officer and will continue to report to Didi CEO Will Cheng. Her president’s position won’t be filled.

The daughter of Lenovo founder Liu Chuanzhi, Jean Liu was once feted as an entrepreneur supreme in her own right, and also one of China’s most successful female entrepreneurs in a club dominated by men. But following its rapid rise, Didi suffered from several safety scandals and a big regulatory rap on the knuckles after rushing to list in the U.S. without getting a required data security review.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue strategic China tariffs from Washington, ‘Big Short’ investor buys China stocks and a diaper maker finds riches in Russia. On a scale of 1 to 100, we give the week a 65 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

U.S. Ratchets Up Strategic Tariffs

Any American thinking of going electric with the latest electric vehicle (EV) from BYD or Nio probably got a case of sticker shock last week after President Biden rolled out new tariffs that will hike EV import taxes to 100% from a previous 25%. That hike was part of a broader package of tariff increases on strategic industries including Chinese EV batteries, microchips and medical products.

The action continues Biden’s highly targeted approach of taking on Chinese exports in an effort to develop America’s own industries in these cutting-edge areas. Notably, the action won’t really affect that much trade right now, since just $18 billion worth of targeted goods are imported annually. But without such tariffs, such imports in new areas like EVs would undoubtedly rise very quickly.

Indicators Mixed as Inflation Picks Up, Factory Prices Slump

We got a mixed bag of economic indicators last week, led by inflation that was rising, albeit from a very low base. The CPI rose 0.3% in April, up from a 0.1% rise in March and in solid inflationary mode, unlike the deflation that has shown up a few times in recent months. But factory gate prices were stuck in deflation territory, with the producer price index down 2.5% in April.

In other indicators released last week, industrial output rose 6.7% in April, accelerating from a 4.5% gain in March, while retail sales slowed to a 2.3% gain from a 3.1% rise in March. These mixed signals look like what happened in 2023 when the year got off to a strong start with the end of pandemic restrictions, only to see the momentum quickly undercut by weak consumer sentiment.

‘Big Short’ Investor Buys Into China Stock Rally

The recent rally for offshore-listed Chinese stocks continued last week, extending gains that have lifted shares well into bull territory after more than two years in the doldrums. The Hang Seng China Enterprises Index rose 3.2% for the week and is now up nearly 40% from a low in late January. The iShares MSCI China ETF also rose 5%, while the Hang Seng Index gained 3.1%.

The rally got a vote of confidence when media reported that Michael Burry, famous for his bet against the U.S. housing market during the financial crisis of 2008, chronicled in “The Big Short,” boosted his Chinese stock buying during the first quarter. New regulatory filings showed his firm, Scion Asset Management, raised its positions in Alibaba and JD.com during the period.

Industry

China to Become a Homebuyer?

Media were abuzz last week when Bloomberg reported the government was mulling a plan to start buying up thousands of unsold homes nationwide to support the battered property market. Later, Beijing announced a new slate of measures to prop up the sector, including lowering mortgages and allowing local governments to buy some homes to resell as affordable housing.

Bloomberg didn’t cite any named sources in its report, and it looks like it was referring to the affordable housing purchases in the broader plan. The government home buying looks like a new approach, while we’ve seen variations on all the other steps before. But such buying would be very costly, and the government would probably need to buy millions of homes to make any difference.

U.S. Bill Targeting Chinese Drug Companies Advances

Meantime in the U.S., a piece of legislation aimed at getting U.S. drug makers to lessen their reliance on Chinese providers of outsourced drug-related services advanced with its approval by a committee in the House of Representatives. The bill would bar U.S. companies that work with Chinese firms like WuXi AppTec from doing any work with federally funded projects.

The Biosecure Act must still get approved by the full House and Senate before President Biden could sign it into law. We’ve seen plenty of talk about similar legislation by U.S. politicians in the past, but such talk usually goes nowhere. This bill, however, could stand a real chance of success, and would follow passage of another law aimed at forcing a sale of TikTok’s U.S. operation.

Severe Weather Devastates Chinese Lychee Crop

A report on how severe weather this year has devastated China’s lychee crop is shining a spotlight on a story that hasn’t gotten much ink internationally, namely the huge rains that have been soaking South China this summer. China produced 3.1 million tons of the fruit last year, but this year’s harvest is expected to be just half that, at about 1.7 million tons.

Lychee lovers will probably be dismayed but not surprised to learn that prices are already much higher due to the low harvest. Barely a week has gone by this summer that South China’s Guangdong province hasn’t gotten hit by huge soaking rains, leading not only to crop damage but also all kinds of other disruptions. Rainfall in April alone was three times normal levels.

Company

Group Assembling Bid for TikTok

ByteDance may say the U.S. portion of its TikTok short video service isn’t for sale, but don’t tell that to an investor group that revealed it’s putting together a bid for the company. The group is being led by former Los Angeles Dodgers owner Frank McCourt, whose Project Liberty organization is working on its bid with Guggenheim Securities and law firm Kirkland & Ellis, among others.

This is the first we’ve heard of any potential buyers since President Biden signed a bill late last month requiring ByteDance to sell or risk having the wildly popular platform banned in the U.S. Any sale would probably cost billions of dollars, and it’s not clear where McCourt would get such big money. Other potential buyers could include wealthier names like Oracle and Microsoft.

McDonald’s Grilled Over Food Safety Violations

In a story that looks like something from five or 10 years ago, McDonald’s has formally apologized after local media in the Central Chinese city of Zhengzhou uncovered evidence of food safety violations by the fast-food giant. Those violations included use of expired ingredients to make some products and tampering with food expiration labels.

This kind of story was all the rage a few years back when food safety was front and center and media throughout China were conducting their own investigations. But such reporting has largely subsided by now after most operators reformed. Guilty parties have also learned their lesson when such scandals occur, and, like McDonald’s, almost always immediately issue public apologies.

KFC Fined for Rejecting Cash

McDonald’s wasn’t the only Western fast-food chain in the news last week, as KFC also made headlines for different violations. In this case, KFC was fined 30,000 yuan not for any food safety issues, but rather after one of its outlets in the city of Wuxi refused to accept cash from a customer trying to pay for breakfast. KFC was just one of several companies fined for such practices.

Paying with cash is becoming increasingly difficult in China, as the big majority of people now do most of their purchasing electronically using Alipay and WeChat. That’s been problematic for many older people who still prefer to pay with cash, and also for international tourists who come to China and discover they can’t pay for anything with cash or their credit cards.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue positive trade signals, a major EV IPO and more sagging home sales. On a scale of 1 to 100, we give the week a 65 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Services, Trade Send Positive Signals

After months of mostly gloomy data, the latest economic indicators from the trade and services sectors were relatively positive for once. The country’s exports rose 1.5% in April, rebounding from a 7.5% decline the previous month, while imports rose 8.4%. Meantime, the Caixin/S&P Global services purchasing managers' index (PMI) came in at 52.5, solidly in expansion territory.

Services has always been relatively solid, even as China’s economy slows, and the latest PMI reading is the 16^th consecutive month in expansion territory, defined as anything above 50. Trade has been more problematic, with figures mostly contracting recently due to weakness from overseas buyers. The big jump in imports this time is encouraging as it could indicate improving domestic demand.

U.S. Overtakes China as Germany’s Top Trading Partner

Also on the subject of trade, Germany crossed a significant milestone in the first quarter when the U.S. became its top trading partner, overtaking China for that position. Germany’s combined U.S. imports and exports for the three-month period totaled 63 billion euros, compared to 60 billion euros for China. Before that, China was Germany’s top trading partner for eight consecutive years.

One analyst attributed the shift to solid demand from the U.S. thanks to its strong economy, whereas demand has softened from China due to its own economic slowdown. At a higher level, the shift also seems to reflect German’s recent moves to lessen its reliance on Russia and China to avoid potential economic shocks if relations sour with either of those countries.

Offshore China Stocks Continue Their Winning Streak

Offshore China stocks marched further into bull territory last week, though the weekly increases have been slowing. The Hang Seng China Enterprises Index rose 2.6% for the week, mostly due to a strong rally on Friday, while the iShares MSCI China ETF rose 0.9% and the Hang Seng Index gained 2.6%. The China Enterprise Index is now up 34% from its low in late January.

The rally could prompt more Chinese companies to strike while the iron is hot and make new IPOs in New York and Hong Kong, ending a prolonged drought in major new listings. One such listing came at the end of last week from Geely-owned EV startup Zeekr, which raised $441 million, making it the biggest U.S. IPO by a Chinese company since 2021.

Industry

New Home Sales at Five-Year Low

Last week we saw some signals that China’s commercial property market may be near a bottom, but the same wasn’t true for the far larger residential market. The latest data showed a paltry 2,100 homes were sold in 12 major Chinese cities over the recent five-day May Day holiday, down 52% from the same period a year earlier and at a five-year low.

That performance continues a trend from April, when the value of new home sales from China’s 100 largest developers fell 45% from a year earlier, extending a similar 46% decline in March. The big declines don’t look likely to end anytime soon, since Chinese consumers are already quite wary about big-ticket spending and worry that home prices will keep falling.

China Takes Some Juice Out of Battery Boom

A growing recent theme has been Western complaints about Chinese overcapacity in key emerging sectors like EVs and solar panels, even though China consistently denies creating such overcapacity. But in a subtle admission that perhaps it is indeed creating too much supply, the country is proposing new rules that could rein in the oversupplied sector producing lithium batteries.

The draft new rules were issued last week by the Ministry of Industry and Information Technology, which oversees the electric vehicle industry that is one of the main consumers of lithium batteries. The rules would raise standards for a range of battery specifications, presumably forcing out makers of lower-quality products and discouraging new entrants.

Chinese EVs Face U.S. Tariffs, Eye More European Production

Speaking of EVs, China’s new energy vehicle sector was in a couple of major headlines, including a Reuters report saying the Biden administration was set to announce new tariffs on a number of strategic sectors this week, including EVs. Another headline noted a growing number of Chinese EV makers are studying producing in Europe to avoid potential future import tariffs from the EU.

The U.S. move looks mostly pre-emptive, as the country has yet to import many Chinese EVs. Instead, this signal is probably aimed at discouraging any local U.S. companies that might want to consider such imports. Meantime, the movement by Chinese companies to Europe is likely to be relatively small, since most producers lack the cash to make such major new investments.

Company

Zeekr Breaks Through U.S. IPO Logjam

As we noted earlier, Geely-backed EV maker Zeekr made a major breakthrough at the end of last week when it completed the largest U.S. IPO by a Chinese company in nearly three years, raising $441 million through its share sale. Demand was surprisingly strong, prompting the company to upsize the listing after the shares priced at the top of their range.

We’ve previously written that Zeekr is a bit late to the China EV game, but could still have a good chance of success thanks to its strong ties to Geely, one of China’s leading private automakers and also one of its few global success stories. The deal valued Zeekr at about $5 billion, which is lower than the $21 billion for rival Li Auto and about half the $11 billion for Nio.

ByteDance Sues to Block U.S. TikTok Ban

In a highly anticipated move, internet sensation ByteDance filed a lawsuit in the U.S. last week aiming to nullify a controversial new law that would ban its TikTok from the market unless it sells the U.S. operations of its wildly popular short video service. ByteDance argued the law is unconstitutional for a number of reasons, including its violation of the right to free speech.

It pointed out that the law signed by President Biden late last month is the first time a specific company has been singled out for this kind of ban. The U.S. worries that TikTok’s Chinese ownership could make it vulnerable to becoming a propaganda tool from Beijing, though election-year politics are probably also playing a big role in this ongoing drama.

Citibank Shutters China Consumer Insurance Business

Citibank’s exit from China’s consumer banking business took another step forward last week as the company officially stopped selling insurance products from other companies to its retail banking customers. Citi’s Chinese bank also stopped issuing local credit cards last week, following through on a move it previously disclosed in January.

It’s no huge surprise that Citi is leaving China’s consumer banking business, as it has very little to distinguish itself from the thousands of local and national state-owned banks that cater to ordinary Chinese. Foreign banks in general have made very little progress in China over the last two decades, mostly due to strict regulation and stiff competition from entrenched local players.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue mixed manufacturing messages, China stocks in bull territory, and travelers stay closer to home. On a scale of 1 to 100, we give the week a 75 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Factories Send Mixed Signals

China’s core manufacturing sector was sending mixed signals last week, pointing to a rebound for exports even as demand remained weak at home. The official purchasing managers index (PMI) clocked in at 50.4 for April, still in expansion mode but down from 50.8 in March. Meantime, the Caixin PMI for April reached a 15-month high of 51.4, up 0.3 percentage points from March.

Most observers believe the official PMI, compiled by the National Bureau of Statistics, is a stronger reflector of manufacturing at big state-owned enterprises, while the Caixin PMI better captures the pulse of small, private manufacturers that often tend to be more export oriented. That’s leading many to observe that exports may be recovering, but consumers remain cautious at home.

U.S. Sanctions Chinese Companies Over Russian Support for Ukraine War

While the signals on the economy were mixed, they were much clearer on the diplomatic front as the U.S. levied fresh sanctions against a group of Chinese companies. Whereas Washington has previously targeted companies that could assist China’s military, this time it sanctioned 20 that it says are helping the Russian military in its war against Ukraine.

U.S. Secretary of State Antony Blinken and Treasury Secretary Janet Yellen both warned Beijing about the potential for sanctions during recent trips to Beijing, but apparently nobody listened. This isn’t the first time Chinese companies have thumbed their noses at Washington. Huawei was one of the first to feel the pinch for selling goods to Iran in violation of such U.S. sanctions.

Hang Seng Charges Into Bull Territory

Offshore-listed Chinese stocks entered unfamiliar territory last week when they officially charged into a bull market. The Hang Seng China Enterprises Index rose 4.4%, while the iShares MSCI China ETF rose 5.7% and the Hang Seng Index was up 4.7%. The China Enterprises Index is now up about 31% from a January low, while the Hang Seng is up 23%, putting both into bull territory.

In a related development, investment has surged so far this year among foreigners buying China-listed A-shares using a program linking Hong Kong’s stock exchange with exchanges in Shenzhen and Shanghai. The enthusiasm seems to be largely driven by investors looking for new deals as people increasingly believe the Fed won’t lower interest rates anytime soon.

Industry

May Day Travel Surges, But People Stay Closer to Home

We’ve written quite a bit about how China’s tourism industry seems surprisingly immune to growing consumer caution, but it seems like even that bright spot is finally fading. The latest data from last week’s five-day May 1 holiday shows tourists were getting out in big numbers to enjoy the first big vacation of spring. But other signals showed they were spending cautiously.

Among other things, people were staying closer to home by making more trips by car and train, rather than flying to more distant places. That was reflected in airline ticket prices, which were down by an average of 3.78% from the same period last year. It seems that even post-pandemic “revenge travel” has its limits, and the industry is destined to follow others into slower growth.

Steel Profits Slump

We’ve written plenty about China’s property market woes, but many suppliers to that sector are also feeling similar pain these days. New data from China’s main steel association shows the sector’s profits fell by nearly half in the first quarter year-on-year, with an average profit margin of just 0.58%.

While demand from the property sector has been weak for a while, steelmakers also received a new curve ball as local governments cut back their spending on infrastructure to reduce debt. China has typically turned to such infrastructure spending to stimulate the economy in slow times, but apparently government debt reduction is now a higher priority.

Solar Giants May Need to Open U.S. Factories, Says One Industry Giant

Chinese solar panel makers already dominate the global market, which has been a growing source of trade friction as the West accuses China of providing unfair government support. Now, the top dog at global leader Longi is admitting the only way to avoid potential anti-dumping tariffs is to build new factories in the U.S., as well as Europe – two of the world’s top markets.

Companies like Longi have been building factories outside China for a while now, mostly in Southeast Asia. But many Westerners believe those factories do mostly finishing work for products still largely produced in China. Longi’s sentiment reflects a growing realization that Chinese firms may need to produce more in the U.S. and Europe if they want to keep selling to those markets.

Company

Cautious Chinese Consumers Take the Foam Out of Starbucks

Chinese fondness for pricey lattes has its limits, or so it seems. That’s the latest assessment coming from coffee giant Starbucks, which has slashed its 2024 growth forecast due in part to weak demand from China. Starbucks said it now expects its revenue growth to be low single digits to possibly flat this year, compared with a previous forecast for 4-6% growth.

The growing weakness in China was inevitable for a number of reasons. The biggest is growing caution, which is making consumers think twice about splashing out for expensive coffee. At the same time, a price war has been brewing for the last year at the bottom end of the market, which is probably drawing away many coffee drinkers from Starbucks’ pricier drinks.

U.S. Law Firm Splits from Hong Kong Partnership

The U.S. law firm of Mayer Brown has become the latest major Western services provider to divorce itself from its China partner amid broader concerns about data security. The Chicago-based firm, which has 1,800 lawyers worldwide, said it will continue to operate in Hong Kong through a local partnership that it purchased in 2008, but will now be spun off to operate separately.

The company, which has 170 lawyers in Hong Kong, Beijing and Shanghai, said the spinoff will allow it "to continue its presence in Hong Kong with a practice that aligns with our strategic priorities." Many Western firms in China previously worried about Chinese restrictions on cross-border data transfers, though those concerns have eased somewhat this year with a recent clarification.

Huawei Profit Surges

Huawei’s ongoing comeback continued last week with a new regulatory filing showing the company’s profit leapt more than sixfold in the first quarter to 19.65 billion yuan, or about $2.7 billion. The same filing to China's National Interbank Funding Center also showed the company’s revenue grew by a healthy 37% for the period to 178.5 billion yuan.

The report didn’t break down revenue or profits for the company’s various business units, which include everything from telecoms equipment to smartphones and smart car technology. One major contributor was probably the smartphone business, which has bounced back strongly after the company found ways to skirt U.S. sanctions to restart mass producing its popular models.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue Blinken in Beijing, a stock market surge and a Huawei comeback. On a scale of 1 to 100, we give the week a 70 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Blinken, Yellen Talk Up China Challenge

Two cabinet-level U.S. officials were talking about the China challenge last week, led by Secretary of State Antony Blinken, who mentioned the fight against fentanyl and discouraging China from supporting Russia’s war effort during his second post-Covid China trip. Meantime, Treasury Secretary Janet Yellen also commented on China in a Reuters interview.

Yellen, who was in China earlier this month, has become outspoken on China’s tendency to disrupt global markets like solar panels and EVs by building up too much capacity on the back of huge government support. Yellen told Reuters that nothing is “off the table” in terms of actions the U.S. might take to curb Beijing from engaging in the destructive pattern.

China’s Capital Markets in Winter

A story in the Financial Times was chock full of data points showing just how bad things have become in China’s financial markets in terms of trading, which directly reflects investor interest. Fundraising through share offerings was at an all-time low of $6.4 billion on China’s domestic markets so far this year, and similar fundraising in Hong Kong totaled $1.6 billion – a 21-year low.

Outbound Chinese M&A totaled $2.5 billion so far this year, the lowest since 2005. And a new report from Bain showed Chinese private equity investment dropped 37% last year to $41 billion yuan, the lowest level since 2013. One veteran analyst summed the situation up nicely, saying “It’s definitely the worst I’ve seen in my career.”

What Gloom? Stock Surge Lifts China Enterprise Index into Bull Territory

While last week wasn’t particularly gloomy, with no major new crises, it certainly wasn’t upbeat either. But that didn’t stop offshore-listed Chinese stocks from posting one of their strongest rallies in more than a year. The Hang Seng China Enterprises Index jumped 9.1% during the week, while the Hang Seng Index surged 8.8%. The iShares MSCI China ETF rose 7.5%.

There were a couple of positive signals in the market, including UBS’ rare upgrade of its rating for China stocks to “overweight”. Another report noted that China’s Central Huijin sovereign wealth fund pumped $45 billion into domestic stocks in the first quarter. The rally officially puts the China Enterprises Index in bull territory, up 25% from a January low.

Industry

China Carmakers Strut Their EVs at Auto Show

After being in the spotlight nonstop over price wars at home and Western accusations of getting unfair state support, Chinese EVs were in more benign headlines last week with the annual staging of China’s largest auto show in Beijing. Some 278 new energy vehicle models were on display, as China passed a milestone with NEVs making up more than half of all cars sold in early April.

But no week would be complete without at least some setback for Chinese automakers as well. Last week was no exception, with U.S. lawmakers introducing legislation to sanction Chinese carmakers that have provided support to Russia’s military. The suspicions stem from a recent surge in Chinese car exports to Russia, with the U.S. arguing some of those went to the military.

EU Investigates Chinese Medical Device Market

Chinese automakers weren’t the only ones under fire last week over accusations of doing things they shouldn’t. The medical device market was also under scrutiny after European firms accused China of denying them the same access enjoyed by domestic firms for the big public procurements of things like needles, scanners and other medical devices.

The European Commission launched a probe into the matter, not long after starting to examine whether Chinese EVs receive unfair state support. We can’t comment on the specifics of this latest case. But China is quite famous among foreigners for giving equal access to its markets in theory, and then setting up all kinds of bureaucratic obstacles that severely limit that access.

Huawei Completes Its Smartphone Comeback

In a story that has fascinated both Chinese and Western audiences, the once-downtrodden Huawei has officially completed its comeback in its home market after being nearly run out of the smartphone business by U.S. sanctions. New data shows Huawei tied with former sister company Honor for top spot in the Chinese market in the first quarter of this year.

Huawei accomplished the feat by doubling its shipments year-on-year, even as most other companies posted year-on-year declines, including Apple. While the comeback looks impressive, one thing the numbers don’t tell is how profitable Huawei’s smartphones are. That’s key, since it’s now using domestically made chips that are far more expensive to produce than imports.

Company

Clock Begins Ticking on TikTok

The biggest corporate news last week was U.S. President Joe Biden’s signing of a law that will force ByteDance to sell its U.S.-based TikTok operation within a year, or risk having the popular video app banned. The legislation was one of the few things that attracted support from both major U.S. parties, which isn’t too surprising considering that this is an election year.

The concerns may even be valid, since China is famous for treating its companies, both private and state-owned, as its personal property, feeling it has a right to any data or other information they may possess. ByteDance has said it will fight the new law in the courts and told media it would shut down TikTok in the U.S. before it would sell the popular service.

Bubble Tea Maker Chabaidao Fizzles in Hong Kong IPO

Bubble tea may be all the rage among Chinese youth right now, but the country’s oversupply of bubble tea makers is proving a turn-off to investors. That’s the key takeaway from the trading debut for Chabaidao, officially known as Sichuan Baicha Baidao Industrial Co., whose shares fell 27% on their first trading day last week and continued to sag after that.

Like many things in China, bubble tea’s popularity has led to a huge explosion of companies trying to cash in on the craze, resulting in huge competition. Many companies are now lining up to list in Hong Kong, including names like Mixue and Auntea Jenny, all operating thousands of stores. With such intense competition, it’s no wonder investors aren’t flocking to Chabaidao’s stock.

Ex-Bank of China Chairman Admits to Bribes

We try to limit our inclusion of new corruption cases in this space, since such cases have become quite common in the current environment. But the latest case against former Bank of China Chairman Liu Liange caught our attention, less for the amount of money involved, and more for the broader significance of the crackdown’s recent move into the financial sector.

Liu admitted to accepting more than 121 million yuan in bribes, which is large but not unheard of. His case is just the latest at China’s big banks, which is creating quite a bit of turbulence inside these institutions. That’s a big distraction in the current climate, as these banks really need to focus as much as possible on dealing with soaring bad debt as China’s economy slows.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue GDP booms, WhatsApp gets the boot and a liquor bubble pops. On a scale of 1 to 100, we give the week a 50 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

China Economy Off to Strong Start in 2024

The big economic news last week was China’s latest GDP, whose 5.3% growth in the first quarter was well ahead of market expectations for a 4.6% gain in a Reuters poll. But many remained cautious nonetheless, pointing out that the nation’s property market that was once one of China’s key growth drivers remains extremely weak.

Similarly, weak retail sales and inflation data hint that China will need to show several more quarters of strong GDP gains before anyone is convinced the economy is on more stable footing. On a more positive note, the stronger-than-expected figure led many analysts to raise their growth forecasts for China this year, and the country looks on track to meet its target of about 5% annual growth.

Yuan Takes Growing Share of Global Payments

China has long pushed for more settlement of international trade in its home currency, the yuan, and that campaign appears to be having some success. The latest data from the authoritative SWIFT organization shows 4.7% of international payments were conducted using the yuan in March, marking a record since SWIFT created a new baseline for tracking the situation last July.

The yuan overtook Japan’s yen to become the world’s fourth most-used currency for such global transactions last November. It still trails far behind the dollar and euro, but could soon pass the British pound for the number-three spot. Much of China’s gains are coming as Beijing pressures big state-owned enterprises to push their suppliers to make payments in yuan.

Anemic China Stock Rally Ends

In a classic case of “buy on the rumor, sell on the news,” offshore-listed China stocks sagged last week after the nation reported strong first-quarter GDP growth, ending a relatively anemic rally over the previous weeks. The Hang Seng China Enterprises Index fell 2.3% for the week, while the broader Hang Seng Index lost 3%. The U.S.-traded iShares MSCI China ETF rose 0.3%.

China stock buyers have been waiting several years now for a sustained rally that has failed to materialize. Last year began with a strong rally that quickly fizzled, and this year has also seen a much weaker rally dating back to late January. All eyes will be watching the markets next week to see if investors can return to their earlier bullish ways, or if the latest rally continues to fizzle.

Industry

Home Prices Log Biggest Losses in Nearly a Decade

While some in Beijing were likely toasting the better-than-expected first-quarter GDP, the mood was far more somber for the embattled property sector. New home prices in March fell 2.2% year-on-year, accelerating from a 1.4% decline in February and representing the biggest decline since August 2015, according to calculations by Reuters using government data.

China’s property sector has been hurting for the last two years, with prices in many markets now down by 20% or more from earlier peaks. The government is trying to sort out the mess by pushing big state-run banks to provide funding to restart construction on some of the many projects that have stalled. But the banks are pushing back, worried about piling up more bad loans.

Intel Launches Made-for-China AI Chips

First it was Nvidia, now Intel is preparing to launch two new AI-optimized chips designed just for China to avoid bumping up against U.S. export restrictions. Intel was quite low-key about its plans, which were included in a white paper posted on its website. The paper said the two chips, HL-328 and HL-388, would launch in June and September, respectively.

China has imposed a wide range of restrictions on content-related products for years, resulting in the rise of many products and services that you’ll only find in China and nowhere else, mostly offered by Chinese companies. This time, it’s restrictions by the U.S. aimed at hobbling China’s high-tech development that’s led to this creation of yet another “made for China” product.

China’s Baijiu Liquor Bubble Pops

Stocks for makers of traditional Chinese liquors, known locally as baijiu, have often defied all reason in terms of their high valuations, including the rise of industry leader Moutai to become the nation’s most valuable company. But recent price cuts to one of Moutai’s signature products may be taking some of the air out of that bubble.

China’s CSI Liquor Index was down nearly 6% last week from a high in early April, as shares of many companies fell on continual Moutai price cuts since the start of the year. Of course, everything is relative, and the latest price of 2,615 yuan per bottle still equals a hefty $360. Most other brands are far cheaper, though Moutai hardly seems worthy of being China’s most valuable company.

Company

Alibaba Tries, But Fails, to Sell Ele.me

Alibaba watchers have noticed a slow-motion unraveling lately of the company’s plan to spin off and separately list some or all of its six main businesses. Now, a new report from financial media Caixin quotes insiders saying the e-commerce giant was in talks to sell its Ele.me takeout delivery business to Bytedance earlier this year, but the two sides failed to reach an agreement.

Ele.me is one of Alibaba’s larger assets, though it’s not one of the six that was named for a separate spinoff in the company’s landmark breakup announcement last year. As the market for new Chinese IPOs remains weak, we can probably expect to see Alibaba try to negotiate more of this kind of sale of large but non-core major assets until market sentiment improves.

Chabaidao Set to Soak Up $330 Million with Hong Kong IPO

The consumer sector hasn’t been too active these days in terms of IPOs, as investors eschew the group over concerns about cautious Chinese consumer sentiment. But bubble tea chain Chabaidao seems confident that investors will lap up its listing plan, which kicked off last week with a $330 million fundraising target – the largest for Hong Kong this year.

We’ve written quite a bit about a sudden burst of bubble tea makers seeking to raise funds via Hong Kong IPOs, with at least five such applications filed since last October. We’ll need to wait and see what kind of reception this one gets but wouldn’t be surprised if Chabaidao ultimately has to scale back its fundraising target due to tepid investor reception.

Apple Pulls the Plug on WhatsApp, Threads

In a development involving some big names, but that’s also a slight head-scratcher, Meta’s popular Whatsapp instant messaging service, as well as its Threads app that’s part of Instagram, have both been removed from Apple’s China app store under government orders. We say this one is a head-scratcher because both apps are already blocked in China.

But that didn’t stop China’s cybersecurity authority from feeling the apps posed a potential national security threat, along with Telegram and Signal, which were also ordered removed. Just about all foreign social media and messaging apps have been blocked in China for years, so now their removal from app stores seems to reinforce the fact they aren’t welcome in China.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue a China downgrade, zooming car exports, and more hotels roll out the welcome mat for foreigners. On a scale of 1 to 100, we give the week a 45 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Weak Inflation, Producer Price Data Hint at Flagging Rebound

We’re getting a sense of déjà vu from the latest CPI and PPI data, which show a brief wave of optimism over improving indicators at the start of the year may have been premature. The consumer price index (CPI) rose an anemic 0.1% in March, down from a 0.7% rise in February that was the first gain for the deflation-prone indicator in six months.

Meantime, the producer price index (PPI) fell 2.8% in March, extending a stretch in negative territory dating back a year and a half. Before these two gloomy data points, people were getting excited by PMI data that seemed to show China’s economy was getting back on track. The whole thing looks a bit like last year, when a highly anticipated rebound at the start of the year quickly fizzled.

Fitch Downgrades China Outlook

The people at the Fitch ratings agency weren’t too upbeat on China either last week, officially downgrading their outlook on the country’s sovereign credit rating to “negative,” citing risks to public finances caused by economic uncertainty. Fitch’s move follows a similar downgrade by Moody’s in December. Not surprisingly, China said it “regretted” the decision.

Making this kind of sovereign downgrade is always hugely sensitive, and the bigger the country, the bigger the consequences for the ratings agency that takes such action. That means we can be almost certain that first Moody’s, and now Fitch, probably felt incredible pressure from Beijing not to take their action, and only did so to protect their credibility.

Markets Shrug Off Bad News

The weak indicators and Fitch downgrade didn’t faze investors too much, with offshore China stocks ending last week relatively unchanged. The Hang Seng China Enterprises Index ended up 0.3% for the week, while the iShares MSCI China ETF fell 1.7%. The broader Hang Seng Index was essentially unchanged.

The three indexes have been posting this kind of small movement for most of the last month, which feels a bit like a holding pattern. Some may still be hoping for a major stimulus like the one China did during the Global Financial Crisis of 2008. But in a piece we published last week, analysts at CCB International, an affiliate of one of China’s top banks, said such a “bazooka-style” plan is unlikely.

Industry

Cheap Hotels Roll Out Red Carpet for Foreigners

China’s recent attempts to bring back foreign tourists took a new step forward last week with reports that hotels rated three stars or higher have been ordered to accept payments using foreign credit cards. Major tourist attractions have also been ordered to accept such cards, and to accept cash as well, according to a joint statement from the central bank and culture ministry.

These latest orders come as China is also making huge efforts to help foreigners link their credit cards to accounts allowing them to make payments in China using WeChat and Alipay, which are used by the vast majority of Chinese to buy everything these days. Part of this drive is obviously economic, but China is also making growing efforts to stem its recent isolation on the world stage.

China Car Exports Soar, But Don’t Blame Overcapacity

The headlines kept flowing last week showing how China has suddenly become an EV powerhouse and is trying to export its wares as its home market slows, even as it denies foreign accusations that its industry receives unfair government support. Leading the headlines was news that China set another record for monthly vehicle exports in March, about a third of them NEVs.

Meantime, new data showed that domestic EV sales in China rose just 10.5% in March year-on-year, well below growth rates last year. And lest anyone think China has too much NEV capacity built on the back of strong state support that Western countries are labeling as unfair, its commerce minister denied that’s the case on a trip to Europe to fend off potential anti-dumping tariffs.

Guangzhou Plugs Residential Development Loophole

As development of new residential housing slows sharply due to big oversupply and lack of financing, the southern mega-city of Guangzhou is taking steps to close a loophole in the market. That latest move targets developers who previously used land earmarked for commercial development to build residential housing instead.

Frankly speaking, this particular move doesn’t seem all that necessary, since there’s probably plenty of land these days for anyone brave enough to develop anything in today’s anemic property market. Perhaps Guangzhou is simply taking the step to plug the loophole while resistance is likely to be minimal, as the city looks forward to better times whenever the market recovers.

Company

Ping An Subsidiary Delays Repayment

The growing volume of stories about investors losing their life savings due to dodgy investments promising big returns has been mostly limited to no-name and second-tier asset managers so far. But last week a unit of financial giant Ping An entered those ranks when its Ping An Trust failed to make scheduled payments on products backed by developer Zhenro Properties.

Ping An Trust said it’s suing Zhenro to recover money it’s owed, after it failed to repay a $100 million trust product on time. Normally speaking, this kind of company would probably ask its wealthy parent to bail it out in this type of situation. But Ping An is one of China’s more market-oriented companies, so perhaps it’s forcing the trust to handle its own finances.

Asset Manager Declares Severe Insolvency

A case of such no-name asset managers getting into trouble was in the headlines last week, as Shanghai HHSC Capital Management ceased operations after becoming “severely insolvent.” The company and its affiliates have failed to pay a whopping 30 billion yuan, or more than $4 billion, owed to buyers of their wealth management products since last August.

This kind of fraud has become increasingly common in China’s vibrant and freewheeling asset management industry, though the magnitude of this case looks larger than most. Reports on the matter say that many of the products were sold illegally, and that the company’s chairman mysteriously disappeared during a recent trip to Hong Kong.

SAIC Brings in Local Investors to India Venture

Leading Chinese automaker SAIC announced last week it is selling 51% of its India business to a local investor group led by JSW Group for $624 million. After the deal, SAIC’s stake in its MG Motor India venture will drop to 49%, while JSW will hold 35%. The remaining 16% will be held by other locally based Indian investors.

SAIC is saying the sale will allow it to recoup most of its investment, which sounds like it may be considering exiting the venture completely. It may also be trying to make the venture look more local as it tries to avoid potential conflicts like those plaguing a growing number of Chinese companies in India amid high tensions between the two countries.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue Xi and Biden talk, car loans get easier and a major EV listing restarts. On a scale of 1 to 100, we give the week a 65 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

China-U.S. Rapprochement Continues with Xi-Biden Call, Yellen Visit

Last week was a short one for traders due to the Easter and Qing Ming holidays, but government officials from both China and the U.S. weren’t taking any breaks. Leading the list of major new dialogues taking place was a phone call between presidents Xi Jinping and Joe Biden. That was followed by a trip to China later in the week by U.S. Treasury Secretary Janet Yellen.

The week also saw the first official meeting of a commercial issues working group set up by the two sides last year. Most of the discussions were described as frank and constructive, with both sides raising issues they consider important. The use of positive words like “constructive,” and the fact that meetings are happening at all at such high levels, should be viewed as generally positive.

Manufacturing, Services Post Solid March Performance

Back in China, other positive signs were emerging from both the manufacturing and services sector with the release of the latest Caixin purchasing managers index (PMI) figures for March. The Caixin manufacturing PMI stood at 50.8 for the month, marking its first month above the 50 level that connotes expansion after contracting for five straight months.

Meantime, the Caixin services PMI was also in expansion mode with a reading of 52.7, up from 52.5 in February. The numbers could point to a fledgling recovery in China’s economy. But after a post-pandemic rebound early last year quickly fizzled, many will want to see at least a few more months of positive data before declaring any recovery is underway.

Stocks Continue Long But Slow Upward March

Chinese stocks continued their upward ways in shortened trading for two holidays in Hong Kong last week, even as the U.S. was open all week. But the gains were hardly large. The Hang Seng China Enterprises rose 0.9% for the week, while the iShares MSCI China ETF finished up 0.6% and the broader Hang Seng Index rose by 1.1%.

The latest gains mean the China Enterprises Index is now up for the year and is actually up 17% from a low in late January. That means that if it can rise just a bit more it will officially enter bull territory that’s defined as a 20% rise. But most of the gains in recent weeks have been relatively small, indicating market sentiment may be improving but is still quite tentative.

Industry

Car Loans Get Easier

Car buyers got some good news last week when the central bank unveiled new rules that scrapped government-mandated minimum downpayments for new car loans. That means those buyers can now purchase cars completely on credit, which may come as welcome news to consumers who are becoming increasingly careful with their own money.

The new policy is part of an existing rule that was revised for the first time since 2018. The revisions also make it easier for people to trade in their used cars. The government has tried similar things with mortgages to stimulate the morbid home market, but with little effect. The same could be true for this policy since most consumers are shying away from buying big-ticket items these days.

Foreign Travelers Return

New data from two of China’s leading online travel agents shows foreign travelers are slowly but surely returning to the country. Bookings of inbound trips to China using leading travel agent Trip.com nearly tripled in the first three months of this year from year-ago levels, while hotel bookings by foreigners on Tongcheng were also up by 136% year to date.

From our position in Shanghai, we can say with relative certainty there are far more foreigners coming into China now than a year ago. Part of that may be due to China’s promotional efforts, including visa waivers for a growing number of countries. Then again, it’s not difficult to notch big gains when you’re coming off a base of nearly zero.

Non-Communist Party Officials Caught in Anti-Corruption Dragnet

We’ve written quite a bit about Xi Jinping’s decade-old anti-corruption campaign, which has netted thousands of people from the government and state-owned enterprises, the big majority of them Communist Party members. But in an interesting twist, a new media report says the dragnet has moved outside the Communist Party orbit with probes of officials from two smaller parties.

At first glance, the detention of senior officials from the Chinese Peasants and Workers Democratic Party and the Taiwan Democratic Self-Government League appears to hint that perhaps the corruption drive may be moving beyond the Communist Party. But these smaller parties are just window dressing designed by the Communist Party to make Chinese politics look more pluralistic.

Company

Syngenta Withdraws IPO Application

Agricultural company Syngenta is singing the blues after being forced to shelve its long-delayed plan for a massive Shanghai IPO to raise 65 billion yuan, or $9 billion. The company withdrew its application after failing to get clearance from China’s securities regulator, which is worried about the impact such a massive new offering would have on the weak stock market.

Syngenta is based in Switzerland but became Chinese-owned in 2017 when it was purchased by ChemChina in a mega-deal worth $43 billion. ChemChina has been hoping to separately list the company for several years now to raise funds to pay down some of the massive debt it took on to fund the purchase. But now it seems it will have to wait a bit longer.

Zeekr to Relaunch U.S. IPO Plan

While Syngenta and ChemChina were licking their wounds, another report said a separate major IPO plan by Zeekr, the new energy car maker owned by Geely, was moving ahead. Zeekr made its first public filing for the listing last November but hasn’t been heard from since then. But the company has quietly restarted the process and is already talking with some potential investors.

Previous reports said the company wanted to raise up to $1 billion, but the latest say that figure has been scaled back to $500 million due to weak market sentiment. Unlike the Syngenta deal, Zeekr is seeking to list in the U.S. where the securities regulator is more market-oriented. So, it won’t face the same kinds of pressure that delayed the Syngenta deal.

Investors Applaud Xiaomi’s EV Launch

While Zeekr’s fundraising targets were shrinking, smartphone maker Xiaomi got a much better reception from investors with the official launch of its own new electric vehicle, the SU7. The company’s stock shot up as much as 16% last Tuesday on strong publicity for the new vehicle, adding as much as $4 billion to Xiaomi’s market cap.

Xiaomi is quite late to the EV game, as is Zeekr. But both EV initiatives have very wealthy backers who can afford to plow lots of money into their latest forays in China’s crowded market. That could help both of these companies quickly catch their older rivals, drawing on their deeper pockets and also richer experience in product development and promotion.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue data relief for foreigners, Holland in the hot seat and a cloak-and-dagger poisoning case draws to a close. On a scale of 1 to 100, we give the week a 50 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

China Eases Up on Cross-Border Data Requirements

Most foreign businesses in China were breathing a big sigh of relief last week after the nation’s cybersecurity regulator posted a key update on rules they must follow for their cross-border data transfers. The update basically exempted the big majority of foreign firms from any restrictions, and said they won’t need to report on most data generated from their activities like international trade.

The original cross-border data transfer requirements were quite vague, and left many smaller foreign businesses worried they could be violating the law by simple things like sending customer information to their home offices. This clarification continues a recent trend of Beijing taking extra steps to try to convince foreigners it still welcomes their investment.

Industrial Profits Back on Growth Track

On the economic front, new data from Beijing showed that profits from industrial firms rose 10.2% for the months of January and February combined. Within that figure, profits at state-owned firms rose by the smallest 0.5% for the two-month period, while profits at foreign and China’s private sector firms rose by 31.2% and 12.7%, respectively.

The strong rise was a notable reversal from last year when industrial profits fell by 2.3%. The indicator is the latest providing some upside surprise for China’s industrial sector since the start of the year. The results were all the more impressive because they came off a relatively strong base at the start of 2023 when businesses posted strong gains as China ended its pandemic restrictions.

Markets in Easter Holding Pattern

Offshore-traded China stocks were in a holding pattern last week due to a shortened trading week for the Easter Holiday. The Hang Seng China Enterprises Index was the biggest mover of the three main gages we follow, gaining 0.9% for the week. The iShares MSCI China ETF was up by a smaller 0.5%, while the broader Hang Seng Index inched up 0.3%.

Despite the small moves, there was plenty of the news in the market as a flood of Hong Kong-listed companies released their 2023 full-year results before a March 31 deadline. But investors were probably looking forward to the long holiday weekend, and perhaps were also mildly upbeat on the latest signals from Beijing that China still welcomes foreign investment.

Industry

Chips in the Hot Seat on Dutch PM Visit

Dutch Prime Minister Mark Rutte’s visit to China last week normally wouldn’t be big news, but it took on far more importance this time due to the Netherlands’ status as home of the world’s most advanced microchip machinery maker. We’re talking about ASML, which has been banned by its government from selling its most advanced products to China.

Rutte probably got an earful from President Xi Jinping, which was reflected in remarks by China’s commerce minister saying he hoped the Netherlands would ensure “normal” trade in lithography machines. Rutte later sought to downplay the conflict, saying the Netherlands never targets specific countries with its trade restrictions and always tries to limit the impact.

China on EV Offensive in U.S., Defensive in Europe

China spent last week trying to protect its fledgling wave of electric vehicle exports (EV) from hitting the brakes in the West. On one front, Beijing officially complained to the WTO that U.S. government subsidies discriminate against Chinese EVs. Meantime, China’s commerce minister is set to travel to Europe to try to convince the EU that China doesn’t unfairly subsidize its EV industry.

The case against the U.S. could have some merit, since big subsidies announced by Washington last year do favor U.S. companies by going only to cars made in America. The EU case could be more problematic, since nothing China can say will halt the bloc’s probe into whether Chinese EVs now flooding into Europe are produced with unfair government support.

Comac Designing New Widebody Plane

Watch out, Boeing and Airbus. After launching its first large commercial jet last year, the narrowbody C919, state-run Comac is now working on another model to take on widebody planes like Boeing’s 787 and Airbus’ A330. The new model, the C929, is currently in the “detailed design stage” a Comac executive revealed at an event with local media in Shanghai last week.

Official confirmation of the new model comes after another company, Huarui Aero, which is building the fuselage of the new plane, said in February that it will be able to deliver the “middle section of the fuselage” in 2027. The new plane would be able to seat up to 400 people and have a range of about 12,000 kilometers.

Company

ByteDance Firmly Opposes TikTok Sale

Despite growing pressure to sell its TikTok operations in the U.S., the popular app’s owner, ByteDance, has no interest in selling. Several sources told financial media Caixin that ByteDance founder and major shareholder Zhang Yiming “steadfastly opposes” such a sale, implying he might prefer to be banned in the U.S. rather than sell the operation.

Zhang is in quite a difficult position and really may have no other choice but to see TikTok banned in the U.S. if legislation now in Congress is ultimately passed. That’s because there are very few companies that could afford to buy the U.S. operation. And even if ByteDance could find a buyer, Beijing would be almost certain to veto such a deal.

Alibaba Scraps Cainiao Listing Plan

First it was its cloud unit, and now e-commerce giant Alibaba has announced it is scrapping previously announced plans for a potential separate IPO for its Cainiao logistics unit. Instead, Alibaba will dip into its large cash pile and pay up to $3.75 billion to buy out other Cainiao investors who currently hold about 36% of the company.

The change of plans for Cainiao seems to represent the rapid unraveling of Alibaba’s landmark plan announced last year to break itself up into six separate companies, each responsible for its own profits and fundraising. Last fall, media also reported that plans to separately list Alibaba’s Freshippo supermarket chain were being put on hold due to weak market sentiment.

Cloak-and-Daggar Poisoning Case Ends with Death Sentence

Very few people have probably heard of game developer Yoozoo, but that could change if and when someone in Hollywood buys the rights to the bizarre story of the poisoning of its chairman by one of his employees. That case reached a conclusion last week with a death sentence for the poisoner, a 43-year-old man named Xu Yao.

This case dates back to 2020, and really does have all the elements of a Hollywood blockbuster. The story revolves around the Chinese sci-fi thriller “The Three-Body Problem,” which Yoozoo was developing into filmed products. Xu was involved in those projects, and poisoned Yoozoo Chairman Lin Qi after the two conflicted over the matter.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue banks get creative, a doctor gets probed, and Apple’s Tim Cook can’t get enough of China. On a scale of 1 to 100, we give the week a 50 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

China Further Extends Its Welcome Mat for Foreign Investors

China just can’t seem to get enough of foreigners, or at least their investment dollars. Last week saw two major headlines underscoring this ongoing theme, led by news of a new action plan with 24  measures to attract foreign investment to China. Later in the week, another report emerged saying President Xi Jinping would meet with foreign CEOs this week as well.

All of this is coming amid a rapid decline in foreign direct investment in the last few years, including a first-ever decline last year. Xi Jinping’s personal meeting with top U.S. business leaders like Apple CEO Tim Cook and Exxon Mobil's Darren Woods shows just how worried top officials are, as Xi rarely holds such meetings with non-heads of state.

Yuan Sinks to Four-Month Low

After falling to multi-year lows last year, only to rebound somewhat later, China’s currency, the yuan, has headed into another weakening cycle that saw it sink to a four-month low last week, at around 7.2 to the dollar. Even before the current declines, the currency was still far weaker than the psychologically important 7-to-the-dollar level where it has settled lately.

This particular story is somewhat technical, though it’s noteworthy that Chinese banks reportedly stepped in by selling dollars to ease pressure on the currency. Current levels would have been unthinkable just a couple of years ago when China’s economy was still looking relatively strong. But as the economy weakens, the yuan looks increasingly unlikely to strengthen beyond 7 anytime soon.

China Stocks Take a Breather

After a relatively strong rally to start the Lunar New Year, offshore-listed China stocks took a breather last week. In fact, the indexes we follow were ahead for most of the week through Thursday. But a big drop on Friday left the Hang Seng China Enterprises Index down 1.1% for the week. The Hang Seng Index fell by 1.3%, while the U.S.-traded iShares MSCI China ETF lost 1.3%.

China is taking a growing number of steps to try to support its main stock markets in Shanghai and Shenzhen, including newly announced rules to tighten controls over new listings. New data on loans to non-bank institutions released last week also suggests that lending for stock purchases was surging as borrowers used money to invest in the market.

Industry

Chinese Banks Get Creative

You have to hand it to Chinese banks for being creative. After often being criticized for their inability to accept anything other than property or other physical assets as loan collateral, some state lenders are experimenting with the use of data assets as collateral. A branch of China Construction Bank is leading the charge by making one such loan for 3.5 million yuan to an online auto platform.

The backstory is that new economy companies, many in the services sector, often have difficulty getting the money they need to operate and grow because state-run banks don’t know how to manage such risk. Beijing has repeatedly called on banks to lend more to such smaller startups that are major employers and innovators, but such calls often go unheeded.

Renowned Doctor Probed for Corruption

A well-known Beijing doctor and academic has been detained on suspicion of corruption, in what one state media called a “landmark case” in a relatively recent crackdown in the healthcare sector. This latest corruption probe is centered on Tian Wei, a former member of the Chinese Academy of Engineering and also former president of Beijing Jishuitan Hospital.

China’s graft-busters have been relatively systematic in their approach, targeting officials in government agencies and at big state-owned enterprises in more traditional sectors. Most recently, their focus is turning to the healthcare sector, where corruption is rampant as doctors supplement their income by taking bribes from drug and medical device makers.

Mainlanders Surge Into Hong Kong Property Market

Hong Kong is trying to perk up its ailing property market by eliminating additional stamp duties it previously imposed on foreign buyers when the market was overheated. That’s led to a rush of Mainlanders into the market, with Mainland Chinese buyers now accounting for 20% to 30% of all Hong Kong property purchases in the weeks since the policy change.

Mainlanders are probably flocking to Hong Kong as they face greater uncertainty on the Chinese Mainland, where property prices have been falling for most of the past year and don’t look set to bottom out anytime soon. Hong Kong is obviously much smaller, so perhaps this kind of policy tweak can prop up its equally ailing real estate market more easily.

Company

Ant Makes International Business More Independent

In what’s become a growing theme among Chinese companies with global operations, financial services giant Ant Group is reportedly getting set to grant more independence to its international business as part of a broader restructuring. Under the rejig, Ant International will become one of three of the company’s main business units that will be run independently with its own board.

Ant’s former parent, Alibaba, is in the process of conducting a similar breakup, which also includes the separation of its Alibaba International unit into a separate company with its own board and management. Ant’s own restructuring has been ongoing for much of the last three years after it scrapped its highly anticipated planned mega-IPO at the 11^th hour in 2020.

Apple’s Tim Cook Back in China

Tim Cook can’t seem to get enough of China. The Apple CEO was a regular visitor to China pre-pandemic and has resumed that tradition since the country lifted its Covid restrictions at the end of 2022. He got a celebrity welcome during his latest trip to the country last week where he attended the opening of the world’s second largest Apple store in Shanghai.

Cook’s trip was a bit longer than usual this time, as he was reportedly planning to stay on for a potential meeting of U.S. business executives with President Xi Jinping that could happen this week. Cook is no doubt concerned about Apple’s sinking position in the market, as it faces new competition from a resurging Huawei.

Tesla Boosts Model Y Prices

Rarely does a simple price increase for a single product attract too much attention. But Tesla’s decision to hike the price of its Model Y in China did just that last week, as people interpreted the move as showing a bloody price war that has gripped the nation’s auto sector for most of last year could finally be easing.

Tesla’s adjustment wasn’t all that big, with the price hike of 5,000 yuan, or around $700, set to take effect on April 1. At the same time, some extras like an insurance subsidy that Tesla was offering in China will also expire at the end of this month. Tesla is a leader in the market, so it’s quite possible that its smaller, money-losing rivals will welcome this move and make their own price hikes.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue spying cranes, a TikTok sale and a meaty IPO. On a scale of 1 to 100, we give the week a 60 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Bring on the Equipment Upgrades, Says Beijing

If infrastructure is nearest and dearest to Beijing’s heart, then manufacturing and industrial equipment are probably a close second. So it should come as little surprise that Beijing has called on businesses and consumers to upgrade their equipment, with the government’s newest stimulus directive going out to sectors including agriculture, transport, education and healthcare.

The State Council, which issued the call, wants those sectors to increase their equipment spending at least 25% by 2027, saying such efforts would get unspecified government support. This kind of spending is what Beijing loves best, as it involves huge amounts of money that ultimately go to the real economy and generally support the nation’s manufacturing sector.

U.S. Investigates Chinese Cranes

First it was Chinese telecoms equipment, then it was TikTok. Now the latest boogeyman threatening U.S. national security is Chinese-made cranes. At least that’s the suspicion of some U.S. House members, who are trying to determine the purpose of telecommunications equipment with no apparent purpose built into Chinese-made cranes at U.S. ports.

The cranes come from a company called ZPMC, which issued a vanilla statement saying it always complies with laws of countries where it operates. We’ll need to wait for any findings before passing judgment in this matter. But that said, any signs that the cranes are sending information back to China certainly won’t look good.

China Stocks Poised for Comeback?

After taking a breather two weeks ago, offshore-listed China stocks returned to their recent winning ways with more modest gains last week. The Hang Seng China Enterprises Index gained 2.9% for the week, while the iShares MSCI China ETF was up 2.8%. The broader Hang Seng Index rose 2.3%, and is now up about 9% from a recent low in mid-January.

More noteworthy, the Hang Seng Tech Index and the Mainland-based ChiNext both officially entered bull market territory last week, meaning they were trading 20% higher from their January lows. Tech stocks have taken some of the biggest beatings over the last two years, so it’s not surprising to see them bouncing back. Whether they can sustain the gains remains to be seen.

Industry

Chinese NEV Devotion Wavers

We previously wrote that some recent negative publicity around new energy vehicles could have a negative effect on consumer sentiment, and that already appears to be happening. A new survey by McKinsey on how car owners feel about their NEVs found that 22% wouldn’t buy an NEV again due to charging issues, up sharply from the 3% that answered that way in 2022.

The results reveal a large divide between NEV owners in smaller cities, 54% of whom said they wouldn’t consider an NEV again, versus just 10% who felt that way in larger cities. Infrastructure issues aside, the past winter has also been hard on NEVs after owners in some northern cities discovered their cars don’t work so well in very cold temperatures.

Nissan, Honda Cut Car Production

While NEVs are facing some challenges, they still command a huge part of China’s new car sales these days, as much as a third. That’s problematic for makers of traditional gas-powered cars, whose manufacturers are suddenly finding themselves with lots of idle capacity as their share of the overall Chinese car market rapidly shrivels.

In response to that, Japan’s Nissan is reportedly getting ready to reduce car production at its Chinese joint venture by up to 30%, while Honda is planning cuts of up to 20%. This report focuses on the Japanese automakers because it comes from Japan’s Nikkei Asia. But other auto majors like GM, Volkswagen and China’s own Geely are almost certainly weighing similar cuts.

No Joy for New Home Prices in February

February may have been a month of celebrations for Chinese families during the Lunar New Year, but there was no joy for the struggling property sector. New home prices continued their losing ways in the month by falling 0.3% from January levels, marking an eighth consecutive month of declines, according to data from the National Statistics Bureau.

China has begun taking a targeted approach to shoring up the property market by specifying who should receive priority funding, after numerous more general approaches failed to have much effect. Credit woes aside, consumer confidence is one of the biggest obstacles to a recovery right now, and that looks unlikely to change as long as prices keep falling.

Company

U.S. Passes Bill Forcing TikTok Sale

The vultures continued circling the popular but also increasingly endangered TikTok last week, as the U.S. House of Representatives voted to ban the short video sensation unless its Chinese parent, ByteDance, sells the app’s U.S. operation. The action was surprisingly swift and bipartisan, with both Republicans and Democrats supporting it over national security concerns.

From the House, the bill would still need to be passed in the U.S. Senate, which hasn’t indicated how it might act. President Biden has said he would sign it. Former President Trump tried to launch a similar effort during his time in the White House, though no one took it too seriously. But much has changed since then, and the rapid movement this time is also tied to election-year politics.

Bottled Water King Comes Under Fire

In a story that could only happen in China, the country’s leading bottled water maker has come under fire for something as simple as the color of its trademark red-and-green bottles. In this case, it’s the red color of the bottle caps that put Nongfu Spring in the spotlight, with nationalists saying the caps bear an uncanny resemblance to the Japanese flag’s Rising Sun.

We don’t usually comment too directly on this kind of thing, but here we have to say: Give me a break. Red is quite a common color on Chinese food packaging, and a trip to the supermarket would uncover many more Japanese sympathizers, based on that criteria. On a more serious note, this case seems to point to a recent uptick in such activity by online nationalists.

Vanke Gets Beijing Backing

We previously noted that Beijing is taking a more targeted approach to propping up the country’s ailing real estate sector. That tack is showing up in a new report saying the state-owned sector is being asked to support embattled developer Vanke. For one, the government is asking creditors to consider letting Vanke extend payments on its maturing debt.

This isn’t the first time Vanke has gotten into trouble, and previously its hometown Shenzhen government and the local subway authority came to the company’s aid. Beijing’s involvement seems to indicate two things: One, that the central government finally realizes a true crisis is happening, and; Two, that it is creating a “white list” of companies it feels are “too big to fail.”

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue GDP growth target unchanged, Apple sales plunge and a Belle returns to the Hong Kong ball. On a scale of 1 to 100, we give the week a 45 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Economic Growth Target Stays at 5%

Another “Two Sessions” has come and gone, this time without much of the usual pageantry. The highlight of this year’s meetings was the announcement of a 2024 GDP growth target of 5%, which is roughly the same as last year. But this time around, Premier Li Qiang admitted the goal could be tough in China’s current economic environment.

If anyone wanted to ask Li for more thoughts at the usual Two Sessions closing press conference, they were out of luck as it was cancelled, ending a 30-year tradition. Such attempts at western-style transparency seem to be falling out of vogue under China’s current leadership, which, admittedly, has more to worry about than looking open to a western audience.

Unexpected Strength for Exports

While meeting the 5% growth target this year might be a stretch, exports were doing their part to achieve that goal, at least in the first two months of 2024. China’s exports rose 7.1% year-on-year for the two-month period, easily topping a Reuters poll that had forecast a 1.9% rise. Imports also rose 3.5%, again topping expectations for a 1.5% jump.

Exports benefited from strong demand for electronics, including microchips, as well as a low base from the year-earlier period. Still, anything in positive territory is good for this important metric, which contracted for most of the second half of last year. The Chinese gain parallels similar strength for Korea and Taiwan, suggesting global trade is picking up after a period of weakness.

Stocks Stay Low-Key for a Second Week

The low-key mood in Beijing flowed over into offshore-listed Chinese stocks last week, which were largely unchanged for a second consecutive week. The Hang Seng China Enterprises Index ended down 1.3% for the week, similar to a 1.4% decline for the broader Hang Seng Index. On the other side of the Pacific, the iShares MSCI China ETF was down 1.7% for the week.

In a bit of stock market-related news from the Two Sessions, newly installed China Securities Regulatory Commission Chairman Wu Qing suggested he won’t be loosening up oversight of new listings anytime soon. That’s not surprising given the current weakness on China’s stock markets, and could produce a bumper crop of new applications for U.S. and Hong Kong IPOs.

Industry

EV Sales Slow, and Could Slow Even More in Europe

It’s only a little more than two months into the year, and already things are looking a bit rocky for China’s vibrant new energy vehicle (NEV) sector. Electric vehicle sales rose “just” 18.2% in January and February combined, which was down from 20.8% for all of 2023 and is quite a bit lower than the triple-digit gains seen at various points when the industry was driving ahead full throttle.

While the domestic market is slowing, Europe was picking up some of the slack with a huge surge in imports. But that may end soon, with reports that the EU started registering imported Chinese EVs last week and could retroactively impose anti-dumping tariffs on them if an ongoing probe determines those vehicles were produced using unfair state support.

Apple Sales Plunge on Huawei Revival

Over in the smartphone arena, Apple was licking its wounds as its China sales tumbled 24% in the first six weeks of the year, with a resurging Huawei taking some of that share by recording its own 64% gain. These figures probably don’t tell the whole story, since Huawei’s 64% gain is coming off quite a low base and thus doesn’t really make up for all of Apple’s losses.

The bigger story is that Chinese consumers are reining in their spending as the economy slows, and bigger-ticket items like smartphones are feeling more pressure than other cheaper categories like restaurant dining and clothing purchases. China’s broader smartphone market has been contracting for several years now, and that trend looks likely to continue into 2024.

China Extends Visa-Free Visitor Program

International tourism in China has been slow to recover post-pandemic, partly due to lack of flights but also because many foreigners simply aren’t as interested in the Middle Kingdom as they were when its economy was booming. China is hoping to lure some of them back by making trips easier, and is dropping visa requirements for a growing list of countries for short trips.

Last week it added another six countries to that list, namely Switzerland, Ireland, Hungary, Austria, Belgium and Luxembourg. Late last year, China announced similar visa-free travel for citizens of France, Germany, Italy, the Netherlands, Spain and Malaysia. While foreign tourists aren’t flooding back just yet, you do seem to see a few more foreign faces than before on the streets these days.

Company

New Congressional Push for TikTok Sale

Recent momentum for a second presidential term for Donald Trump is emboldening lawmakers to revive one of his earlier signature efforts as president, namely forcing a sale of the popular TikTok video app by its Chinese parent, ByteDance. In the latest move on that front, a bipartisan group of U.S. lawmakers last week introduced legislation that would force such a divestiture.

Getting TikTok to shed its China connection became a major cause for Trump, and talks were underway before being abandoned after Trump lost the 2020 election. Some U.S. senators tried to revive the campaign last year, but their proposal ultimately failed after TikTok mounted a strong lobbying campaign. Still, this does seem to be one rare area where both parties agree.

Alibaba Welcomes WeChat Users to Its DingTalk Meeting App

Alibaba and Tencent are China’s two biggest internet companies, and are also famous for their fierce rivalry. But Alibaba seems to be calling a truce of sorts, at least in one area, with word last week that it was making its DingTalk online meeting app increasingly accessible to users of Tencent’s hugely popular WeChat.

The move looks at least partly aimed at boosting DingTalk as Alibaba prepares to break itself up into its various major business units to operate independently. It could also reflect a nascent era of greater harmony between China’s internet majors, following a brutal crackdown on anti-competitive behavior that saw Alibaba fined $2.8 billion in 2021.

Morgan Stanley Cuts Staff at China Fund Unit

China’s anemic stock markets are hardly attracting too many investors these days, and Morgan Stanley has resigned itself to that by laying off about 9% of the staff at its China fund unit. The actual size of the layoffs wasn’t huge, with about 15 employees affected by the cuts at Morgan Stanley Investment Management China.

Morgan Stanley took full ownership of the company just last year with a buyout of its local partner. The unit is losing money, so these job cuts are at least partly aimed at reducing those losses. Still, demand for the unit’s asset management services is probably quite low at the moment, as it has to compete with far larger domestic rivals for a limited pool of business.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue China NEVs hit U.S. speed bump, a beverage legend passes on and coffee is king among China investors. On a scale of 1 to 100, we give the week a 50 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Foreign Firms Put New Investments on Hold

In the latest sign of China “de-risking,” a new survey by AmCham’s South China chapter found 40% of foreign firms surveyed said they weren’t planning to make additional investments in China over the next three years – the highest number on record. This particular data point comes after China reported that its foreign direct investment (FDI) reached a 30-year low in 2023.

A couple of factors are feeding this trend, led by the fear many companies felt after being barred from accessing their China operations for most of the pandemic due to the country’s strict Covid controls. Now, companies may also be having second thoughts about investing in China as the domestic market rapidly cools after three decades of breakneck growth.

Factory Activity Contracts – Again

Foreigners aren’t the only ones skittish about new China investment. The latest official manufacturing purchasing managers’ index (PMI) remained in contraction territory in February for a fifth straight month, dropping slightly to 49.1 in February from 49.2 in January. That’s on a scale where anything below 50 indicates contraction.

At least some of the weakness may have owed to seasonal factors, since many factories were closed for weeks in February for the Lunar New Year, which fell in January last year. The economy – and how to perk it up – is almost certain to be a major topic when the annual Two Sessions, which includes a meeting of China’s top legislature, opens later this week in Beijng.

China Stocks Take a Breather

Offshore-listed China stocks took a pause after starting the Year of the Dragon with a three-week roar that lifted the major indexes we follow around 10%. The Hang Seng China Enterprises Index lost 0.6% for the week, while the iShares MSCI China ETF fell 0.7%, and the broader Hang Seng Index was down 1%.

The early-year rally seems based mostly on hopes rather than anything substantial. It’s possible Beijing could announce some major new stimulus measures at the annual meeting of China’s legislature that kicks off this week. A major cue will come in the government’s GDP growth target for 2024, which will indicate how aggressively it might move to support the economy.

Industry

U.S. Turns Up Heat on Chinese NEVs

They haven’t even entered the U.S. in a serious way just yet, and already Chinese new energy vehicles (NEVs) are coming under assault. President Joe Biden disclosed last week that the U.S. has opened an investigation into whether imported Chinese NEVs could pose a national security risk due to their collection of large amounts of sensitive user data.

Many will say this is just an excuse by the U.S. to keep Chinese NEVs out of the market, protecting its domestic industry and avoiding a fate like what is happening in Europe right now. This particular campaign looks quite similar to the U.S. ban on Chinese telecoms equipment from Huawei and ZTE nearly a decade ago, which was also done in the name of national security.

E-Bikes Behind Deadly Nanjing Fire?

Speaking of NEVs, electric bikes were in the hot seat after a fire that began in a parking lot for electric bikes spread to a nearby building in Nanjing, killing 15 and injuring 44. While the cause hasn’t been announced just yet, e-bikes in China are famous for their low-quality lithium batteries that are often prone to catching fire, unlike electric car batteries that are far safer.

We spotlighted this incident last week in our own earnings story on NEV maker Li Auto because it’s the latest in a string of recent negative reports involving NEVs that could turn off local consumers. Other reports over the Lunar New Year holiday said some NEV owners became stranded on Hainan island due to strict limits to the number of NEVs that could board ferries due to fire hazards.

Alibaba Heats Up China Cloud

First it scrapped its plans to be spun off from Alibaba, and now the cloud unit of China’s largest e-commerce company has announced it will slash prices for some of its new products by up to 55% to garner more customers. These latest cuts come less than a year after the company made similar cuts, and are almost certain to pressure China’s large field of cloud service providers to follow suit.

Alibaba Cloud surprised many last year when it canceled its plans to be spun off as part of a breakup of the bigger Alibaba. The unit’s inability to import cutting-edge AI chips from the U.S. due to sanctions was given as a possible reason for the move. But this latest round of price cuts also seems to show Alibaba Cloud may not be ready to stand on its own just yet.

Company

Beverage Tycoon Passes On

We begin our company news with a tribute to beverage tycoon Zong Qinghou, who died last week at the age of 79. Zong was one of the first super-rich people in China’s Reform Era thanks to his Wahaha empire that became a household name for its drinks in the 1990s. The company also made major headlines when it joined with France’s Danone to form a joint venture.

But like Danone’s yogurt, that joint venture quickly soured after the French company discovered Zong had used its know-how to set up a parallel rival company. That kind of freewheeling still occurs in China’s business world today. But foreign companies have more options now, including the right to open wholly-owned ventures far more easily rather than working with local partners.

HiPhi Shifts Into Low Gear

Human Horizons Group, maker of the HiPhi brand of luxury new energy vehicles (NEV), has been in steady headlines these last two weeks, starting with word that it suspended production for six months on Feb. 18. Later reports said company founder Ding Lei was out pounding the pavement in search of a white knight to rescue his sinking company.

If it goes under, which seems quite possible, Human Horizons and HiPhi would become just the latest victims in a bloody consolidation in China’s NEV market, which also looks set to claim former highflyer WM Motor. Most have predicted that just four or five of China’s many NEV startups will remain standing when the dust settles, and it appears HiPhi won’t be one of those.

Country Garden Next to Liquidate?

Lest we go an entire week without any news from the embattled property sector, we’ll close our company section with news that a creditor of struggling Country Garden has petitioned a Hong Kong court to liquidate the company. In this case a unit of Kingboard Holdings made the request after Country Garden failed to repay a $205 million loan.

Equally embattled Evergrande fell victim to the same type of bankruptcy petitions from its creditors, and finally succumbed when a Hong Kong judge ordered it to liquidate in January. It’s quite possible that Country Garden could follow down the same path, though the process would take a while. And in the meantime, it’s also possible China could step in to try to help the company.

AND FROM THE PAGES OF BAMBOO WORKS

  In this week’s issue foreign investor flight, a major mortgage rate cut and a former drug highflyer disbands. On a scale of 1 to 100, we give the week a 55 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Foreign Investor Flight

Leading this week’s macro news is the latest annual data point that shows foreign direct investment (FDI) into China fell to a 30-year low last year, as foreign businesses and investors avoided the market. The news wasn’t completely terrible, as FDI showed signs of recovery in the fourth quarter after posting its first-ever contraction in the third quarter with an 11.8% decline.

For the year, China recorded $33 billion in net FDI, marking the weakest performance since 1993 when inflows totaled just $27.5 billion. The data is a direct result of growing foreign unease with heavy reliance on China as a manufacturing hub, as well as concerns about Chinese financial markets that have been some of the world’s worst performers these last two years.

China, India Look to Tone Down Border Tensions

On the geopolitical front, an interesting and potentially significant news item last week came from the Chinese and Indian defense ministries, which jointly said they have agreed to resolve their border issues “as soon as possible.” The two sides made their remarks after holding talks on the Chinese side of a meeting point at the Moldo-Chushul border.

The dispute on the China-India border goes back decades, and resulted in violent clashes in 2020 and 2022. So, both sides would probably like to prevent such clashes in the future. But so many other issues exist between China and India right now, including a desire by each to become Asia’s next leading power, that settlement of this border dispute won’t change much in their rivalry.

Stocks Keep Roaring to Start Off Year of the Dragon

Offshore Chinese stocks continued their roaring ways last week to start the Year of the Dragon, though, again, there wasn’t any major news behind the gains. The Hang Seng China Enterprises Index rose 3.6% and is now up about 10% over the last three weeks, while the iShares MSCI China ETF rose 2.9% last week, and the broader Hang Seng Index was up 2.4%.

Last week we took a closer look at the Year of the Dragon historically for Chinese stocks, and discovered it is typically a lucky one for Hong Kong, whose Hang Seng Index has recorded net gains in every Dragon Year since its inception in 1969. Will 2024 be the year that breaks the streak? Things are off to a good start, but the new lunar year is still quite young.

Industry

China Cuts Key Mortgage Rate by Record Amount

Two of last week’s top industry stories came from the embattled property sector, which has the potential to drag China’s entire economy down if it doesn’t stabilize soon. Leading the news was the central bank’s announcement of a 25-basis-point cut in a key mortgage reference rate, marking the largest-ever reduction under the current system launched in 2019. 

This rate-lowering is just the government’s latest step to try and encourage more people to buy homes. Unfortunately, most people are staying on the sidelines over worries that anything they buy now will only go down in value later. Tackling that perception will be key to restoring buyer confidence, though that’s much easier said than done.

Chinese Banks Approve ‘White Listed’ Property Loans

Also from the property sector was word that Chinese banks have approved $17.2 billion in loans for property developers under a new government program that looks quite innovative. “Project Whitelist” was launched last month, and allows local governments to recommend individual development projects to receive priority funding from state-run lenders.

This particular approach seems relatively innovative because it could help to restore confidence to a market where potential buyers often worry that homes still under construction may never actually get completed due to lack of funds. But a closer look at the list shows some new loans are actually just repackaged older ones, hinting that banks are still reluctant to sign onto this plan.

Comac Wins a New Order for Homegrown Jetliner

From real estate, we’ll jet down to Singapore, where global aviation giants were strutting their wares at one of the region’s biggest air shows last week in search of new customers. China’s own Comac scored a minor success at the show when the nation’s Tibet Airlines signed a deal to purchase 40 of Comac’s self-developed C919 jets, which it hopes can compete with Boeing’s 737.

Comac delivered its first C919 last year to China Eastern Airlines, and Chinese airlines have been quite supportive of the model, since most are state-owned and try to show their support for projects like the C919. Still, another year or two of solid performance for the model with no mishaps will probably be needed before any major foreign airlines might consider a purchase.

Company

EU Launches Anti-Dumping Probe Into China’s Top Train Maker

Leading our company news is word that the EU has launched an investigation to determine if a bid for business in Bulgaria by a unit of leading Chinese train maker CRRC included unfair state subsidies. The deal is a bit unusual as it involves a 610 million euro bid placed by Qingdao Sifang Locomotive, rather than any actual final deal.

The move follows a far higher-profile ongoing EU investigation that could ultimately result in anti-dumping penalties against Chinese EVs. All this seems to signal the EU intends to become more aggressive about imposing penalties for products from China that are often made with help from generous state subsidies for industries that Beijing wants to promote.

JD.com Eyes Europe

From homemade jetliners, we’ll move to something China is far better at: E-commerce. Despite that however, Chinese e-commerce giant JD.com has been notably disappointing outside its home China market, even as others like PDD’s Temu and Shein perform much better. JD may be hoping to change that as it reportedly has entered talks to buy British electronics retailer Currys plc.

JD disclosed the talks in a regulatory filing, though it cautioned they are at a very early stage. It made the comment after Currys said it rejected an offer from another suitor. Some are saying such a purchase could provide JD.com an entry to Europe, though Currys’ focus as a brick-and-mortar electronics retailer makes it seem like a less-than-ideal fit.

BoCom Takes $3 Billion Bite Out of HSBC

And finally, we’ll move to the banking realm, where British giant HSBC has said it will take a whopping $3 billion charge related to its investment in China’s Bank of Communications, known locally as BoCom. The charge was related to HSBC’s 19% stake in BoCom, whose Hong Kong-listed stock is down about 20% from a peak five years ago.

HSBC has historically been one of the most bullish foreign banks on China, and has used its relationship with BoCom to try to advance its own business in the country. But China is quickly turning into an albatross for HSBC, which took a similar-sized provision last year related to expected losses on its exposure to China’s sagging property market.

AND FROM THE PAGES OF BAMBOO WORKS

 In this week’s issue bank lending sags, the holiday box office roars, and Huawei gets an unwanted call in France. On a scale of 1 to 100, we give the last two weeks a 60 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Bank Loan Growth Hits Record Low

The government has released very little economic data these past two weeks, partly due to the weeklong Lunar New Year holiday that just ended, but also due to a tradition that says no bad news is allowed during this festive period. But one piece of data that squeaked through showed that bank loan growth fell to just 10.4% in January.

The expansion marked the smallest increase since the central bank began releasing data in 2003, and shows that new lending is still anemic despite repeated government calls for banks to extend more credit. The problem, of course, is that banks like their money, and don’t really want to lend it to the many struggling borrowers out there who might never repay their debts.

MSCI Boots Chinese Companies, Gives More Weight to India

Meantime, an interesting indicator of the times came from outside China, in this case in the latest adjustments to the MSCI Global Standard index that tracks emerging-market stocks. The latest adjustment saw China’s weighting in the index drop to 25.4% from 26.6% a year earlier. India picked up most of that slack as its weighting in the index rose to an all-time high of 18.2%.

The closing of the gap between India and China has happened relatively quickly, as the latter’s weighting was five times the former’s as recently as August 2020. MSCI also booted 66 companies from its MSCI China Index in its latest quarterly review, including developers Gemdale and Greentown China, as well as China Southern Airlines and Ping An Healthcare.

No Stimulus is Good Stimulus for China Stocks

When it comes to boosting offshore-listed Chinese stocks, it seems no news is better than the steady stream of new stimulus measures China likes to keep announcing. The Hang Seng China Enterprises Index started the Year of the Dragon with a 6.5% rise over the last two weeks, while the iShares MSCI China ETF and Hang Seng Index rose 7.6% and 5.2%, respectively.

That’s not to say that Beijing has been completely mum on the markets. Reports that President Xi Jinping was set to be briefed on the stock market situation sparked a big rally just before the holiday, and the sacking of the head of the securities regulator around the same time added to hopes that Beijing would do more to support embattled stocks.

Industry

Box Office Roars Over Lunar New Year

We’ll start our industry news roundup with the requisite look at data from the Lunar New Year holiday period, in this case zooming in on China’s beleaguered box office. The Year of the Dragon has breathed some new life into Chinese cinemas, which recorded more than 7 billion yuan, or nearly $1 billion, in ticket sales in the first five days of the holiday period.

By comparison, the China box office took in just 5.8 billion yuan for the entire seven-day holiday period in 2019, the last year before the pandemic. The strong performance parallels other data that show Chinese traveled in record numbers during the latest holiday period, which has really been the first normal Lunar New Year for many since the pandemic.

Car Sales Contract Month-on-Month in January

While festive holiday activity boomed last week, the same wasn’t true for China’s car sales, which returned to their contracting ways in January. The latest industry data showed Chinese car dealers sold 2.04 million passenger vehicles last month, down 13.9% from December. NEV sales fell by an even sharper 29.5% over the same period, as both figures dropped for the first time since August.

Despite the month-on-month declines, passenger car sales actually rose 57.4% year-on-year in January, while NEV sales more than doubled. But much of that was due to timing, since the slow Lunar New Year holiday fell in January last year, but was in February this year. We’ll probably need to wait for data combining January and February sales to get a better picture of what’s happening.

Banks Step Up Lending to ‘White-Listed’ Properties

In an interesting development for the struggling property sector, banks have begun lending aggressively to unfinished real estate projects that have been handpicked by local authorities for priority to receive such funds. Chinese banks extended 17.9 billion yuan in loans to 83 such projects, according to a recent CCTV report, which didn’t give a timeframe.

Those 83 projects are among 3,218 that local authorities have recommended to receive such funds, the report said. This approach looks like it could actually have some impact due to its very targeted nature. But it could also provide new headaches, since such recommendations seem to include an implied government guarantee to help recoup any loans that aren’t repaid.

Company

Anti-China Legislator Goes After Shein IPO

While U.S.-China tensions were largely out of the spotlight during the holiday, they did make an appearance in the latest political ploy from Marco Rubio, an outspoken U.S. senator who is a notable China hawk. Rubio urged the U.S securities regulator to block a planned IPO by Shein unless the fast fashion sensation is more forthcoming about its China risk.

Rubio made his concerns known in a letter to Gary Gensler, chairman of the Securities and Exchange Commission, saying Shein’s seeking of permission for the listing from Beijing shows it is not being forthcoming in confidential IPO documents it has reportedly already filed. Shein is officially based in Singapore, but still sources most of its clothing from a vast China network.

Huawei Gets Unwanted Call in France

Huawei is coming under the microscope again, this time at its French operations. The telecoms giant said its offices in France were searched by local authorities as part of a preliminary investigation into potential financial wrongdoing. Authorities confirmed the action, but didn’t provide more details into what they were investigating.

Huawei said it is cooperating with the investigation, and noted that it has been compliant with all French laws during its 20 years in the country. A number of Chinese smartphone makers have come under the investigation for tax evasion in India lately, but such financial probes have been relatively rare so far in Western countries.

BYD Heads for Mexico

In a move that many might have predicted, leading new energy vehicle (NEV) maker BYD is heading for south of the U.S. border, with plans to set up a production facility in Mexico. The company has already launched a feasibility study, and is currently negotiating terms that would include the facility’s actual location, a representative told Japan’s Nikkei news agency.

This particular news comes as Mexico officially overtook China to become the largest U.S. trading partner last year, reflecting recent moves by many U.S. companies to lower their reliance on China. With its relatively low labor costs and close U.S. proximity, Mexico is quickly emerging as one of the biggest winners in the ongoing wave of U.S.-China “de-risking.”

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue China’s crushing debt, green energy overtakes coal and Evergrande ordered to liquidate. On a scale of 1 to 100, we give the week a 40 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Provinces Get Set for Slower Growth

In an acknowledgement that China’s economy is slowing, many provinces are lowering their growth targets for 2024. Of the 27 provinces, regions and municipalities that had given out forecasts as of last Friday, only five set their economic growth targets higher this year than for 2023. Many have become more conservative since missing recent goals.

This widespread lowering of expectations looks quite significant, as it may indicate someone at the top is telling the provinces “It’s ok not to grow so quickly all the time.” In the past, provinces were always under huge pressure to set and meet big growth targets each year, doing their part to help Beijing reach its often-ambitious GDP growth goals for the entire country.

Local Governments Crushed by Debt

New full-year data is showing just how heavy China’s debt burden is becoming, falling especially hard on local governments. One data point shows the country’s debt-to-GDP ratio rose to a record 288% last year, 13.5 percentage points higher than in 2022. Another shows local governments paid a record $174 billion in interest on their bonds for the year, which excludes off-book borrowing.

Both figures show not only how China is trying to spend its way out of its economic slowdown using more debt, but also how that debt is slowly crushing local governments as their traditional funding from land sales dries up. This kind of growing debt would be unsustainable in the West, though Japan has shown it can continue for quite a long time in certain Asian countries.

Factory Indicators Paint Mixed Picture for January

Widely watched manufacturing indicators painted a mixed picture in January, with one showing growth and the other contraction. On the growth side, the Caixin PMI for the month came in at 50.8, unchanged from December. But the official PMI stood at 49.2, improving from December but still below the 50 threshold that’s the dividing line between expansion and contraction.

The dichotomy seems to show the private sector is faring better in the current economic slowdown than China’s massive state-run sector, since the Caixin PMI is concentrated among companies from the former while the official PMI focuses on the latter. Exports were a key bright spot in the reports, so it’s quite possible that private sector companies benefited from their strength in that area.

China Stocks Return to Losing Ways

After a brief “dead cat rally” last week on eternal hopes for strong government action to boost the economy, offshore-listed Chinese stocks returned to their losing ways last week in the absence of any positive news. The Hang Seng China Enterprises Index fell 2.6% for the week, while the iShares MSCI China ETF and broader Hang Seng Index fell 5.6% and 2.6%, respectively.

Last week, Vice Premier He Lifeng added his voice to the growing chorus of people calling for greater action to support China’s wilting stock markets. The country has already taken a number of steps, such as encouraging major organizations not to write negative reports about China’s economy and banning some short selling. But none seem to be having much effect.

Industry

Tale of Two Airline Types

China’s vibrant stable of state-owned and private airlines are turning in their preliminary financial reports for last year, and the former group are mostly reporting big losses while many in the latter are showing profits. China Eastern was the worst of the big three state-run carriers, saying it expects to report a loss of up to 8.3 billion yuan for the year, or around $1.2 billion.

By comparison, private carriers Spring Airlines, Hainan Airlines and Juneyao Air all said they will report profits for the year. 2023 was a year of “revenge travel” as China lifted most of its Covid restrictions, so the return to profitability for the private carriers isn’t surprising. The state carriers’ losses probably reflect weak international business, and also their bloated cost structures.

Wind and Solar Power Past Coal

In what’s sure to be a major milestone, China’s total installed capacity for wind and solar power combined is expected to officially pass coal-fired power this year. The China Electricity Council is saying wind and solar will contribute around 1,300 GW to the nation’s grid by the end of this year, or about 40% of the total. By comparison, coal power is expected to fall to 37% of the total.

The 1,300 GW is already ahead of the official target China had set for 1,200 GW of wind and solar power by 2030. The rapid buildup is the result of a massive building frenzy by big state-owned companies rushing to help Beijing meet its clean energy targets. But it’s unclear how economical all this new capacity is, especially since most state subsidies for such power have now ended.

Three Injured at Space Startup

Much is written about private efforts to explore space in the West, especially the U.S. But China has also embarked on its own private race to space, though it’s always a bit fuzzy how private this domestic group of startups really is. In a major headline from that space, three employees from a company called LandSpace Technology were injured last week during a test firing.

Many were speculating that a major accident had taken place after hearing a loud boom from the company’s facility in suburban Shanghai. LandSpace played down the severity, saying the three people sustained only minor injuries. In fact, such mishaps would be quite common in the U.S. But in the secretive Chinese industry, they are seen more as an embarrassment and rarely publicized.

Company

Evergrande Ordered to Liquidate

The biggest corporate news last week, and one of the world’s top business headlines, came from a Hong Kong judge who ordered embattled developer Evergrande to liquidate after the company failed to reach a debt restructuring agreement with its foreign bondholders. The news was largely expected, and many doubt that such a restructuring can happen without help from Beijing.

Evergrande is typical of China’s many developers that racked up huge amounts of debt by borrowing from investors and banks both inside and outside China. The case heard in Hong Kong involves mostly foreign bondholders. But since most of Evergrande’s assets are on the Chinese Mainland, the Hong Kong judge has little or no authority to order that those assets be sold.

U.S. Lawmakers Set Sights on WuXi Family of Biotech Stars

Shares of two of China’s hottest biotech stars, WuXi AppTec and WuXi Biologics, both cratered last week, after U.S. federal lawmakers introduced legislation barring the pair from accessing federal contracts. The two WuXi firms weren’t specifically singled out, but were part of a larger group of companies that the lawmakers believe is tied to the CCP and could pose a national security risk.

Truth be told, this kind of exclusion from federal contracts seems rather inconsequential since neither of the companies probably does much, if any, work for the federal government. The case was quite different two years ago, when WuXi Biologics was added to a U.S. blacklist that could have cut off its access to its U.S. suppliers. But it was later removed from that list.

Tesla Moves Some Equipment from China to U.S.

In a move with highly symbolic overtones, EV giant Tesla will reportedly expand its battery facility in Sparks, Nevada, using idle battery-making equipment it obtained from one of its largest battery suppliers, China’s CATL. The reports are quite short on details, but they strongly imply that Tesla is moving some battery-making capability from China to the U.S.

This kind of move is widely expected, and, in fact, companies often try to locate facilities for manufacturing big bulky parts like batteries close to where those parts will actually be used. Still, this kind of action does seem to show that more such manufacturing will move out of China for key components like the batteries that are likely to power most cars in the future.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue provincial economic realism, a new reserve rate cut and vanishing game regulations. On a scale of 1 to 100, we give the week a 50 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Provinces Get Set for Slower Growth

In an acknowledgement that China’s economy is slowing, many provinces are lowering their growth targets for 2024. Of the 27 provinces, regions and municipalities that had given out forecasts as of last Friday, only five set their economic growth targets higher this year than for 2023. Many have become more conservative since missing recent goals.

This widespread lowering of expectations looks quite significant, as it may indicate someone at the top is telling the provinces “It’s ok not to grow so quickly all the time.” In the past, provinces were always under huge pressure to set and meet big growth targets each year, doing their part to help Beijing reach its often-ambitious GDP growth goals for the entire country.

Another Reserve Rate Cut

China has announced yet another cut to its reserve requirement ratio for banks, with the latest 50 basis-point cut set to take effect on Feb. 5. Central bank Governor Pan Gongsheng heralded the cut as the latest move to unleash a flood of new funds into China’s sputtering economy, saying it would release an additional 1 trillion yuan, or about $140 billion.

Reserve requirement ratio cuts are relatively unique to China, as most countries see these rates as non-negotiable benchmarks for banks to maintain their financial health. Thus, the steady lowering of rates these days seems to show that Beijing is currently more concerned about the economy than keeping its banking system in tip-top shape.

Markets Do a Dead-Cat Dance

There really wasn’t much reason for the rally by offshore China stocks last week, which is what’s leading us to call the brief uptick a “dead cat China dance.” The Hang Seng China Enterprises Index rose 4.5% for the week, while the iShares MSCI China ETF rose 3.1% and the broader Hang Seng Index gained 4%, finally halting an otherwise miserable start to the year.

In a development with big symbolic overtones, India overtook Hong Kong last week to become the world’s fourth largest stock market. Of course, this isn’t really an apples-to-apples comparison, as Hong Kong has a huge foreign investor element that India lacks. But nonetheless, it shows how India is rapidly taking China’s place as the latest investor flavor-of-the-day.

Industry

Beijing Eases Up on Developers

Sometimes we feel a bit redundant recounting all the latest steps that Beijing is taking to try to prop up the sagging property market. None seems to have much effect, but perhaps things will be different for the latest step that has banks being told to slightly ease up their lending to developers.

Under the latest policy, developers can now use their commercial properties as collateral to take out new loans, according to a new announcement from the central bank and financial regulator. This move looks a little different from previous ones, since many developers have plenty of properties to pledge as collateral for new loans. Now the banks just need to play ball.

Now You See It, Now You Don’t

In a development that seems “Oh so Chinese,” a set of draft gaming regulations, which rocked the sector several weeks ago by sparking worries about a new crackdown, has magically vanished. Someone at Hollywood should really make a film about this kind of thing, as it would make great fodder for a tale of behind-the-scenes intrigue.

There’s not really much else to say about this, since the only news is the disappearance of proposed rules from the regulator’s website that were aimed at curbing spending and rewards to encourage gaming. Gaming stocks nosedived after the document was discovered, and a top official at the ministry also reportedly lost his job not long afterwards.

Huawei Eats Apple’s Lunch

The latest signs of a resurgence by hobbled smartphone maker Huawei were on display in new data last week, which showed its shipments in China soared by 36.2% in last year’s fourth quarter, lifting its share of the market by more than 3 percentage points to 13.9%. At the same time, Apple’s smartphone shipments in China fell by 2.1%.

While Huawei clearly outperformed the overall market, which grew 1.2% in the final quarter of last year, Apple did just the opposite. Huawei has gotten a sort of “high-five” from supportive consumers in its home market for finding ways to skirt U.S. sanctions that cut off its access to 5G chips, though it’s not really clear if Huawei’s latest phones are actually profitable.

Company

Sinking Shein?

All eyes these days are on fast fashion sensation Shein, whose plans for a U.S. IPO hit a recent speed bump when China’s cyber regulator opened a probe into the company’s data handling practices. Now, media are reporting that shares of Shein were selling for 30% less than the company’s valuation just a month ago in recent private market transactions.

The sales may not reflect true market value, since this kind of private market transaction is almost certainly coming from one or two parties looking to quickly raise some cash through a share sale. Still, it does seem to reflect the kinds of pressure Shein’s stock will come under as China, and possibly the U.S., throw obstacles into the path of its planned New York listing.

Kaisa Calls It Quits in Soccer

Kaisa Group, one of China’s many struggling real estate developers, has decided to call “game over” in its role as soccer club owner. The company’s Shenzhen Football Club was officially forced out of the Chinese Football Association and has been disbanded after its cash-strapped owner said the team’s debts had become unsustainable.

Kaisa is just one of a growing number of Chinese soccer club owners who are calling it quits after running into their own financial difficulties. Such club ownership has been highly lucrative in the West, but it’s been most a money-losing vanity play in China due to lack of popularity for most of the country’s domestic sports leagues that are often seen as rife with corruption.

Nokia Sells China JV Stake, Settles with Oppo

You don’t see Nokia’s name in too many headlines these days, even though the company remains a top global seller of telecoms equipment. But the former cellphone giant’s name popped up not just in one, but in two, China headlines last week, led by its settlement of a long-running patent lawsuit with China’s own Oppo.

In the other headline, Nokia finally managed to find a buyer for its stake in a joint venture with Huawei. It’s not too surprising Nokia wanted out, since the two partners are fierce rivals on the global stage since Nokia abandoned its cellphone aspirations and went on a buying spree that transformed it into one of the world’s top telecoms equipment sellers.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue a Premier premieres in Davos, more property pain and the U.S. talks tough on export controls. On a scale of 1 to 100, we give the week a 35 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Premier Li Qiang premieres in Davos

Last week all eyes were on Davos, Switzerland, where Li Qiang made the first address by a top Chinese official at the World Economic Forum since the pandemic. It was Li’s first time at the event since becoming premier last year. Headlining his remarks were his disclosure that China’s economy grew 5.2% last year, which was broadly in line with Beijing’s target and market expectations.

Li also hobnobed with a number of banking big-wigs, including JPMorgan chief Jamie Dimon and the CEOs of Bank of America and Blackstone. Chinese central bank governor Pan Gongsheng also attended, suggesting that China may soon be looking to some of the world’s top financial leaders and institutions for advice on how to bolster its stumbling economy.

China’s Incredible Shrinking Population

In what comes as little surprise, the other big macro news last week was new government data showing China’s population shrank for a second consecutive year in 2023. The decline was still relatively small, with the population dropping by 2.08 million to bring the total to 1.41 billion. China lost its crown as the world’s most populous country to India last year.

China’s birth rate also fell to 6.39 births per 1,000 people, a new record low since the founding of the PRC in 1949. The falling birth rates are a combination of too much success from China’s earlier “one child policy” that has now been scrapped, and public concerns about the high costs of raising children. Beijing has tried to encourage people to have more children, but with little success.

China Stock Freefall Accelerates

The freefall for offshore-listed China stocks in the New Year accelerated last week on growing concerns over the Chinese economy, sending our indexes to levels not seen since the global financial crisis of 2008. The Hang Seng China Enterprises Index lost 6.5% for the week, while the iShares MSCI China ETF fell 4.5% and the broader Hang Seng Index shed 5.8%.

Year to date, the Hang Seng China Enterprises Index is down about 12%, marking an ominous start to 2024. Much of the selloff is being fueled by foreign fund managers spooked by all the negative headlines coming out of China. The Hang Seng Index now trades at a paltry price-to-earnings (P/E) ratio of just 7, its lowest in at least a decade and a third of the 22 for the S&P 500.

Industry

Property Pain All Around

The latest data is showing just how bad China’s property market became last year after years of breakneck growth. New home prices in December fell by their steepest rate in eight years, while sales based on floor area fell 23%. New investment in property development for December fell at the sharpest rate since 2020, with overall property investment down 9.6% for the year.

Real estate accounts for about a quarter of China’s economy, and many other individuals and companies are exposed through property-related investments. Many observers believe the government downplays the magnitude of the slump and doesn’t allow publication of figures that show how bad it is. Our sources say prices are down anywhere from 20% to 50% from their peaks.

U.S. Talks Tough on Export Control Cheaters

U.S. attempts to stifle China’s chip sector have faded from the headlines these past few weeks, as Washington focuses on implementing and refining the many restrictions it has rolled out to block the most cutting-edge technology from entering China. Now, U.S. officials are starting to talk tough, saying they will crack down on anyone who tries to skirt the restrictions.

"There are going to have to be some penalties that get everyone's attention," said Matthew Axelrod, a secretary of export control at the U.S. Commerce Department, speaking at an event in New York. That probably means we can expect to see some eye-catching fines starting later in the year ahead, perhaps in the tens or even hundreds of millions of dollars, to discourage cheating.

China Embraces More Genetically Modified Crops

Beijing is slowly learning to embrace genetically modified crops, which typically have higher yields and are more disease resistant, despite questions about their safety due to their newness. In the latest embrace of such crops, China last week approved the importation of some additional forms of genetically modified soybeans and corn.

It also expanded the areas where such crops can be planted within China. This doesn’t come as a huge surprise, as stories are repeatedly popping up about farmers growing such GMO crops already illegally. What’s more, the GMO industry now has a strong lobbying voice in Beijing, following the landmark 2017 purchase of global seed giant Syngenta by a Chinese buyer.

Company

Shein Discovers It’s Still Chinese

China could soon throw a major wrench into what was shaping up to become one of the world’s biggest IPOs of 2024, with a report that the nation’s cybersecurity regulator has opened a probe into online fast fashion sensation Shein. The Wall Street Journal reported the Cyberspace Administration of China is looking into Shein’s practices for handling and sharing data.

Media reports late last year said that Shein has already made confidential filings for a U.S. IPO that would value the company at up to $90 billion. The company previously relocated its headquarters from China to Singapore to lower its exposure to Chinese regulation. But its huge base of operations in China means Beijing can still exercise significant control over the company.

Huawei EV Faces Delivery Delays

Huawei’s drive into EVs has hit one of its first speed bumps, as buyers of one of its first models co-developed with car maker Chery are learning they won’t get their deliveries on time. The news is coming from disgruntled buyers of the Luxeed S7, which is the first model under Huawei’s Smart Selection business model.

In fact, Huawei is working with a number of other car makers, and some are speculating the Luxeed delay may owe to Huawei’s decision to focus more on another tie-up for an SUV it is helping to produce with another company that has gotten more positive publicity. We wouldn’t read too much into the delay, as such hiccups are quite common for new products.

Country Garden Pledges Big Home Deliveries, Nears Australia Exit

The latest headlines from embattled property developer Country Garden show the company is desperately trying to complete its many domestic projects in progress, and may be selling down its overseas operations to raise cash to do that. The company announced at its annual meeting that it aims to deliver 480,000 homes this year, down from the 600,000 last year.

While the number of homes being delivered is down year-on-year, we have to commend the company for being able to keep delivering any homes at all as it struggles with a debt crisis. In a bid to raise cash to fund its core China operations, another report says the company has been selling its interest in a number of Australian projects, as it winds down its operations down under.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue exports rebound, deflation rolls on and car exports zoom. On a scale of 1 to 100, we give the week a 45 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

China-U.S. Ties in Focus Ahead of Taiwan Election

China-U.S. ties were front and center in a number of headlines last week, ahead of Taiwan’s presidential election that took place over the weekend and always puts strains on China’s ties with the West. One headline saw the U.S. and China wrap up two days of military talks that have only recently resumed, while another saw senior security officials from both sides meet virtually.

One of the most striking headlines came from the very top, with President Xi Jinping sending a somewhat nostalgic letter to an old friend in Iowa saying “the future and destiny of this planet require Sino-U.S. relations to be more stable, to be better.” The flurry of activity seems to continue a recent thaw in U.S.-China ties as the two sides look for ways to peacefully co-exist.

Exports Rebound, But Deflation Continues

The latest economic data were quite the mixed bag, headlined by a continuing rebound in exports but continued deflation. China’s exports rose 2.3% in December, marking a second consecutive month of growth after a slight gain in November. Imports also rose by a small 0.2%. Both figures spent much of last year in contraction territory, so the increases were a welcome end to the year.

But signals weren’t nearly as positive for the consumer price index, which fell for a third straight months with a 0.3% drop. The producer price index, which reflects prices for manufacturers, fell by a larger 2.7%, and has now been contracting for more than a year. The overall picture still looks quite bleak, reflecting weak sentiment among Chinese consumers worried about the future.

China Stocks Retreat from Santa Claus Rally

Offshore Chinese stocks continued to sag last week, wiping out nearly all their gains from a surprising – and largely groundless – Santa Claus rally in the final week of 2023. The Hang Seng China Enterprises Index lost 2.2% for the week, and now trades roughly where it was before the brief rally. The iShares MSCI China ETF lost 1.6%, while the broader Hang Seng Index fell 1.8%.

The year certainly hasn’t gotten off to a good start for offshore-listed Chinese stocks, with the Hang Seng China Enterprises Index now down about 5% in the first two weeks of the year. But that hasn’t stopped companies from lining up to list in Hong Kong, with three of the four big global accounting firms expecting IPO activity to double this year from last year’s anemic level.

Industry

Car Sales End 2023 on High Note as Exports Zoom

China’s car sales ended 2023 with a bang, rising 8.5% in December to boost the sector to 12% growth for the year. That’s quite a strong showing considering the tough times carmakers experienced for much of the 2023, with most of the growth concentrated at the start of the year during China’s brief post-pandemic rebound, and also at the end of the year.

The big story of the year was a surge in exports that saw China take the crown for the world’s biggest car exporter from Japan, based on a forecast from one of China’s main car associations. That surge came on the back of China’s recent strength in new energy vehicles that are taking the world by storm.

China Energy Storage Soars

China is already leading the world in the installation of green energy like wind and solar, and now it’s zipping ahead in the related sector for energy storage. The country’s renewable energy storage capacity soared by 150% last year to 34.5 GW, and the figure is expected to double again this year, according to an official from the China Energy Storage Alliance.

Energy storage is a crucial piece for wind and solar power, as it allows for excess energy to be stored when the sun is bright and wind is strong for use when generating conditions are less ideal, such as at night time. As usual, Chinese companies are rushing to answer Beijing’s call to develop the sector, with the result that the country could end up with big excess capacity.

Hong Kong Enters Crypto ETF Race

Move over, New York. Hong Kong wants a piece of the cryptocurrency ETF action, with eight fund companies now in advanced talks to launch spot ETFs backed by virtual currencies on the city’s stock exchange. Word of the talks comes from an executive at cryptocurrency exchange operator HashKey Group, though the Hong Kong Stock Exchange hasn’t commented.

The Hong Kong securities regulator and monetary authority announced last month they would accept applications for funds backed by cryptocurrencies, making the city the first in Asia to allow such products. The move looks aimed at helping Hong Kong try to stay at the cutting edge of financial markets, following a bruising for the city’s reputation over the last few years.

Company

Nvidia Prepares ‘Made-for-China’ AI Chip

If Uncle Sam gives you lemons, you make lemonade. That’s the lesson U.S. chip makers are quickly learning, after Washington banned them from selling their most advanced chips to China over concerns they could be used by the Chinese military to develop advanced weapons.

In response, Nvidia is reportedly getting ready to roll out several “made for China” chips that could satisfy the market’s demand for advanced chips needed to run AI applications without violating U.S. sanctions, according to a Reuters report. We can probably expect other chip majors like Intel to follow suit and develop similar “made for China” chips to cater to the huge market.

Evergrande EV Executive Detained

As if struggling property developer Evergrande didn’t have enough problems, now the company’s dubious electric vehicle unit has just suffered its own major blow with the sudden detention of its vice chairman. The company disclosed the development in a stock exchange filing, saying Liu Yongzhuo had been detained on suspicion of “illegal crimes.”

Not surprisingly, shares of China Evergrande New Energy Vehicle Group tanked as much as 23% after the announcement, though they later clawed back much of that and closed down 6%. The relatively mild selloff shows that anyone investing in this stock probably has a huge appetite for risk already, since Evergrande itself is in such trouble and it’s also quite late to the EV game.

Meituan Delivers in Hong Kong

Just eight months after arriving in Hong Kong, takeout delivery giant Meituan is quickly finding a place in the city, its first market outside Mainland China. The company’s “KeeTa” app accounted for 37% of the Hong Kong takeout dining market in December, behind only market leader Food Panda’s 42% and ahead of Deliveroo’s 20%.

Such a rapid takeoff isn’t surprising for Meituan, which is already China’s market leader and is known for its aggressive tactics that often include heavy subsidies for new businesses to gain market share. With the Hong Kong success, all eyes will likely be looking to see if Meituan joins others like ByteDance, Shein and PDD in venturing beyond China.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue New Year’s travel bounces back, Wanda sells off shopping malls and a top influencer topples a CEO. On a scale of 1 to 100, we give the week a 50 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

PMI Readings Signal Strong End to 2023

While 2023 will probably go down as a year that China might prefer to forget, at least in terms of the economy, the end of the year saw strong upticks in the Caixin purchasing managers’ indexes (PMIs) for both manufacturing and services. The Caixin PMI for manufacturing stood at 50.8 in December, while the services PMI came in at 52.9.

The latest manufacturing figure showed expansion for a second consecutive month, defined as anything above 50, while the services figure was the strongest in five months. The data is broadly encouraging, and shows that perhaps some of China’s endless stimulus measures are starting to have some effect. But there were also notable weaknesses in areas like employment and exports.

$50 Billion Boost for Policy Banks

In the latest signal that China will turn to its old playbook of infrastructure building to stimulate its economy, the central bank injected nearly $50 billion in low-cost funds into its policy banks in the final month of 2023. Observers are interpreting the move as aimed at encouraging lending to both the infrastructure and the struggling property sectors.

Truth be told, these banks, led by the likes of China Development Bank, probably need this money more to shore up their capital, since their loans are often based on government priorities and thus are riskier than those made by true commercial banks. Beijing spent much of last year engaging in similar lending-based stimulus measures, though with seemingly limited results.

China Stocks Return to Wilting Ways

After a cryptic rally for no apparent reason to end 2023, offshore-listed Chinese stocks returned to their losing ways last week in the absence of any major news to support the market. The Hang Seng China Enterprises Index ended the week down 2.8%, while the iShares MSCI China ETF fell 3,2%. The broader Hang Seng Index also lost 3%.

In a sign of the times, foreign funds continued to flee Chinese stocks in the month of December, dumping them at their fastest rate of the year, according to new data from Morgan Stanley. China and Hong Kong equities saw a net outflow of $3.8 billion in foreign funds for the month, which was not only the biggest monthly outflow last year but also the third-biggest on record.

Industry

Travel Rebound Marches On

China’s travel rebound continued last week, even as the nation continued to try and boost international tourism that remains well below pre-pandemic levels. The country recorded a combined 1.72 million inbound and outbound trips for each of the three days of the New Year holiday, exceeding forecasts and up almost six-fold from last year.

Meantime, China announced a new program with Thailand that will allow visa-free travel between the two countries for their citizens starting in March. The aviation regulator also predicted China’s international flights could reach 80% of pre-pandemic levels by the end of 2024. That latter figure, in particular, shows just how slowly China’s international travel has been to recover post-pandemic.

Gaming Regulator Removed After Fears of New Crackdown

China rarely provides much insight into its murky world of regulation, generally posting new rules and regulations with little warning or explanation behind the process. But gaming industry watchers got some rare insight last week when a top official overseeing their sector was ousted just days after the publication of new rules that sent shockwaves through the industry.

Feng Shixin’s removal as head of the publishing unit of the Communist Party's Publicity Department was revealed in a Reuters report citing unnamed sources. No reason was given, but the report implied that Feng had allowed the publication of new rules that led many to fear a new crackdown on the gaming sector, even as Beijing is placing greater focus on supporting the economy.

Top Banks Limit Exposure to Smaller Peers

If China experiences a banking crisis with its slowing economy, such a development is almost certain to start in its vast system of small, regional banks that are far less sophisticated than big national lenders. Reflecting such concerns, major banks have begun to more sharply scrutinize their smaller peers’ asset quality and also tighten their standards for interbank lending.

All this may sound a big vague and jargony, but the bottom line is that China is home to thousands of smaller local banks that are often beholden to local government leaders and don’t always make the best lending decisions. These banks may have become especially challenged due their status as important funding sources for all kinds of dubious projects to prop up their local economies.

Company

Wanda in Race to Tackle Debt

It’s a new year, and that means everyone is guessing who will be the next property company to follow down the default path blazed by former superstar developers Evergrande and Country Garden. One possible candidate could be Wanda, which has been selling off its signature Wanda Plaza office and shopping complexes in a bid to raise cash to service its large debt.

New information in the Tianyancha business database shows Wanda recently sold off four of its signature properties in Shanghai, Hangzhou, Suzhou and Guangzhou, following three similar sales in June. The company acknowledged last April that it was facing a cash crunch, and said it would suspend principal payments on some of its medium- and long-term bank loans.

Dubai Carmaker’s Investment in Evergrande EV Unit Stalls

In what should come as little surprise, a deal for Dubai-based carmaker NWTN to invest $500 million in the electric vehicle arm of struggling property developer Evergrande has expired. It appears the deal isn’t actually dead just yet, with reports indicating the two sides were continuing to negotiate terms of the investment, hinting at a disagreement on valuation.

Evergrande New Energy Vehicle was founded in 2019, and began selling its first vehicles in late 2022. We don’t know much about its electric SUVs, but its ties to embattled property giant Evergrande certainly can’t be too reassuring. The intense competition in China’s EV sector may also be leading NWTN to have second thoughts about the investment.

Bubble Teamakers Mixue and Guming File for IPOs

The New Year may be a time for bubbly celebrations with champagne, but two Chinese beverage companies welcomed in 2024 with other bubbles that are a signature ingredient of trendy premium tea drinks. Both Mixue and Guming, the country’s top two bubble tea chains by store count, filed for Hong Kong IPOs last week, in deals that could raise more than $1 billion combined.

Mixue is easily China’s biggest bubble tea operator with 36,000 stores, while Guming is still sizable at 9,000. Frankly speaking, we’re surprised these filings weren’t made earlier since China is filled with bubble tea operators that have been rumored to be eyeing IPOs for the last four years. To date, only a single chain, the Japanese-themed Nayuki, has managed to list in Hong Kong.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue new China-India tensions, BYD overtakes Tesla, and Boeing emerges from the China doghouse. On a scale of 1 to 100, we give the week a 55 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

China-India Tensions Flare with New Arrests

We kick off our first edition of the New Year with what could well become a major theme in 2023, following reports that India has arrested two executives from Chinese smartphone maker Vivo. The action came two months after four other India-based Vivo employees were arrested in connection with a money laundering investigation, leading many to guess the latest detentions are related.

Vivo expressed alarm at the actions, while China warned India not to discriminate against its companies. The China-India rivalry has heated up over the last few years as the pair increasingly vie with each other on the global stage for status as economic powerhouses. Look for this rivalry to continue heating up in the New Year, in both the political and corporate realms.

Anti-Monopoly Crackdown Marches On

Anyone who thought China’s crackdown on anti-competitive behavior was finished might want to think again. As 2023 wrapped up, a Beijing court ruled in favor of e-commerce giant JD.com, which had sued the larger Alibaba for unfair competition. The court awarded JD.com 1 billion yuan, or about $140 million, in compensation.

China’s market regulator socked Alibaba with an even larger fine of $2.75 billion in 2021 at the start of the anti-monopoly crackdown, before leveling smaller but still sizable fines against other big companies including Tencent and Meituan. This latest move signals that both regulators and also competitors will continue to punish companies that engage in uncompetitive behavior in the future.

China Stocks End 2023 with Santa Claus Rally

Christmas may not be an official holiday for most of China, but that doesn’t mean Santa Claus didn’t have some nice year-end presents for offshore-listed Chinese stocks. The indexes we follow all posted nice gains to end the year, led by a 5.1% rise last week for the Hang Seng China Enterprises Index. The iShares MSCI China ETF rose 3.7%, while the Hang Seng Index gained 4.3%.

Those gains provided an upbeat ending to what was otherwise a miserable year for offshore-listed Chinese stocks, summed up by an 18% decline for the Hang Seng China Enterprises Index for the year. Many are probably hoping the year-end rally will signal better things to come in 2024, though we have yet to see any real signals from China’s sputtering economy to justify such hopes.

Industry

BYD Overtakes Tesla for Global EV Crown

2024 could well go down as a seminal year for Chinese electric vehicles (EVs), with leading domestic producer BYD poised to overtake Tesla as the world’s largest EV maker in the fourth quarter. Here, we have to commend Warren Buffett, who was one of the few to spot BYD’s big potential more than a decade ago and has profited handsomely by investing in the company.

In separate related news, Chinese EVs were reportedly the subject of new higher tariffs being considered by the U.S., according to a Wall Street Journal report. Europe is also currently conducting an anti-dumping investigation into Chinese EVs, and we expect this kind of growing EV friction to be another major theme in 2024.

Home Price Freefall Hits New Highs

The latest data shows new home prices fell in 59 of the 70 cities tracked by the National Bureau of Statistics in November, marking a new record. Overall new home prices fell by 0.4% during the month from October, while previously owned home prices dropped by a larger 0.8%. Frankly speaking, we’re surprised that there are still 11 cities where new home prices are still rising.

China’s slumping property market was a major theme in 2023, with former powerhouses Evergrande and Country Garden symbolic of the sector’s woes. 2024 is almost certain to be a year of reckoning, as Beijing finally decides how to sort out the mess. We predict it will let the weakest companies fail, while trying to save healthier ones and also trying to keep prices from going into freefall.

Gaming Firms Launch Wave of Share Buybacks

The year ended with a roller coaster ride for the gaming sector, with the government releasing draft new rules to further regulate the group, only to quickly downplay its intentions. At the same time, the gaming companies themselves fought back by announcing share buybacks last week to try to support their stocks that tumbled after the draft rules were first announced.

The latest rules look relatively minor, and their release at such a sensitive time probably reflects a certain tone deafness among Chinese regulators. Gaming companies have been hammered with a wave of new regulations over the last two years designed to curb gaming addiction, though Beijing seems to be easing its stance lately to focus more on the economy.

Company

Boeing Emerges from the China Doghouse

After being in the China doghouse for much of the last four years, aircraft giant Boeing is finally seeing some relief in the market. The company said last week that its 737-MAX planes that were grounded by China in 2019 were all back in service at the end of last year. In a separate development, the company also delivered its first 787 Dreamliner to the market since 2019.

China was commended for grounding its 737-MAX fleet back in 2019 after two crashes caused by faulty plane systems. But it also took its time allowing the planes to resume flying after Boeing made necessary fixes. Many attributed the foot-dragging for both the MAX and also Dreamliner deliveries to growing U.S.-China tensions, which have begun to ease recently.

Failed Sichuan Trust Compensates Investors

More than three years after running into difficulties, Sichuan Trust Co. has finally offered a compensation plan to 8,300 retail customers who bought its now-defaulted financial products. But those investors might not be too happy to learn they will only get between 40 cents and 80 cents for every dollar they invested in the failed products.

The company was one of many Chinese trust companies that played just a tad too fast-and-loose with money from investors who often forked over their life savings in exchange for promised big returns. Sichuan Trust was ultimately seized by the government, which is increasingly having to step in and clean up many similar messes that are likely to keep coming in 2024.

AstraZeneca Pays Big Bucks for Chinese Biotech

The year ended on a high note for a little-known U.S.-listed Chinese drug company called Gracell Biotechnologies, which received a buyout offer from global giant AstraZeneca in a deal valued at $1.2 billion. AstraZeneca’s offer represented a 62% premium to Gracell’s last closing price before the announcement, and will bring it Gracell’s technology in the CAR-T cell therapy space.

While this deal is quite large and noteworthy on its own, it’s also notable because it could mark the start of a wave of similar buyouts for the dozens of Chinese biotech firms that have emerged in the last five years that often have promising products, but are short on cash. This kind of M&A is quite common in the west, but has yet to really take off in China.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue Beijing says progress over stability, a lifeline for local banks, and TikTok’s $1.5 billion Indonesia bet. On a scale of 1 to 100, we give the week a 45 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Progress First, Stability Second, Says Politburo

The big macro news last week came from the annual Central Economic Work Conference, where central leaders led by President Xi Jinping vowed to “pursue progress while ensuring stability.” While that may sound rather bland, China watchers pointed out that the pursuit of progress is not usually emphasized so much, so it’s significant that it is suddenly being prioritized over stability.

The meeting also sets the widely watched GDP growth forecast for next year, and one policy insider said the figure was likely to be around 5% – the same as this year’s target. The focus on progress seems to indicate we’ll see more stimulus and other measures to prop up the economy next year, which means Beijing will probably continue to wrack up more debt.

UK Businesses Join China Pessimism Bandwagon

U.S. and EU businesses are quite pessimistic on their future China investment plans, and now the UK is adding its voice to that chorus. According to a new poll by the British Chamber of Commerce in China, British businesses are delaying their new investments in China and downgrading the country’s importance in their global operations.

What’s worse, 60% of companies polled said China’s current economic slowdown is presenting a bigger challenge for them than the country’s three years of crippling Covid controls. Foreign direct investment (FDI) in China passed a major milestone when it went negative for the first time ever in the third quarter, and we expect that trend will continue into 2024.

China Stocks Rise on Late-Week Rally

Offshore-listed Chinese stocks broke their recent losing streak and posted slight gains last week thanks to a Friday rally. The Hang Seng China Enterprises Index rose 1.8% for the week, lifted into positive territory by a 2.3% rise on the last trading day of the week. The iShares MSCI China ETF rose 1.9%, while the broader Hang Seng Index rose 2.8%.

The relative divergence between the Hang Seng China Enterprise Index and the broader Hang Seng Index looks significant, potentially showing investors are slightly more bullish these days on Hong Kong than on Mainland China. That’s not too surprising, since Hong Kong is much smaller and also much better integrated with the more robust global financial system than the rest of China.

Industry

France, Turkey Take Fresh Steps Against China EVs

A couple of headlines from Europe last week show how individual countries are starting to challenge China’s attempts to dominate the emerging market for new energy vehicles (NEVs). One saw France revamp its list of NEVs that are eligible for government subsidies, and, not surprisingly, that list is notably devoid of Chinese models that are flooding the global market.

The other headline had Turkey placing an onerous new restriction on all EVs sold in the country, saying each brand must have at least 140 authorized service centers spread across the country. These moves come as the EU investigates Chinese NEVs for receiving unfair government support, as everyone races to cut off China’s aggressive drive to dominate the global NEV market.

China Tackles Small Private Equity

The latest proposed amendments to China’s rules governing venture capital and private equity look squarely aimed at squashing the many smaller companies that are a vital source of cash for startups, but are also relatively unsophisticated. The change would require qualified PE and VC funds to put up 3 million yuan, triple the current threshold.

Truth be told, 3 million yuan is not a huge sun, and seems quite affordable for any serious investor. This kind of small investor has become a fixture of China’s funding landscape, and was probably fine when the economy was booming. But now that it’s slowing, these micro funds are probably being exposed as less sophisticated players with high probability of losing their investments.

Provinces on Bond-Issuing Binge to Prop Up Local Banks

Much is written about China’s largest banks that are “too big to fail” and would almost certainly get government bailouts if they ran into trouble. But China’s many smaller banks are more problematic, often playing critical roles in their local economies but not justifying such rescues. Still, these smaller lenders are probably suffering far worse right now than big banks due to their limited resources.

Now, local governments are using special purpose bonds permitted by Beijing since 2020 to assist such local banks. Local governments have issued 208 billion yuan worth of such bonds through Dec. 11, more than triple the amount for 2022. While that number looks big, it’s probably relatively small compared with the magnitude of this less-visible problem in China’s financial system.

Company

Country Garden Repays Yuan Notes, Confident of Viability

Struggling developer Country Garden was in a couple of headlines last week, led by its announcement that it had remitted adequate funds to repay some yuan-denominated notes coming due. In a separate report, the company’s Chairman Yang Huiyan was quoted as saying she was “very confident” the company could clean up its messy finances.

The first development shows that China’s embattled developers will do everything they can to repay their domestic debt, as Beijing tries to protect domestic investors. More sophisticated foreign debt holders, on the other hand, are on their own, though that could change if such foreign creditors ultimately cause Country Garden or one of its peers to collapse.

TikTok Pumps $1.5 Billion Into Southeast Asia

Short video sensation TikTok made headlines last week with word that it was investing a total of $1.5 billion into Tokopedia, Indonesia’s largest e-commerce company. It made the move after being forced to shutter its own relatively new local e-commerce service, TikTok Shop, after Indonesia banned e-commerce on social media sites in an effort to protect youth.

The move reflects TikTok’s recent aggressive move into e-commerce, aiming to replicate its huge success in short videos that has made it a global sensation. The new Tokopedia tie-up will take it into direct competition with other China-backed local players, including Alibaba’s Southeast Asian Lazada unit and Singapore based Shopee, whose backers include Tencent.

Alibaba Pumps $630 Million Into Lazada

TikTok wasn’t the only one funneling hundreds of millions in new funds to the hotly contested Southeast Asian e-commerce market last week. In a separate development, Alibaba also pumped an additional $634 million into its Southeast Asian Lazada operation, according to a local filing.

Lazada is part of Alibaba International, one of the company’s main business units that is being spun off to operate independently. It previously said it could do some fund raising, though it wasn’t clear if this capital injection is part of that. What is clear, however, is that Southeast Asia is rapidly shaping up as a major battleground for Chinese e-commerce companies.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue a Moody’s downgrade, a China-EU summit, and Evergrande dodges a meltdown. On a scale of 1 to 100, we give the week a 40 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Moody’s Downgrades China Outlook

The biggest story last week was Moody’s downgrade of its outlook on China’s credit rating to “negative” from “stable.” Such downgrades don’t guarantee an actual lowering of a country’s actual credit rating, but signal such a move could come. In this case many believe China will soon have no choice but to help many of its struggling companies and local governments.

Beijing’s reaction was surprisingly muted, with the Finance Ministry calling the move “disappointing.” Perhaps expecting the worst, Moody’s also reportedly told its Chinese employees to work from home the day of the announcement. Moody’s may be worried by China’s recently announced plan to issue 1 trillion yuan, or about $137 billion, in sovereign debt to support local governments.

EU Comes Calling on Beijing

We often write about China-U.S. relations, but last week the big foreign relations news came from the first meeting between Chinese and EU leaders since the pandemic. The list of topics discussed at the Beijing summit included many evergreens like China’s call for less confrontation. But the EU was having none of that, making very clear it wants to reduce its trade deficit with China.

In another development from Europe, Italy formally announced it was withdrawing from China’s signature Belt and Road Initiative (BRI). This move was as much about a change of leadership in Italy as it was about growing indifference towards BRI in the west, which sees the program as a propaganda ploy at best and a way to saddle developing countries with big debt at worst.

China Stocks Sag Under Moody’s Downgrade

Offshore-listed China stocks extended their skid for a second consecutive week, as the Moody’s downgrade dominated the headlines and fueled concerns about China’s economy. The Hang Seng China Enterprises Index fell 2.8% during the week, while the iShares MSCI China ETF lost 4.4%, and the broader Hang Seng Index fell 2.9%.

Adding in declines from the previous week, offshore China stocks have now fallen between 5% and 7% over the last two weeks. Markets got a slight shot of good news later in the week when Chinese exports returned to positive territory for the first time in six months. But the Moody’s downgrade, combined with lack of positive noise from the China-EU summit, dominated broader sentiment.

Industry

Exports Return to Growth Track

Last week’s broader gloom got a brief reprieve when the latest foreign trade data showed an unexpected revival for China’s manufacturing sector, which powered exports to their first growth in the last six months. But the growth wasn’t exactly impressive, with exports up just 0.5% in November from a year ago. Imports continued to stumble, dropping 0.6% for the month.

Analysts had been expecting just the opposite, forecasting a small drop in exports and a 3.3% rise in imports, which had previously risen in October. But lest anyone get too excited, China’s official purchasing manager’s index showed export orders decreased for a ninth consecutive month in November, meaning the latest export rise could possibly be just a statistical blip.

Home Inventory Builds in Smaller Cities

New data is showing what most people who follow China’s ailing property sector already know, namely, that the problem is much worse in smaller cities than major metropolises like Beijing and Shanghai. According to the China Index Academy, new homes in China’s third- and fourth-tier cities took an average of 26.3 months to sell at the end of October – or more than two years.

The time needed to sell an average home in top-tier cities like Beijing or Shanghai was 12.7 months at the end of October, or about half the level of smaller cities. Such long wait times are inevitably putting huge pressure on prices, since many sellers may not be able to wait for such long periods and thus will lower their prices to attract a buyer more quickly.

Bring on the International Travelers

China has given some data that shows its new policy allowing visa-free stays of up to 15 days for citizens of five European countries and Malaysia may be having some positive effect at restarting international travel that dived during the pandemic. About 7,000 of the nearly 18,000 travelers from the six countries to enter China in the first three days of December took advantage of the policy.

The policy only took effect Dec. 1, so it’s probably safe to say that most of the 7,000 people who took advantage of it were already planning trips to the country before the policy was announced in late November. Still, it’s an encouraging sign, especially considering the difficulty many people have talked about in obtaining visas to come to China post-pandemic.

Company

Evergrande Kicks Liquidation Can Down the Road

Just when it looked like it might be forced to liquidate, embattled developer Evergrande has once again managed to kick the can of this increasing inevitability down the road by nearly two months. A Hong Kong judge was set to possibly order the company’s liquidation at the start of last week, but gave it until Jan. 29 to finalize a restructuring plan for its offshore debt.

We suspect the Hong Kong judge was under huge pressure to delay this ruling, since a forced liquidation could have set off a chain of events with disastrous consequences. It’s quite possible Evergrande could ultimately get some help from Beijing, which is reportedly preparing a list of “too big to fail” developers that could receive government assistance.

Honda Cuts Jobs at China Venture

Japanese carmaker Honda passed a dubious milestone last week when its main China joint venture implemented its first job cuts since entering the market 25 years ago. GAC Honda announced it was cutting 900 jobs, equal to about 7% of its 12,600 workers at the end of 2022.

Honda and other makers of traditional gas-powered cars have been losing market share to companies more focused on new energy vehicles (NEV) that are being strongly supported by Beijing. GAC Honda’s sales have been declining since 2021, including a 3% drop that year and another 5% fall in 2022.

Wanda Loses Control of Cinema Business

He once likened his Wanda Group to Disney, as Wang Jianlin sought to build up a Chinese version of the global entertainment giant with operations spanning filmed entertainment to theme parks. But these days Wang is watching that empire slip away with slower consumer spending and pressure on Wanda’s core real estate business.

In Wang’s latest setback, Wanda announced it was selling 51% of Wanda’s cinema business to a subsidiary of China Ruyi Holdings, a filmed entertainment producer that’s controlled by Tencent. This move isn’t all that surprising, since China’s theater industry hasn’t been doing all that well these days after briefly passing the U.S. to become the world’s biggest box office.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue supply chain mania, a solar shakedown and the world’s first bird’s nest stock. On a scale of 1 to 100, we give the week a 40 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Keep Your Supply Chains in China, Beijing Says

Anyone trying to read the latest Chinese tea leaves need look no further than the newest and greatest Beijing trade show. This time it was the first edition of the China International Supply Chain Expo last week that signaled where central leaders’ latest priorities lie. At the event’s opening, Premier Li Qiang said China wants to strengthen its supply chains with all countries.

Not to sound too cynical, but there’s a reason no other country has ever held an exhibition dedicated to supply chains, namely because it’s a general term that applies to any industry, and its actual meaning varies quite widely for each industry. Thus, the event can only be seen as China’s way of trying to stem the flow of companies moving their supply chains to other countries.

PMIs Mixed, as GDP Growth Target Looks Reachable

Moving on to more mundane economic indicators, the latest purchasing managers index (PMI) readings for November were mixed. On the one hand, the official PMI fell to 49.4, marking a second month in contraction, defined as any reading below 50. But the Caixin PMI unexpectedly rose to 50.7, indicating expansion, from a 49.5 reading in October.

Meantime, central bank chief Pan Gongsheng was quoted saying China is expected to hit its 5% growth target for this year. The mixed PMI readings seem to show that perhaps all the recent economic stimulus is having some effect. Meantime, reaching the GDP target seems like almost a no-brainer, since China rarely misses such centrally set targets.

China Stocks Sag Amid Quarterly Earnings Barrage

Last week was notable for the crush of third-quarter earnings reports from offshore-listed Chinese companies, most showing just how weak China’s economy is. That showed up in the broader market indices, with the Hang Seng China Enterprises Index down 4.6% during the week, while the iShares MSCI China ETF lost 3.1%, and the broader Hang Seng Index fell 4.2%.

As we head into December, 2023 is shaping up as a year that many of the companies we follow would probably rather forget. All three indices we track are down about 20% for the year, which got off to a strong start on positive regulatory and economic signs. But the rally quickly ran out of fuel around April amid growing signs of a slowing economy.

Industry

Walmart, Apple Shift Supply Chains from China

We started this week with Beijing’s call to foreign companies to keep their supply chains in China. Two other stories show why it’s doing that. One report shows that global retailing giant Walmart now gets “just” 60% of its wares from China, down from 80% in 2018. The other says Apple’s main production partner Hon Hai is planning to invest a further $1.6 billion in India.

India has probably been the biggest beneficiary of the ongoing “de-risking” process, which is seeing foreign companies diversify their global supply chains after many were badly burned during the pandemic by too much reliance on China. Other big beneficiaries include Vietnam and Thailand.

Solar Shakedown Builds

After booming earlier this year as the cost of their main ingredient plummeted, solar panel makers are now feeling their own pain as prices for their products tumble as well due to a global supply glut. The latest to comment on the trend is the chairman of leading panel maker Trina, who says no one is earning profits right now and the current situation is unsustainable.

This is what happens when China comes to dominate this kind of emerging industry, often resulting in cutthroat competition where no one cares about anything but gaining market share. We’re seeing similar bloody competition right now in the electric vehicle space, and saw similar things a few years ago in smartphones – all sectors now largely dominated by China.

Corruption Crackdown Sweeps Through ICBC

We try to avoid too many stories on corruption, as crackdowns on graft are a dime-a-dozen these days. But the latest report on that front looks worth mentioning, as it says an ongoing sweep has netted quite a few big fish at ICBC, the nation’s top bank. The report points out that the ICBC sweep is part of a larger crackdown consuming China’s financial sector.

We’ve seen other sectors targeted for similar cleanups, but this one looks a bit larger than those, probably because the financial sector is so huge and is dominated by state-run entities. The danger, however, is that such turmoil could put further pressure on the sector just as it’s having to deal with a wide range of other crises related to China’s economic slowdown.

Company

ByteDance Says Goodbye to Gaming

We’ve written often about how difficult China’s gaming sector is due to intense competition and heavy regulatory oversight. Now, the latest sign of how tough things are is coming from TikTok parent ByteDance, which has decided to shutter its Nuverse gaming business and eventually leave the mainstream online gaming sector altogether.

While it’s one thing for smaller companies to throw in the towel, it’s quite another when a giant like ByteDance with huge amounts of cash and related experience makes such a decision. At the end of the day, the company probably decided it would have to spend huge sums to carve out a place in the sector, and that its money would be better spent elsewhere.

Evergrande’s Looming Demise?

Embattled developer Evergrande has been out of the headlines these last few weeks, but that doesn’t mean it’s on the road to recovery. A new Reuters report says the company is racing to get its bondholders to accept an offshore debt-restructuring plan before a Hong Kong court hearing on Monday. Failure to win such approval could potentially trigger a liquidation of the company.

All this sounds a bit extreme to us, as Evergrande has shown a remarkable ability to keep kicking the can down the road each time its demise looked imminent. But people were probably saying the same thing about Lehman Bros. for months or even years before its final implosion in 2007 that kicked off the global financial crisis.

Shein Hopes to Shine on Wall Street

In the latest signal that the two-year winter for Chinese IPOs on Wall Street is nearing an end, a new report last week said online fast fashion sensation Shein has made its first confidential filing for a New York listing that could value the company at up to $90 billion. Such a listing would probably raise $10 billion or more, potentially becoming one of the biggest in New York next year.

Shein started out in China, but has moved to Singapore in a bid to become more global. Still, the vast majority of its supply chain is in China, where it quickly produces the latest clothing using a vast network of workshops. While Shein is technically not a China company anymore, its IPO application still seems to signal that big Chinese listings may finally be returning to Wall Street.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue the yuan bounces back, a lifeline for developers and a livestreamer confirms its CEO’s arrest. On a scale of 1 to 100, we give the week a 50 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Yuan on the Comeback Trail

Many U.S. investors had a short week for Thanksgiving last week, but China’s yuan was hard at work clawing back some of the ground it has lost over the past year. The currency scored a milestone of sorts early in the week when it strengthened above the daily reference rate set for it by the country’s central bank for the first time since July.

That may sound a bit technical, but the bottom line is that currency traders may finally think the yuan has reached bottom following a steady decline for the currency that has been one of Asia’s worst performers this year. The currency’s weakness owes partly to China’s weakening economy, but also to the country’s low interest rate environment compared with the U.S.

Japanese Bearish on China

While the yuan was bouncing back, the same can’t be said for sentiment among foreigners for investing in China. The latest sign of gloom came from Japan, where just 27.7% of executives in a new survey said they plan to expand their operations in China in the next year or two.

This was the first time since the survey began that the number of respondents planning new near-term investments fell below the 30% mark. The number was down from 33.4% last year and 40.9% in 2021, showing just how rapidly foreign sentiment has deteriorated due to the slowing economy and increasingly tough operating environment.

China Stocks Linger in Glow of Xi-Biden Summit

In the absence of any major catalysts, offshore-listed Chinese stocks managed to notch some small gains the holiday-shortened week in the U.S. The Hang Seng China Enterprises Index rose 1.1% during the week, while the iShares MSCI China ETF rose 0.9%, and the broader Hang Seng Index rose 0.6%.

Investors may still be basking in the lingering glow of the relatively positive summit between Xi Jinping and Joe Biden in San Francisco a week earlier. Some signs emerged last week that the meeting is already having some positive effect on business for foreigners in China, including Beijing’s approval of a major U.S. M&A deal that we’ll discuss shortly.

Industry

Too-Big-to-Fail Developers

In the latest step to prop up the property sector, reports emerged last week saying Beijing was compiling a list of 50 developers eligible for a wide range of government support. Not long after the initial reports came out, another report emerged saying one of the 50 would be none other than Country Garden, which, along with Evergrande, are the two most troubled companies.

This marks a relatively big development for the sector, since up until now Beijing had largely left these struggling property developers to sort out their massive debt problems by themselves. Thus, the establishment of this “list of 50” seems to indicate the central government considers these companies too important to fail, and could help to rescue them.

Warming U.S.-China Ties Grease the Wheels for Major M&A

Next we look at a major development last week on the M&A front, where Beijing finally approved the $69 billion merger between U.S. microchip giant Broadcom and cloud computing firm VMWare more than a year after the deal was first announced. The move made China the final major market to sign off on the deal, which quickly closed afterwards.

While Beijing probably was taking its time considering this complex deal, observers also noted the approval came just days after the relatively friendly meeting between Joe Biden and Xi Jinping in San Francisco. If that’s true, the approval could signal a more cooperative attitude by Beijing going forward in its strained relationship with western businesses.

More U.S.-China Flights Ahead

M&A wasn’t the only area feeling the glow of the Xi-Biden summit last week. Back in China, the head of the country’s aviation regulator met with U.S. Ambassador Nicholas Burns, with the two discussing boosting the number of flights between the two countries. In a speech, Song Zhiyong said the two countries should continue the vision laid out by Xi and Biden in San Francisco.

The two sides have gradually been increasing direct flights between them, but they are still a fraction of where they were in the pre-Covid era. China has been slow to add back international flights in general, but the U.S. flights seem to be coming back more slowly than most. Perhaps things will finally change as China-U.S. ties finally start to improve.

Company

Is Wanda Next?

First it was Evergrande, then Country Garden and Sino-Ocean. Now, everyone is wondering who will be next in the growing list of Chinese developers getting mired in debt crises. The latest signal came from the property management arm of Wanda Group, with reports that it wants to push back the maturity dates on a $600 million dollar-denominated bond by 11 months.

The debt owed by Wanda Commercial Management comes due on Jan. 29 next year, but the company fears it may not have the cash to pay up. Wanda Commercial has already repaid 18 billion yuan worth of onshore and offshore bonds since the start of this year, and is apparently running low on resources to keep paying out more funds.

Zhongzhi Says It’s ‘Severely Insolvent’

It’s one thing when someone else says you have cash problems, and quite another when a company publicly admits that it’s “severely insolvent.” But that’s exactly what happened in the case of investment conglomerate Zhongzhi Enterprise Group, which used the characterization in disclosing a financial shortfall of up to 260 billion yuan, or around $36.5 billion.

Zhongzhi rose to prominence as a major wealth manager, but has been in more negative headlines since it began failing to repay some of its investors starting around June. The company said a recent audit of its balance sheet shows its debts were more than twice its assets. So far, we have yet to see any signs that Beijing will step in to bail out the company and its investors.

DouYu Confirms CEO’s Arrest

It’s been rumored for a few weeks now, but livestream gaming operator DouYu finally fessed up this week that its CEO Chen Shaojie was arrested, though it didn’t say why. But media noticed an announcement from the Chengdu police around the same time saying someone of the same age surnamed Chen was arrested on suspicion of operating a casino, and put two-and-two together.

Chen is the latest in a recent string of corporate chiefs to go missing, though it’s often unclear whether the missing executives are suspected of a crime or assisting in an investigation of someone else. DouYu’s stock fell 6% after the confirmation. But truth be told, the company’s business was already suffering as the result of a string of government crackdowns even before Chen’s arrest.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue reading the tea leaves from a Xi-Biden summit, a muted Double Eleven, and China’s latest bubble tea sensation. On a scale of 1 to 100, we give the week a 45 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Just What Was Accomplished at the Xi-Biden Summit?

The headlines have been buzzing for days now with everyone trying to read the tea leaves to figure out what exactly happened at the meeting between Presidents Xi Jinping and Joe Biden at their summit in San Francisco. The pair agreed to work together to control the fentanyl trade, and also to maintain better contacts between their defense ministries.

But most reports noted those accomplishments were concluded before the summit, and that Xi and Biden exchanged some frank words during their actual meeting. While that may not sound like much, dialogue has to begin somewhere, and there’s been notably little between this pair of leaders yet. Now, everyone will be watching to see if the two men continue talking.

China Eases Rules for Foreigners Buying Chinese Stocks

We’ll take a break from the usual economic indicators this week and look instead at a new report that says China is revising rules that will make it easier for foreigners to buy Chinese stocks. Among other things, the rules would make it easier for foreign institutional investors to register to open China brokerage accounts, and also for them to move money between China and outside.

Truth be told, these are really just the latest in a long series of steps China has taken over the last two decades to gradually open its stock market to foreign participation. Right now, such participation is quite limited. But as China’s stock markets sag and the economy slows, any new liquidity that foreign investors can provide will probably be increasingly welcome.

China Stocks Rally, then Give Back Most Gains

We’ve written how offshore Chinese stocks sagged for the first part of many recent weeks, before paring those losses with Friday rallies. It was the opposite last week, with a strong early-week rally mostly killed by a Friday selloff. The Hang Seng China Enterprises Index ended last week up 1.2%, while the iShares MSCI China ETF and Hang Seng Index rose 1.8% and 1.5%, respectively.

It doesn’t take much brains to figure out the early-week rally was fueled by big hopes for the Xi-Biden summit, while the selloff owed to disappointment over what the summit actually produced. This is just a variation of “buy on the rumor, sell on the news,” and we’ll really need to see what happens next to determine where China-U.S. relations – and China stocks – go from here.

Industry

China Eyes 1 Trillion Yuan Property Boost

No one will ever fault China for not trying hard enough to try to boost its sputtering real estate market. A new anonymously sourced report last week said the central government is preparing one of its biggest boosts to date that will provide at least 1 trillion yuan, or nearly $140 billion, in low-cost financing for affordable housing and home renovations in rural areas.

This particular approach looks quite targeted at the have-nots, which comprises a huge swath of China’s population that can’t afford homes at their current inflated levels. For that reason, this plan looks like one of the few recent stimulus measures that could actually have some potential impact, since these are exactly the kind of people who would still jump at the chance to buy a home.

Double What?

It wasn’t long ago when the annual “Double Eleven” shopping extravaganza would become a feeding frenzy each year for consumers who would spend days planning their purchases to take advantage of special bargains. But you would never know that this year, as the festival once billed as China’s answer to Black Friday barely registered in the headlines.

E-commerce companies certainly weren’t hyping things much, with leaders Alibaba and JD.com simply reporting that their Double Eleven sales grew this year compared with last year. While that’s obviously better than a sales contraction, it certainly won’t get anyone too excited. Then again, any growth at all in these consumption-challenged times is still probably noteworthy.

Bank Exec, Health Chief Nailed for Corruption

We’ll wrap up our industry news with the latest headlines on the corruption front, which have seen high officials from the banking and healthcare industries toppled for taking bribes. On the banking side, a former head of Citic Bank has received a death sentence for taking 1 billion yuan in bribes. Meantime, a former health chief of Guangdong province is also under a similar probe.

We raise these two cases because they represent major sectors that have recently fallen under the corruption microscope, namely healthcare and finance. Ten years into his signature campaign, President Xi Jinping seems to be taking a more systematic approach these days, targeting individual money-rich sectors that are prime candidates for this kind of corruption.

Company

Country Garden Sales Plunge

No one will be surprised to learn that struggling developer Country Garden recorded its biggest sales decline in at least six years in October, as home buyers that once flocked to it now avoid it like the plague. The company’s contracted sales plunged by a staggering 81% in October versus the same month a year earlier, though the figure was up slightly from September.

Country Garden and fellow developer Evergrande have emerged as China’s two poster children for the woes of its property sector. Both are currently caught up in a sort of death spiral, since no one will lend them any money, and consumers won’t buy their homes for fear of losing their money. Both companies are trying to sort things out, but their prospects don’t look good.

Alibaba Aborts Cloud Unit Spinoff

And then there were five. Alibaba was originally planning to split up its six main business units as part of a breakup plan, but now has indefinitely suspended a split for one of those. It disclosed the about-face for its cloud unit in its latest quarterly results that left investors unimpressed.

Alibaba shares fell nearly 10% after the announcement, and many are attributing some of that to the aborted split-off for the cloud unit, whose own future looks cloudier due to U.S. restrictions on Chinese imports of high-powered computing chips. The cloud unit was once Alibaba’s pride and joy outside its core e-commerce businesses, but clearly that has now changed.

Xiaomi Teases New Smartcars

Last week we got more details about smartphone maker Xiaomi’s big gamble on smart electric vehicles, after the company registered two of its upcoming new models with China’s auto regulator. The registrations included extensive information on the models, the Beijing Xiaomi Max SU7 and SU7 Max, including photos of the two cars.

Xiaomi is quite late to the smartcar race, only entering in 2021. Its late arrival looks similar to the Zeekr brand launched by Chinese car giant Geely around the same time. Xiaomi is a strong believer in an interconnected world of smart devices, so this move into smartcars makes sense from that perspective. Whether it’s too late to succeed in the game is another matter.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue an import surprise, Nio slims down and Hong Kong investors to feast on Sichuan-spicy hot-and-sour noodles. On a scale of 1 to 100, we give the week a 45 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

More Sagging Exports and Deflation, but an Import Surprise

The latest macro data are mostly more of the same, with exports down in October as the latest consumer price index (CPI) also showed China slipping back into deflation. Exports contracted 6.4% in the latest monthly reading, quickening from a 6.2% decline in September. Meantime, the CPI fell 0.2% in October, landing back in contraction territory after posting a slight rise in September.

The one surprise came from imports, which posted an unexpected 3% rise in October, marking their first year-on-year increase since February. Soybeans and oil powered the import rise. Perhaps we’re being slightly cynical, but the surprise increase was announced the same week as China’s big Import Expo was happening in Shanghai, which seems just slightly coincidental.

U.S. Makes Splash at Import Extravaganza

Speaking of that, the China International Import Expo was the toast of the town in Chinese media last week, as it came back to life after three years with very limited foreign participation during the pandemic. The U.S. got special attention this year after sending its largest-ever delegation, including more than 200 American exhibitors, many from the agricultural sector.

Leading the U.S. delegation was none other than Ambassador Nicholas Burns, who has become a very high-profile spokesman for the U.S. in China. Burns sought to assure China that the U.S. has no intention of decoupling, and that trade between the two countries is very important. All this comes as Presidents Xi Jinping and Joe Biden get set to meet next week in San Francisco.

China Stocks Return to Downward Track

After a couple of weekly gains fueled by strong Friday rallies, offshore-listed Chinese stocks returned to their falling ways as a Friday rally failed to materialize to save them last week. The Hang Seng China Enterprises Index fell 2.5% during the week, while the broader Hang Seng Index was down 2.6%. Over in the U.S., the iShares MSCI China ETF fell 1.7%.

More weak economic data probably weighed on market, and most foreigners probably dismissed the big Import Expo in Shanghai as little more than pageantry. The next big news could come from the Xi-Biden summit in San Francisco next week, which could help to lift stocks if the meeting is positive.

Industry

Beijing Summons Top Developers, Calls on Ping An to Rescue Country Garden

Ongoing concerns about China’s slumping property market led Beijing regulators to call a pow-wow last week with the financial chiefs of six leading developers to better understand their situations. Equally interesting was a separate Reuters report saying Ping An was being asked by the government to step in and rescue sinking developer Country Garden.

Not surprisingly, Ping An vehemently denied the Reuters story, which cited four unnamed people familiar with the matter. We wouldn’t be surprised if Ping An was being pressured to assist, as it’s one of China’s relatively healthier financial institutions. Such an assist would fit with the broader pattern of Beijing using healthy companies to rescue sick ones like Country Garden.

China Snaps Up U.S. Soybeans

We’ve already mentioned that soybeans were a major driver behind the unexpected rise in China’s imports last month, and a separate report shows the U.S. may be supplying a big portion of those soybeans. Another Reuters report says China recently booked its largest soybean purchases in at least three months, though the goods won’t be shipped until December or later.

China watchers may recall that Beijing committed to big purchases of U.S. agricultural products back when Donald Trump was president as part of a trade deal, but that many of those commitments were never completed. With the U.S. and China now trying to mend fences, it should come as little surprise that China is once again stepping up its U.S. soybean purchases.

Chinese Solar Panels Illuminate European Warehouses

They were designed to generate power, but it seems a growing volume of solar panels being shipped from China to Europe are sitting in warehouses instead. A new report shows the number of unsold solar panels sitting idle in European warehouses doubled to nearly 80 GW by the end of August from 40 GW in mid-July. An expert said the figure could climb even higher to 100 GW.

This building glut is leading to crashing solar panel prices. In our last newsletter we quoted a top official from leading producer Longi saying that prices were so low right now his company could barely cover its costs. Look for prices to dip even lower, which will probably send most of the Chinese manufacturers that dominate this industry into the red.

Company

Apple Supplier Luxeshare Ups Vietnam Investment

Much has been written about growing investment in India by Foxconn, one of Apple’s key manufacturing partners. But another major Apple partner, China’s Luxeshare, is also diversifying away from its home market. Luxeshare was in the news last week after being licensed to invest an additional $330 million in its facility in Vietnam, raising the investment there to $504 million.

Luxeshare is interesting for its roots in Mainland China, unlike Foxconn, which is based in Taiwan. While many foreign companies have been diversifying their manufacturing from China, it’s unclear if Chinese companies are also doing this. This development shows big names like Luxeshare are indeed also diversifying geographically to hedge their risk.

Nio Tries to Run More Efficiently

While EV makers BYD and Tesla have navigated the tough road to profits, most of China’s other EV startups are still mired deeply in red ink – a situation that looks increasingly unsustainable. Recognizing that, Nio, one of the leading domestic startups, is cutting 10% of its staff this month and also considering spinning off its noncore businesses, according to local reports.

Nio is making the adjustments as it and other smaller Chinese EV makers see their sales growth slow sharply after a bumper year in 2022. The fierce competition resulted in a price war earlier this year, hitting smaller players like Nio that really couldn’t afford to cut prices. We have yet to see any major companies fail, though a few appear to be running on fumes.

Another Day, Another AI Unicorn

We’ve recently detailed quite a few Chinese AI startups on steroids, often reaching “unicorn” status by attaining $1 billion market valuations just a year or two after their founding. The latest in that club is 01.AI, which reached the $1 billion mark in a recent funding whose backers include Alibaba’s cloud unit. The company only began operating in June.

01.AI is drawing more attention than most because of its founder and CEO, AI guru Lee Kai-fu. Lee, who disclosed the $1 billion valuation in a recent interview, is legendary in AI circles, following his earlier stints as a top executive at Microsoft and Google before striking out on his own in his current company, Sinovation Ventures.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue local governments line up for handouts, solar sector gets squeezed and Shein smiles on Britain’s Missguided fashion. On a scale of 1 to 100, we give the week a 45 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Manufacturing Contracts, Foreign Investment Plunges

The latest indicators show that China’s economy continues to sputter, with the Caixin Manufacturers Purchasing Managers’ Index (PMI) falling to 49.5 in October from 50.6 the previous month. The Caixin Services PMI did a little better, rising to 50.4 from a nine-month low of 50.2 over the same period. Anything above 50 is considered expansion, while below that is contraction.

At the same time, some data crunching by the Financial Times showed foreign direct investment (FDI) in China plunged by 34% to 72.8 billion yuan in September from a year earlier, the biggest-ever drop since monthly data became available in 2014. While the two PMI figures tend to move in very small steps, the huge decline in FDI should be bigger cause for concern in Beijing.

Their Growth Slowing, Provinces Line Up for Government Largess

New data suggests that growth in China’s 31 provinces is slowing, even as Beijing tries to help these debt-strapped governments that are the engines of the nation’s economy. Just 11 of China’s 31 provinces reported growth in the first nine months of the year that exceeded their first-half growth, implying growth slowed for the other 20 in the third quarter.

Meantime, another report says local governments are already clamoring for a piece of 1 trillion yuan worth of sovereign debt approved by Beijing last month for infrastructure construction. This particular debt issue is quite large and will add a heavy repayment burden for Beijing. But it may feel it has no choice since local governments are even more heavily debt-strapped.

China Stocks Eke Out Gains

Offshore Chinese stocks managed to finish in the black last week, but only in a familiar pattern that saw them slump for most of the week before being lifted into positive territory by a Friday rally. The Hang Seng China Enterprises Index rose 1.2% during the week after the 2.4% Friday rally, while the Hang Seng Index rose 1.5%. The iShares MSCI China ETF rose by a larger 3.7%.

The rest of the world did quite well last week, so the fact that China stocks could only muster small gains based on a single-day rally sort of sums up the weak sentiment in the market right now. Things could continue to hobble along until mid-November, when stocks could get a lift if things go well at an expected summit between Xi Jinping and Joe Biden in San Francisco.

Industry

Property Loans Post First-Ever Decline

Nobody needs to be reminded that China’s property market is currently in a state of crisis. Now, yet another new data point is nicely illustrating how weak things are right now. That data point comes from the sector for property loans, which have fallen for the first time ever as new building activity shrivels.

Specifically, the outstanding amount of loans to China’s property sector totaled 53.19 trillion yuan at the end of September, which was down 100 billion yuan from that time a year earlier. The shrinking loan volume is the result of growing caution by banks and other lenders, which fear they’ll never get repaid by China’s increasingly shaky property developers.

Airlines Jet Back to Profits

After three years in the red, China’s big three state-owned airlines have cruised back into the black with their first quarterly profits since the pandemic began. Air China and China Southern led the way with profits of about 4.2 billion yuan each for the three months to September, while China Eastern trailed slightly behind with a profit of 3.6 billion yuan.

In a separate report from the airline space, China and the U.S. announced an increase in flights between the two countries, raising them to 70 each week from the current 48. While that’s an improvement, it’s still well below the 300-plus flights between the two countries pre-pandemic. It’s unclear if the number will ever return to the earlier level, however, due to declining demand.

China Feels Solar Squeeze

First it was makers of polysilicon, the main material used to make solar panels, that felt the squeeze as prices for their product plunged early this year. Now, makers of finished panels are getting sucked into the vortex of this highly cyclical industry as well, with one leading company, Longi, recently complaining that current prices are roughly just enough to cover its costs.

Longi made the remarks as it reported a 44% profit plunge in the third quarter. We also spotlighted the trend in our own look at the latest earnings from JinkoSolar, another leading Chinese name. With this kind of bloody competition occurring frequently, many Westerners might be thinking they’re better off leaving the Chinese to fight among themselves for supremacy of this industry.

Company

HSBC Sucked Into China’s Ailing Property Black Hole

While China’s property woes have been mostly an internal family affair, a limited but growing number of foreigners are also getting sucked in to the crisis. Holders of dollar-denominated bonds issued by Chinese property developers are one major group in that category, and now global banking giant HSBC is joining their ranks.

HSBC said that of the $1.1 billion in credit loss charges it took in the third quarter, nearly half, or $500 million, were related to China’s commercial real estate sector. That brings charges by HSBC related to its Chinese property portfolio to $800 million so far this year. That means the final figure is likely to top well over $1 billion as more loans continue to sour.

Apple Confident on China as Huawei Eyes Comeback

There’s been lots of talk about a new rivalry in China for Apple, following Huawei’s recent launch of a new cutting-edge smartphone model in its home market. Now, Apple CEO Tim Cook is saying not to worry, that Apple continues to see strong demand in China, and even set a quarterly record for the market in September following the release of its latest iPhone.

Huawei once dominated its home market, and was challenging Apple at the upper end. But that ended when the U.S. choked off Huawei’s supply of 5G chips. The launch of its latest phone appears to show Huawei has found a way around the U.S. bans, and could soon mount a comeback. Many Chinese consumers are sympathetic as well, believing Huawei has been unfairly bullied by the U.S.

Shein Smiles on British Fashion Brand

Some may call it “misguided,” but Chinese fast-fashion sensation Shein quite likes what it sees in the British Missguided fashion brand. As part of its new deal to purchase the brand, Shein, which began in China but is now officially a Singaporean company, will form a joint venture with Missguided’s founder Nitin Passi to manage the brand under a licensing agreement.

Missguided doesn’t have the greatest track record. It was teetering on the brink of bankruptcy when it was acquired by Britain’s Frasers Group for 20 million pounds, or about $24 million, in 2022. This kind of cheap acquisition certainly matches Shein’s own reputation for bargains, and also fits a pattern of Chinese companies that love to buy struggling foreign brands for bargain prices.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue Xi-Biden meeting looks likelier, airlines offer “all-you-can-fly” promotions and Foxconn gets probed. On a scale of 1 to 100, we give the week a 50 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

More U.S.-China Warming as Xi, Biden Meet Each Other’s Emissaries

The ongoing thaw in U.S.-China relations continued in earnest last week, first as Xi Jinping gave a surprise audience to visiting California Governor Gavin Newsom in Beijing, and then as Joe Biden granted a similar audience to Chinese Foreign Minister Wang Yi. In addition, a U.S.-China working group on economic issues held its first round of talks.

Wang was the first cabinet-level Chinese official to visit the U.S. since the thaw began earlier this year. Before that, it was all U.S. cabinet-level officials visiting China. Xi’s decision to meet with the California governor also raised eyebrows, given Newsom’s lower ranking. The U.S. confirmed the two sides will try to work towards a Xi-Biden meeting at the APEC summit in the U.S. next month.

China Cracks Open the Debt Floodgates Wider

In what’s being described as a rare mid-year move, China has officially raised its limit on the amount of sovereign debt it can issue. The latest tweak now allows China to issue sovereign debt worth up to 3.8% of its GDP, compared with a previous limit of 3% set in March. The plan allows China to issue an additional 1 trillion yuan, or about $137 billion, in sovereign debt.

Beijing says it needs the new debt to support disaster relief and construction, and we suspect the big majority of that will go to construction. This seems to be the latest signal that as many of its other stimulus measures fail to have much effect, China will return to its old playbook of trying to stimulate the economy through new infrastructure spending.

China Stocks Post Weekly Gains after Friday Rally

A Friday rally helped offshore-listed Chinese stocks to post gains for all of last week, though the rally didn’t seem to have any major foundation. The gains came after a sharp selloff the previous week. The Hang Seng China Enterprises Index rose 1.8% during the week, while the iShares MSCI China ETF rose 0.5%, compared with a 1.3% rise for the broader Hang Seng Index.

Markets may have been moved by the latest signs of warming China-U.S. ties, and the growing possibility of a Xi-Biden meeting, which looked more likely at the end of the week when Joe Biden unexpectedly met with visiting Chinese Foreign Minister Wang Yi. Still, it will take quite a bit more than improving U.S.-China relations to fix what ails the Chinese economy right now.

Industry

China to Identify ‘Too Big to Fail’ Insurers

When it comes to “too big to fail,” China has been quite vigilant about naming its biggest banks that are systemically so important that the government would rescue them no matter what if a major crisis occurred. But Beijing has been less proactive in defining which of its insurers are also “too big to fail,” or at least until now.

The People’s Bank of China and the National Administration of Financial Regulation (NAFR) have just issued criteria to identify which insurers should get such status, meaning we will probably see a list of names soon. This looks prudent, given that China has some very large insurers by now, most notably China Life and Ping An, whose collapse could ripple throughout the financial system.

Airline Goes Global in Recent Wave of ‘All You Can Fly’ Promotions

Chinese airlines have recently begun selling “all you can fly” packages for their best customers in a bid to boost sales, and now at least one, China Southern, is adding international flights into its mix. One of the earlier original packages came from budget carrier Spring Airlines, which offered unlimited flights from October to next March for just 3,399 yuan, or $465.

Airlines were one of the hardest hit groups during the pandemic, and they may have suffered longer in China due to the country’s strict Covid controls that lasted about a year longer than the rest of the world. International flights, in particular, were slashed at the height of the pandemic, and still are only at a fraction of their pre-pandemic levels.

Funding Dries Up for Healthcare Startups

Airlines aren’t the only ones looking for some love out there. China’s hungry field of healthcare startups is also starting to feel abandoned by investors who once fawned over the group for their big potential. After peaking at $34 billion in 2021, funding for healthcare startups fell to $15.6 billion last year and was on track to fall further still with just $5.7 billion in the first half of this year.

The drop isn’t too surprising, since China’s healthcare market has become a bit of a bloodbath these days, especially for the many drug startups that are big cash burners. Even when such companies finally bring their drugs to market, they are suddenly finding themselves earning far less than they hoped due to the low prices paid by China’s national health plan.

Company

Foxconn Gets Probed

National champion one day, scapegoat the next. That’s the story of Foxconn these days, as the Taiwanese company that’s one of Apple’s key manufacturing partners confirmed that it’s getting probed for something. Foxconn said the reasons were unclear for the recent visits to some of its Mainland-based units by investigators, but did confirm the visits occurred.

It’s quite possible that these probes are directed against individuals and not the company, since China appears to be cracking down on company officials who accept bribes. But it also shows how far Foxconn has fallen from Beijing’s graces. The company was untouchable at one time as one of China’s biggest employers, but lately has been moving jobs to nearby India.

Stellantis Buys Into Struggling EV Maker Leapmotor

Struggling Chinese electric vehicle (EV) maker Leapmotor got thrown a lifeline last week when Euro-American carmaker Stellantis announced it would pump $1.6 billion into the Chinese company in exchange for a 21% stake. Stellantis hopes it can slap its name on Leapmotor’s cars to help it gain a toehold in the booming Chinese market that accounts for more than half of all global EV sales.

The deal comes just months after Volkswagen made a similar move, paying a more modest sum of up to $700 million for 5% of the similarly struggling Xpeng. Both Leapmotor and Xpeng are part of a bumper crop of Chinese startups that were speeding toward the scrap heap of EV history when they received their lifelines. The money may buy them another year or two, but probably not much else.

Pony.ai Lands Big Saudi Investment

Also from the world of new-economy cars, autonomous driving startup Pony.ai got a nice cash infusion of its own last week courtesy of a $100 million investment from Saudi Arabia. The deal will see Pony.ai and Saudi Arabia’s Neom urban development project set up a joint venture to develop robotaxis for the Middle East.

This looks like a nice validation for Pony.ai’s technology, which will be used in a new $500 billion megacity set to rise in the Saudi Arabian desert. It also shows how the Middle East is becoming an important investor in China’s tech startups as their traditional Western funding sources increasingly avoid the market.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue GDP growth beats expectations, dueling export restrictions and the piping hot IPO for a top premium rice maker. On a scale of 1 to 100, we give the week a 40 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

GDP Rebounds, as Putin Comes Calling

The two big stories last week were the latest GDP figures that showed China’s economy appeared to be picking up steam, and the latest edition of the Belt and Road (BRI) Forum in Beijing. GDP growth was the bigger of those, with the figure up 4.9% in the third quarter year-on-year. At the BRI Forum, the biggest headline was the attendance by Russian President Vladimir Putin.

There’s been much ado about the fact that the GDP growth was stronger than expected, and it does indeed seem to put China suspiciously close to its target for “about 5%” growth this year. Meanwhile, aside from Putin’s attendance, the BRI forum was mostly a beauty pageant of Global South leaders who were largely upstaged by the much bigger news happening in the Gaza Strip.

China Delays Another Global Merger

In another big story with global implications, China is flexing its muscle by delaying another big global M&A deal. This time, it’s Beijing’s approval for Broadcom’s $69 billion purchase of VMWare that’s taking longer than expected. Beijing hasn’t killed the deal, but may be taking longer than expected because such approvals require consultation with the Foreign Ministry and State Council.

This latest delay comes after China killed Intel’s plan to purchase Tower Semiconductor earlier this year using similar foot-dragging. Most people see this as Beijing expressing its displeasure at recent Western efforts to stifle China’s chip sector. The danger for Beijing is that Western chipmakers, fearful of having their M&A killed, may simply start avoiding doing business in China.

China Stocks Resume Their Downward Ways

After a brief rally two weeks ago, offshore-listed Chinese stocks resumed their recent downward ways despite the relatively positive third-quarter GDP report. The Hang Seng China Enterprises Index dropped 4% during the week, while the iShares MSCI China ETF fell 5.2%. The broader Hang Seng Index was also down 3.6%, hitting a fresh low for the year.

GDP news aside, the stock vultures continued to circle around fast-failing former real estate giants Evergrande and Country Garden. At the same time, announcements of new economic stimulus measures were relatively light last week as China turned most of its spotlight on the Belt and Road Forum in Beijing.

Industry

U.S. Bans More China Chip Sales, EU Eyes Unfair Wind Subsidies

China’s two biggest trading partners were taking more steps last week that could hobble some of the country’s most cutting-edge industries. The latest move by the U.S. continued its policy of banning the sale of some of its most cutting-edge chips and chip technology to China. Meantime, the EU reportedly is scrutinizing China for illegal subsidies to its wind energy sector.

Both moves extend recent campaigns by the U.S. and Europe, which are trying to prevent China from dominating some of the world’s most leading-edge technologies. While the U.S. campaign has gotten a lot of attention, the EU’s scrutiny of Chinese wind power equipment could also result in new tariffs that would deal a big blow to Chinese producers, so to speak.

China Rolls Out More Tech Material Export Restrictions

The U.S. and EU weren’t the only ones taking new actions that could dampen global trade last week. China was also busy on that front, this time rolling out new export restrictions for some types of graphite, an important element used to make electric vehicle (EV) batteries.

China is the world’s top graphite producer, and is also vying to become its dominant EV battery maker. This move, which will require special licenses for the export of graphite products, is undoubtedly aimed at stifling other countries’ efforts to develop their own battery makers. China rolled out similar restrictions earlier this year for two other metals used in high-tech products.

Gemdale Chairman Resigns, as Country Garden Defaults

Another ticking time bomb has emerged from China’s struggling property sector, this time with word that Gemdale’s longtime chairman has resigned, as the company struggles with 10 billion yuan in maturing debt. That comes as the larger Country Garden finally fell into default by missing a bond interest payment that was already overdue, but was still within a 30-day grace period.

The latest distress signs come as fresh data showed that investment in Chinese real estate contracted 9.1% in the first three quarters of this year compared with a year earlier. Construction starts by floor area fell by an even sharper 23.4%. That’s hardly surprising in the current market where prices are falling and transactions are plunging.

Company

Apple’s New iPhone Sales Disappoint, as Tim Cook Calls on Beijing

Global tech titan Apple was in a couple of China headlines last week, led by a report that sales of its latest iPhone 15 were off to a disappointing start. A separate report said that Apple chief Tim Cook also visited China’s commerce minister during the week, and discussed his company’s development in China as well as the U.S.-China trade relationship.

Cook’s visit is relatively minor news, since he was a frequent visitor before the pandemic and has returned since China reopened. The disappointing iPhone sales is more significant, and probably reflects a resurgence in China for Huawei, which surprised everyone in late August with its launch of a new cutting-edge smartphone that appeared to skirt U.S. sanctions on the company.

WH Group Eyes U.S. Listing for Smithfield

China’s WH Group made headlines in 2013 when it purchased leading U.S. pork producer Smithfield for $4.7 billion, marking one of the biggest takeovers of a U.S. company by a Chinese buyer at the time. Now, it seems WH Group is ready to give some of Smithfield back to U.S. investors with plans for a New York IPO for the unit as early as next year.

Much has happened since the landmark deal, including WH Group’s own listing in Hong Kong a year after the acquisition. But its shares now trade near a record low, partly due to all the turbulence in China’s pork market several years ago due to an outbreak of African swine fever. Smithfield benefited from that by exporting more pork to China, though those exports have tumbled this year.

Vanguard Exits Ant Group Joint Venture

Vanguard Group has offloaded its 49% stake in a robo-advisory services joint venture with Alibaba-affiliated Ant Group. The move is part of the U.S. fund giant’s broader flight from China’s 29 trillion yuan mutual fund market, coming after it shuttered some of its other China businesses earlier this year.

Vanguard’s retreat contrasts with larger rivals like BlackRock and Fidelity, which have been boosting their fund management businesses in China. Vanguard is more indicative of recent trends that have seen foreign funds flee from China on concerns of an economic slowdown. That said, there’s still plenty of money sloshing around the country in need of management.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue exports keep falling, tourism rebounds and Country Garden and Evergrande leave creditors guessing. On a scale of 1 to 100, we give the week a 45 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

China Rallies Consumers, Banks, Huijin and Foreigners to the Economic Cause

Beijing was calling on just about everyone to do their part to prop up China’s sputtering economy last week. It called on consumers to buy more cars and banks to assist in financing. It called on Huijin, one of its biggest sovereign wealth investors, to buy shares of the nation’s four biggest banks. And it even called on foreigners to buy more of its offshore sovereign debt.

The steady series of calls to arms has a slightly coordinated feel to it, showing that Beijing is taking the slowing economy more seriously and trying to prop things up on multiple fronts. Unfortunately, the property sector that’s been dragging the broader economy down is likely to prove even more powerful than all these other various efforts.

Export Keep Sliding as Deflation Pressure Remains

Two big economic indicators last week showed China’s exports continued to contract, while the country also teetered on the brink of deflation. Exports fell 6.2% in September, marking a fifth consecutive month of declines. Meantime, the country’s consumer price index was unchanged, while the producer price index fell for a 12^th straight month.

Some are noting that things could have been worse, as economists were mostly forecasting bigger declines in trade, though they were looking for a slight rise in inflation. Year-ago comparison figures are also quite weak since China was in the midst of its brutal Covid controls at this time last year. That means the latest declines could have been even worse if not for weak numbers last year.

China Stocks Make Big Gains, Only to Give Them Back

Offshore-listed Chinese stocks posted big gains in the first four days of last week as people returned from the long National Day holiday, only to give most of those back on Friday after the weak export and inflation data came out. The Hang Seng China Enterprises Index rose 2.4% during the week, while the iShares MSCI China ETF rose 0.1%. The broader Hang Seng Index rose 1.9%.

This week’s cycle is becoming all too common in China these days. People get excited when Beijing announces new initiatives to prop up the economy, often calling on banks and other state-owned entities to join the cause. But then new data comes out showing things are still bad, effectively killing any positive sentiment.

Industry

Tourism Rebounds Past Pre-Pandemic Levels

One factor behind the stock market rally early last week was data from the weeklong National Day holiday, which showed that spending this year actually surpassed pre-Covid levels in 2019. The increase wasn’t huge, with tourism revenue over the period up 1.5% from 2019. But, hey, any gain in this kind of climate should be cause for some celebration.

The reality is that this year’s holiday contained eight days, one more than usual, due to the inclusion of the annual Mid-Autumn Festival holiday that coincided with the National Day period this year. And truth be told, many Chinese would probably rather be anywhere than at home right now, as they look for ways to escape the increasing economic gloom of their daily lives.

Evergrande, Country Garden Leave Creditors Guessing

The ongoing sagas of China’s two poster children for its struggling property market marched on last week, with developments that left creditors mostly scratching their heads. One report said Evergrande creditors were “left in the dark,” after a scheduled restructuring meeting was scrapped. Meantime, Country Garden finally fessed up that it can’t meet all of its offshore debt obligations.

Both stories have overtones of some behind-the-scenes maneuvering, and we suspect that each company is bargaining fast and furiously with the central government to stave off its own collapse. Beijing seems to blow hot and cold over this pair, at some times wanting to save them while at others appearing to leave them to fend for themselves.

Samsung, Hynix Get U.S. Waivers for Their China Chip Plants

The latest U.S. actions in its war on China’s chip sector took a new twist last week, as Washington granted official waivers to South Korean chip giants Samsung and SK Hynix, allowing them to equip their Chinese facilities. Here it’s noteworthy that the exemptions are going to non-Chinese chip companies that just happen to be manufacturing in China, and not to Chinese companies.

It’s also quite likely that neither Samsung nor Hynix are producing their most cutting-edge chips in China, and are doing that at home. So, whatever equipment they export to China as a result of this waiver will probably be one or two generations old, which shows the U.S. is becoming more targeted in its approach by allowing China to obtain older chip technology.

Company

India Turns Up the Heat on Vivo

The U.S. isn’t the only country that’s getting tough on China tech. A far less visible story involves India, which is making life miserable these days for Chinese brands that now dominate the world’s second-largest smartphone market. In the latest twist, Delhi has accused leading brand Vivo of illegally obtaining visas for some of its workers, and illegally traveling to sensitive areas.

India also arrested a top Vivo official over money laundering accusations. This all occurred as India accuses Vivo and most other Chinese smartphone makers of tax evasion, and has frozen huge sums of their money until the disputes are resolved. This latest twist looks like the start of a new chapter in the story, and we wouldn’t be surprised to see Chinese brands start to pull back from the market.

XPeng Suspends Supply Chain Chief

Beijing isn’t the only one on a hunt for corrupt officials. Xpeng, one of China’s leading homegrown new energy vehicle (NEV) makers, made headlines last week after it suspended its supply chain chief, Li Feng, on suspicion of corruption. We suspect that Li will ultimately be handed over to the police and spend the next few years in jail alongside similarly corrupt government officials.

The fact of the matter is that someone in Li’s position has huge leverage over his company’s many suppliers, and is very prone to corruption as those suppliers offer lavish gifts and other incentives to buy their products. We’ve seen similar actions in the past from other private companies, but many probably choose to keep this type of thing quiet to avoid reputational damage.

Imax China Shareholders Nix Buyout

This was one show-stopper that global large-screen cinema operator Imax didn’t see coming. The Canadian company made an offer earlier this year to privatize its China unit, Imax China, after the company’s shares failed to excite investors over their eight years of trading. But then some investors decided they didn’t like the buyout price and killed the deal.

In fact, the buyout premium was relatively small, at around 10%. But Hong Kong, which is where Imax China trades, also has rules that set a very high bar for buyouts, allowing even small groups of investors to sink such deals. That differs quite a bit from the U.S., where minority shareholders have very little power to stop similar buyout offers.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue big data catches a break, Evergrande’s restructuring stalls, and a fading sports brand tries its hand at grain trading. On a scale of 1 to 100, we give the week a 45 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

Big Data Gets a Break

Of all the things that scare foreign businesses in China these days, the nation’s growing obsession with data security is one of the highest on the list. After more than a year of tightening security in this key area, Beijing has suddenly taken a step back by releasing draft measures that would significantly roll back recent rules for cross-border data transfers.

Among other things, companies would no longer need to apply for permission to transfer their China-based data outside the country, though they could be requested to do that if regulators independently determine their data is important enough. That was a huge concern before, and shows economic growth is finally gaining more equal footing with national security.

U.S. Sends Senators to China, Warns of More Export Curbs

It may not be the kind of win-win warm, fuzzy feeling that China likes, but the U.S. seems determined to put its relationship with Beijing back on more stable footing with a certain new degree of pragmatic realism. In the latest step in that direction, a group of U.S. senators will visit Beijing this week, where they are seeking a meeting with President Xi Jinping.

Separately, the U.S. has warned China to expect an updated list of export curbs later this month, refining earlier rules first released last year. We don’t know what the senators will discuss, but it’s probably safe to say they’ll raise a wide range of concerns to show their toughness on China. Similarly, the new export curb rules won’t be pleasant, but at least China knows they’re coming.

No Holiday for China Stocks

Much of China was on holiday last week for the country’s weeklong National Day break last week, but the picture wasn’t as sanguine for offshore-listed Chinese stocks that continued to trade. The Hang Seng China Enterprises Index has lost 4.6% over the last two weeks, while the iShares MSCI China ETF is down 2.1%, and the broader Hang Seng Index has shed 3.2%.

The Hang Seng Index actually hit a low for 2023 last week, and it would have been a low not seen since 2009 if not for a brief massive selloff a year ago that achieved that record. Last year’s selloff was quite fleeting and was followed almost immediately by a major rally. But we’re skeptical that will happen again this time as growing signs of gloom continue to build over the Chinese economy.

Industry

New Home Prices Tick Up

It wasn’t all gloom and doom last week, with at least one small piece of good news coming from the nation’s embattled property sector. New home prices eked out a tiny 0.05% month-on-month gain in September, ending four months of declines. Of course, that doesn’t say anything about sales of existing homes, which don’t typically fetch as strong prices as new ones.

Separate reports show some new steps the public and private sectors are taking to shore up this vulnerable market that looks set to drag China into its worst economic slump in decades. One saw leading home broker Lianjia slash its commissions in the important Beijing market to boost sales, while another saw the city of Chengdu ease home buying restrictions in some districts.

Travelers Shun Global Vacations

Masses of Chinese travelers took to the road during the weeklong National Day holiday, but they’ve been far less enthusiastic about traveling abroad. A new survey conducted in September showed that only 54% of China’s most seasoned travelers said they plan to go abroad this year, down from 62% who answered that way to a similar question in June.

The survey also showed that 22% of respondents had no plans to go abroad for the next three years, up from just 6% in June. Global travel was already hurting due to a lack of flights, which have been slow to come back since China reopened less than a year ago. Now, it seems higher prices for global travel are also dampening demand in the current environment of economic uncertainty.

Kroll Exec Barred from Leaving China

Another week, another foreign executive barred from leaving China. This time it was Michael Chan, a Hong Kong-based managing director from the U.S. risk advisory firm Kroll, who has been prevented from leaving China. Chan informed his employer of his situation, and said he has been assisting in an investigation for a case dating back a few years.

Unlike some of the other people who have been detained, Chan is still working and can freely move about China. And we should note that similar actions against U.S. firms Mintz Group and Bain & Co. don’t appear to have resulted in any arrests of their employees. But such moves, combined with all the recent focus on national security, aren’t particularly reassuring to foreign businesses.

Company

Evergrande Restructuring Stalls as Chairman Gets Investigated

After appearing to make some substantial progress in its reorganization, embattled property developer Evergrande is once again falling into the doghouse with both its creditors and also Chinese officialdom. The company scrapped a meeting with its creditors late last month after it became apparent they wouldn’t accept its latest terms to reorganize Evergrande’s debt.

Then, Evergrande’s Chairman Xu Jiayin was suddenly hauled away by the police, with reports saying he is suspected of illegally transferring assets abroad, even as his company struggles to complete many of its stalled projects. This really does look like the start of a new downward spiral for Evergrande, since it will be hard for Xu to do much when he’s sitting in a jail cell.

Huawei Unveils More Products That Skirt U.S. Sanctions

At first embattled tech giant Huawei was being low-key with its unveiling of a new smartphone that appeared to find a way around U.S. sanctions that deprived the company of cutting-edge chips to power its handsets. Now Huawei appears to be getting a bit more brazen with its recent unveiling of more products that appear to be made with its own high-tech chips.

Some reports have suggested Huawei is working with a network of chip companies, mostly from Taiwan, to skirt the U.S. sanctions. Huawei was previously working with another Taiwan company, TSMC, to manufacture its self-designed chips. So, finding other partners to do this work shouldn’t be too difficult, though the quality of their work may not be as high.

Ford Halts Construction of China-backed Battery Plant

A China-backed electric battery plant under construction in the U.S. has become a lightning rod for controversy, showing the American backlash to anything with China ties from this cutting-edge industry. Construction of the $3.5 billion plant, being built by CATL to supply Ford, was suddenly halted late last month, while Ford determined if it could competitively operate the facility.

The U.S. House of Representatives had already begun investigating the plant in April, and warned Ford that it had until the end of last week to hand over information or face potential consequences. In this case the consequences don’t look that dire, and Ford is also facing bigger problems from a major union strike. Still, the future of this particular battery plant looks anything but certain.

AND FROM THE PAGES OF BAMBOO WORKS

In this week’s issue U.S. companies go gloomy on China, a climate shift, and the wedding industry sings the blues. On a scale of 1 to 100, we give the week a 45 for offshore-listed China stocks.

Doug Young, Editor in Chief

You can sign up to get China Bulletin weekly in your inbox.

MACRO

U.S. Firms Go Gloomy on China

On the one hand, a new annual sentiment survey showing U.S. businesses are gloomy about their China prospects should come as no big surprise in the current climate. But having followed these surveys for quite some time, we can also say that such glum results are a huge shift from the usual optimism shown by foreign businesses in China in better times.

The latest survey from the Shanghai branch of the American Chamber of Commerce showed just 52% of companies polled were optimistic about their prospects for the next five years. That was down by 3 percentage points from last year, and marked a record low in the 25 years the survey has been conducted. The times are definitely changing.

Corruption Crackdown Is Here to Stay

It’s official. After being one of the top items on Xi Jinping’s agenda during his 10 years as president, his signature anti-corruption campaign has attained formal status. The crackdown was included for what appears to be the first time in official language, with the Communist Party publishing a new Five Year Plan aimed at stamping out “industrial, systemic and regional corruption.”

The plan specifically targeted finance, health care, sports, higher education and state-owned enterprises as areas where corruption continues to flourish despite the decade-long crackdown. This publication of a formal plan shows the campaign will continue for the foreseeable future, with the party continuing to lead the effort.

China Stocks Fall, But It Could Have Been Worse

Offshore-listed China stocks failed to show many signs of life last week, though it could have been worse without a Friday rally that pared some of the losses. The Hang Seng China Enterprises Index lost 0.7% during the week, while the iShares MSCI China ETF fell 0.4%. Meantime, the broader Hang Seng Index fell 0.7% for the week.

The downward pressure was mostly due to continuing gloom about China’s economy, with few signs that the situation will improve anytime soon. In one slightly positive signal, the Chinese securities regulator took a significant step toward resuming U.S. listings by Chinese firms. But such resumption won’t mean much if the economy remains weak.

Industry

China Backpedaling on Greenhouse Pledges?

In what could become a potential backtracking on China’s aggressive climate pledges, the nation’s top climate official was quoted at a forum last week saying the complete phase-out of fossil fuels isn’t realistic. Xie Zhenhua made his comments in response to comments by ambassadors, ahead of the next COP28 climate meeting set for November in Dubai.

China has repeatedly said it aims to reach peak carbon emissions by 2030 and become carbon neutral by 2060. But those pledges were given during stronger economic times, and undoubtedly assumed stronger economic growth. If the current downturn becomes a longer-term trend, it’s quite possible Xie’s comments could signal a re-think of the earlier carbon-reduction goals.

China Halts Exports of Germanium and Gallium

China has made good on its earlier promise to sharply slow its exports of Germanium and Gallium, two important ingredients in the manufacture of high-tech microchips. New data showed the country’s exports of the two metals fell to zero in August, following the announcement of new export controls in July that took effect Aug. 1.

But fear not. At least one company, U.S. firm AXT, also announced last week it applied for and received a license to export the metals. Most people believe China introduced the controls to show its displeasure with recent U.S. efforts to stifle its microchip industry. But the gesture may be mostly for show, as evidenced by the short time it took for at least one company to obtain its license.

No Bells for Wedding Industry

The property and car markets aren’t the only ones suffering as Chinese consumers rein in their spending. The nation’s massive market for weddings is also going through some tough times, according to a new Reuters report. But the problem is less due to consumer caution, and instead owes simply to less couples getting married.

Just 6.8 million couples tied the knot last year, down by 800,000 from the previous year and the lowest level since the government began tracking the data in 1986. That’s looking problematic for an industry that’s worth an estimated $500 billion per year, fueled by brides, grooms and their families throwing lavish parties to kick off their lives as married couples.

Company

GGV Capital Hives Off China Business

Venture firm GGV Capital made headlines last week with its announcement that it would split itself into two pieces, one focused on Asia and the other on the U.S. While the company didn’t say it directly, most interpreted the step as the latest dumping of a Chinese business that has become increasingly problematic for many Western investment firms.

GGV’s move comes not long after the more prominent Sequoia Capital also split off its China arm, saying the move would give Sequoia China more space to operate. That’s one way of putting it. But it also comes as the U.S. puts growing restrictions on investing in Chinese high-tech firms, worrying many major investors that don’t want to end up on the wrong side of the law.

TikTok Gets Big Fine in Europe

The clock continued to tick down on TikTok last week, this time as the short video sensation was handed a massive 345 million euro fine by the European Union for endangering children through its mismanagement of their personal data. This particular decision spotlights the way that Chinese firms are often careless with their handling of user data, rather than any national security risk.

It shows how TikTok and a new generation of aggressive, globally minded Chinese internet companies are facing growing scrutiny as they score big breakthroughs in lucrative Western markets. A fine of that magnitude might have killed TikTok just a few years ago. But we expect it will be quite manageable for now for the company, which has become huge among Western youth.

Go, Go, Gotion

China’s growing complex of EV battery makers took another big step forward last week, as Gotion High-tech Co. Ltd. began production at a massive new manufacturing plant in Europe. The plant in Germany could reach 5 GWh of annual production by the middle of next year, and quadruple that to 20 GWh by the time it is fully functional.

The German launch comes a week after Gotion selected the U.S. state of Illinois for another $2 billion manufacturing base it plans to build for the North American market. The company is the world’s ninth largest battery maker, well behind leading player CATL, which is also Chinese and controls more than a third of the global market.

AND FROM THE PAGES OF BAMBOO WORKS