"The Chinese government has always been very slow in forcing substantial changes by way of mergers, acquisitions, or closure of enterprises." — on the historical hesitance of Chinese authorities to eliminate obsolete industrial capacity

Key Takeaways

• The absence of Chinese business leaders during Xi Jinping's U.S. visit likely stems from a mix of historical precedent and American national security concerns
• A new cross-shareholding deal between two state-owned legacy automakers signals the start of a slow, government-led consolidation in China's car market

By Rene Vanguestaine and Doug Young

During Chinese President Xi Jinping’s recent trip to Washington, the world watched closely as the leaders of the world’s two largest economies held their second summit of the year. Yet, beyond the official diplomatic dialogue, there was a striking parallel in how Beijing manages its corporate landscape — both abroad and at home. This overarching state control was glaringly obvious in two separate spheres this past week: the total absence of a Chinese business delegation in the U.S. capital; and a rare, state-backed merger between two of China’s largest state-run automakers back home.

We'll start with the Washington visit, which was the talk of the town in both capitals. In the week leading up to the summit, rumors swirled that Xi would bring a major delegation of corporate titans, including leaders from smartphone giant Xiaomi (1810.HK) and CATL (300750.SZ), the world’s largest EV battery maker. In the end, neither of those two, nor any other Chinese business leaders, showed up.

Everyone has been guessing what happened. We think there are two highly plausible explanations. First, historically speaking, Chinese businesspeople rarely travel with Xi on official state trips. The pre-summit chatter may have simply been media fantasizing, or corporate fabulating meant to force politicians' hands for an invitation.

More importantly, it's highly plausible that the U.S. administration objected to certain companies attending due to national security concerns. The products of companies like CATL have dual-purpose capabilities, which is a diplomatic way of implying they could be utilized by the Chinese military or its surveillance apparatus. Notably, both Xiaomi and CATL have largely been excluded from the U.S. market. You don't see Xiaomi phones in America, and a planned CATL battery factory recently seems to have gotten scrapped.

This absence provided a sharp contrast to the U.S. side. American business leaders, including Jeff Bezos and Mark Zuckerberg, were prominently involved. We've seen this before: when Donald Trump went to China in May, he was accompanied by CEOs like Jensen Huang, Tim Cook, and Elon Musk. The U.S. is a capitalistic environment, making the confluence between the corporate and government sectors inevitable. China operates on a vastly different model. The primacy of the Communist Party over everyone, including successful entrepreneurs, is simply a fact of life.

A sluggish push for auto consolidation

That exact primacy brings us to a second development that underscores Beijing's tight grip on corporate China. Back at home, we're witnessing a rare merger of sorts between two of the country's largest state-owned automakers, FAW and GAC (2238.HK; 601238.SH).

This isn’t an outright acquisition, but rather an entwinement through cross-shareholdings. The deal was notably announced just three days after China’s auto regulator publicly expressed its support for industry consolidation. FAW is one of China’s oldest state automakers owned by the central government, while GAC is a younger, highly successful company owned by the affluent Guangdong provincial government.

It's a well-known fact that there are way too many car manufacturers in China. Even for a market of 1.4 billion people, having 100 to 120 automakers is unsustainable. Yet, the government has historically been slow to force substantial changes — whether through mergers, acquisitions, or closures — largely to protect local employment.

Why choose these two companies now? Both are deeply tied to struggling legacy formats. GAC is a main joint venture partner with Toyota and Honda, while FAW partners with Toyota and Volkswagen. The sale of internal combustion engine cars in China has plummeted. Volkswagen, BMW, and Mercedes have been slow to transition to EVs and are suffering dramatic sales declines in China. State-owned companies like FAW have also largely failed to successfully navigate the EV transition.

Conversely, private companies are faring much better. Automakers like BYD (1211.HK; 002594.SZ), Xpeng (XPEV.US; 9868.HK), Li Auto (2015.HK, LI.US), and Nio (9866.HK; NIO.US) are dealing with a brutal domestic price war, but they're positioned almost exclusively in the EV space and are seeing massive growth in overseas sales across Southeast Asia, Latin America, and Europe. Geely (0175.HK) is a similar success story, benefiting from exports and its ownership of EV brands like Volvo and Polestar. Beijing has tried to force private companies to behave and consolidate, but those efforts have largely failed. It makes sense that the government is now starting with the laggards it controls most closely. Whether this cautious, cross-shareholding approach will translate into meaningful capacity reduction remains to be seen. But in both Washington and Guangdong, the message is clear: Beijing is firmly in the driver's seat.

"If you want to ensure the success of a company that is still very much regional Southeast Asia when going to market, it's probably a bit easier in Hong Kong than in the U.S." — Explaining why a Southeast Asian consumer brand would prefer a Hong Kong listing over Wall Street.

Key Takeaways:

• A U.S.-developed AI tool's mock breach of WeChat highlights escalating cybersecurity risks and could trigger tighter oversight from Beijing
• Jollibee's decision to list in Hong Kong over the U.S. underscores the city's growing appeal for regional consumer brands seeking Asian capital

By Rene Vanguestaine and Doug Young

A couple of recent stories are reflecting a shift in the trans-Pacific business landscape. On one hand, a mock AI attack on China's premier WeChat messaging app has exposed the vulnerabilities of the country's digital ecosystem to U.S.-developed technology. On the other, a major Southeast Asian fast-food conglomerate has decided to bypass Wall Street in favor of Hong Kong for its international listing. Both events underscore the evolving regionalization of Asia's digital and financial infrastructure — and the intricate push-and-pull dynamics with the U.S.

We're learning that a group of benign researchers in California recently used U.S. AI to build a tool that could breach millions of accounts on WeChat, the ubiquitous app owned by Tencent (0700.HK), in just hours. Their tool, dubbed WeWorm, can hijack a user’s account, call their contacts, and spread from phone to phone without anyone ever answering a call.

For a platform boasting 1.4 billion users that essentially functions as a telecoms carrier in its own right, this is deeply alarming. We believe Beijing isn't reacting well to this development. Usually, the shoe is on the other foot, with the U.S. accusing Chinese hackers of infiltrating its digital spaces. WeChat is the nexus of communication for the Chinese population. The ability to control this network and reach such a massive audience carries severe risks of abuse by anyone seeking to incite social instability and spread disinformation.

While Beijing doesn't directly own the network, it maintains heavy indirect control, likely communicating with Tencent on a daily or even hourly basis. Beijing has consistently demonstrated its ability to control the internet in ways previously thought impossible. If the Chinese security apparatus believes Tencent isn't doing enough to contain this AI threat, we're sure the government will step in with heavier oversight to bring the situation under control.

The AI angle is equally compelling. Until just a few days ago, the major tech heads pushing AI were essentially telling the world not to worry — assuring us that while there might be a minuscule chance of disaster, everything would generally be okay. Then, they suddenly reversed course, warning that the technology might be getting out of control and require immediate slowing down.

We're sure WeChat is working to fix this specific vulnerability that was uncovered by the California team. But as we've seen with social media companies losing control or maliciously manipulating users, this certainly isn't the last time we're going to talk about this kind of risk.

In response to offshore threats, we expect Beijing to crack down and implement stronger oversight on domestic AI companies. While China's public focus has largely been on AI applications to boost manufacturing productivity and counter a shrinking working-age population, it's highly probable the government is heavily involved in behind-the-scenes military and defense applications.

Shifting tides in Asian IPOs

Shifting gears to the capital markets, we're seeing another interesting regional play. Jollibee, a Philippines-based fast-food giant that owns brands like The Coffee Bean & Tea Leaf, recently announced a change of direction for its international operations. The company scrapped plans to spin off and separately list the international operation in the U.S., choosing to move the listing to Hong Kong instead.

Wall Street has long held the upper hand in attracting major Asian listings, but Hong Kong is gaining momentum. Much of this is driven by Mainland Chinese companies that currently face a hard time getting Beijing's approval to list in the U.S. But Jollibee's case highlights a different trend. Fast food doesn't typically boast the high margins or name recognition required to excite U.S. retail investors, who already have no shortage of domestic food and beverage IPOs to choose from.

In contrast, Hong Kong hosts a sizable, dedicated pool of investment money — including funds from the U.S. and Europe — focused specifically on Asia and Southeast Asia. These investors have a much better understanding of local economies in the region and why this company is successful. There are some cases where consumers have tried the brand in Hong Kong and responded positively, reflecting this deeper regional familiarity. Going to market in Hong Kong is simply easier for a regional Southeast Asian business.

This presents a vital test for Hong Kong: can its stock market attract more Southeast Asian companies to diversify away from solely Mainland firms? We think Hong Kong is far better equipped for this than Singapore. Despite being the financial capital of Southeast Asia where Jollibee is strongest, the Singapore Stock Exchange just doesn't seem to have the liquidity depth and trading volumes to satisfy companies of a certain size. Hong Kong's advantage is further bolstered by having China as its massive financial benefactor. That doesn't mean Wall Street is losing its crown entirely. For unproven, early-stage high-tech companies, the U.S. remains the better market. U.S. investors better understand the tech sector and are more willing to risk capital, offering sustained valuations beyond just the current AI hype. But for the regional consumer sector, Hong Kong is proving to be a much more welcoming home.

"If they stick with being pure-play, when the cycle turns, they will benefit from that in terms of stock price compared to other companies." — view on the investability of solar companies seeking to weather their sector’s current massive supply glut.

Key Takeaways

• Solar manufacturers like JinkoSolar are attempting to escape massive industry oversupply by pivoting into high-risk AI venture capital investing
• Beijing has paused new energy storage construction to prevent the kind of unbridled competition and overcapacity seen in the EV and solar sectors

By Rene Vanguestaine and Doug Young

China's once-booming new energy landscape is currently grappling with severe growing pains. Across the board, manufacturers are facing the harsh reality of massive overcapacity, forcing both companies and regulators into unusual maneuvers. In the struggling solar sector, desperate panel makers are abruptly transforming into venture capitalists to chase the AI wave. Meanwhile, in the closely related energy storage space, the Chinese government has taken the rare step of freezing new infrastructure projects to prevent yet another bubble from forming.

We’ve watched the solar panel sector suffer from massive oversupply for the last two years. Tired of waiting for a cyclical turnaround, JinkoSolar (JKS.US) abruptly announced last week that it’s entering the high-tech investment business. It unveiled its first moves as a venture capitalist in frontier industries, pouring between 70 million yuan and 100 million yuan ($10 million to $14 million) each into high-flying AI startups Moonshot, StepFun, and SiliconFlow.

We often refer to these types of businesses as "chameleon companies" because they are constantly changing their colors to match the latest market trends. However, investors weren’t thrilled by this transformation. JinkoSolar's stock plunged nearly 10% over the three trading days following the announcement, demonstrating that the market saw right through this attempt to create artificial excitement.

This reaction is hardly a surprise. The company used to be a pure-play solar manufacturer with nearly 20 years of expertise in that field. Now, it’s acting as a hybrid solar manufacturer and high-tech venture capitalist. Most investors prefer pure-play businesses. If they want to put money into venture capital, they can choose from plenty of asset management firms with strong track records, rather than relying on a solar company stepping far outside its core competency.

Yet, JinkoSolar is not alone in this pivot. Back in June, another solar materials company, Daqo New Energy (DQ.US), announced it was moving into the manufacturing of electrical equipment for AI data centers. With solar stocks currently trading near all-time lows due to the massive overcapacity, we expect to see more of these manufacturers attempting to tie themselves to AI — today's biggest investment theme — just to generate some buzz.

However, for investors looking at the solar sector, we believe the best strategy is to stick with pure-play companies that have not strayed from their central business. AI is highly volatile and increasingly suffering global backlash. Eventually, government intervention and the natural elimination of obsolete capacity will turn the solar cycle around, and pure-play companies will be the ones positioned to benefit.

Putting the brakes on energy storage

Jinko’s pivot away from the bursting solar bubble looks a lot like another rapidly inflating bubble: energy storage. According to a recent scoop from financial media outlet Caixin, Beijing has ordered a pause on the construction of new power and energy storage projects pending an industry review.

Energy storage facilities have become all the rage lately for storing the massive amounts of excess power produced by China's solar and wind farms. Because the state-managed power grid was unable or unwilling to absorb overcapacity from these farms, energy-saving batteries became the next logical step. Chinese entrepreneurs adopted a "why not?" mentality, and solar manufacturers — including JinkoSolar — pushed heavily into this field. Inevitably, swarms of competitors blindly chased the promising trend.

But central authorities became alarmed when they noticed that planned new capacity for this year had already climbed to roughly 1.5 times China's total projected battery output for 2025. Consequently, Beijing put the brakes on all new construction in mid-May. Moving forward, only companies that can demonstrate relatively high utilization rates for their existing energy storage capacity will be allowed to proceed with new construction next year.

This proactive halt is highly unusual. Beijing typically loves infrastructure spending, frequently using it to spur economic growth during troubled times. However, it seems the government has finally learned from the unbridled, irrational competition that plagued the EV and solar sectors. They are stepping in much earlier in the process to keep the genie in the bottle and prevent destructive involution.

There is a notable irony here. This domestic crackdown on excess capacity is happening exactly as the Chinese government tells the U.S. and Europe that there is no overcapacity in China, claiming the issue is a Western fabrication designed to limit China's growth. It is not totally surprising to see the apparatus speaking out of both sides of its mouth. While a portion of this battery-saving capacity is undoubtedly meant to meet growing global export demand, Beijing is clearly terrified that unchecked competition will destroy profitability, lead to sustained losses, and ultimately threaten domestic employment and social stability. For those looking to invest in newly listed energy storage companies, our advice mirrors our outlook on solar panels. The market is waiting for order to be restored. Until Beijing allows capacity to be built again, we advise sticking with bigger, established names that possess scale, reasonable capital, and proven management teams who have successfully navigated earlier down cycles. Success in China's new energy sector remains a waiting game — and entirely a question of timing.

The company’s core e-commerce profits grew faster than its revenue, while its Gap China unit showed sales momentum and value as a strategic testing ground

By Da Cheung

Baozun Inc. (BZUN.US; 9991.HK) reported sharply improved profitability in the second quarter, as stronger earnings from its core e-commerce business and continued growth at its brand-management unit prompted the company to raise its long-term profit target.

The company’s revenue rose 7.5% year-on-year to 2.74 billion yuan ($404 million) for the three months through June, while its non-GAAP operating profit climbed to 74.3 million yuan from 6.1 million yuan a year earlier.

The improvement was led by Baozun’s traditional e-commerce business, as the unit’s adjusted operating profit for the quarter more than doubled to 107.1 million yuan from 41.1 million yuan year-on-year, its strongest second-quarter result since 2022. Its e-commerce revenue rose by a more modest 4.6% to 2.3 billion yuan.

Baozun said the gap between profit and revenue growth reflects efforts to scale back its lower-margin distribution business and focus more on higher-value services and products.

Meanwhile, its newer brand management business became a more important growth contributor, as revenue from the unit rose 21.9% to 485.6 million yuan, led largely by its Gap China operation.

Baozun took over Gap’s Greater China business after agreeing to acquire it in 2022, expanding beyond its core e-commerce services for brand partners to directly managing merchandise, inventory, stores and marketing.

Gap China’s omni-channel same-store sales grew in the 20% range for a second consecutive quarter in the three months to June. That compares with 6.7% growth in Chinese clothing retail sales in the first half of 2026, suggesting Gap’s recent momentum has outperformed the broader market.

Gap China’s profitability has also improved. It recorded its first quarterly non-GAAP operating profit in the fourth quarter of 2025 and remained profitable on the same basis in the first quarter of 2026. Management has also set a target of full-year operating breakeven for 2026, signaling confidence in the brand’s longer-term operating trajectory.

Baozun said it is increasingly using Gap as a testing ground for tools and operating methods that could also benefit its core e-commerce business. The company says the two businesses can reinforce each other, with e-commerce capabilities supporting brand operations and lessons from direct brand management feeding back into services for other clients.

Management also says early AI and automation pilots are improving productivity. Baozun recently raised its 2028 annual non-GAAP operating-profit target by more than 27%, from 550 million yuan to at least 700 million yuan, citing better e-commerce margins, greater operating leverage in brand management and deeper cooperation between the two units.

The Bamboo Works offers a wide-ranging mix of coverage on U.S.- and Hong Kong-listed Chinese companies, including some sponsored content. For additional queries, including questions on individual articles, please contact us by clicking here

To subscribe to Bamboo Works free weekly newsletter, click here

“There’s been a very definite trend of what I would call re-transferring part of the economy from the private sector to the state sector.” — on Beijing’s regulatory retreat from private consumer finance back toward state dominance

By Rene Vanguestaine and Doug Young

Two vastly different segments of Chinese business are facing deep regulatory skepticism this month, one abroad and the other at home. Fast-fashion phenomenon Shein (0625.HK) has found its planned purchase of U.S. clothing label Everlane getting snagged in an improbable national security review in Washington. Meantime, China’s remaining cohort of private fintech lenders is getting plunged deeper into crisis following a multibillion-dollar fraud case. Together, these developments highlight how swift political tides can unravel business models on both sides of the Pacific.

Things have never been smooth for Shein outside its core fast-fashion business. The apparel powerhouse long served as a lightning rod for criticism over questionable labor practices, environmental complaints, and its aggressive use of customs loopholes to dodge U.S. and European import tariffs — concerns that scuttled its initial plans for a U.S. IPO roughly three years ago.

Now, Shein’s $80 million bid to acquire Everlane is undergoing scrutiny by U.S. national security regulators. The deal raised eyebrows from the moment it was announced, given that Everlane built its brand identity on corporate responsibility, environmental sustainability and ethical supply chains. Yet it’s nearly impossible to argue that Shein’s acquisition of an activewear and basic apparel brand threatens U.S. national security.

Instead, the pushback looks to have originated from within. When businesses lean heavily into environmental and worker protections, their workforces tend to care deeply about those standards. There are plenty of documented cases where corporate staff revolted against leadership — perhaps most famously when employees at Google rebelled against management over contracts with the U.S. Department of Defense. We think it’s likely that Everlane employees, alarmed by Shein’s labor and environmental record, agitated and persuaded unions or sympathetic regulators to intervene.

Beyond internal discontent, this review is another pawn in an escalating tit-for-tat between Washington and Beijing over cross-border deals. We don’t necessarily view this as the start of a trend, but it’s bound to ratchet up tensions. While national security remains a valid hurdle in advanced technology, regulators increasingly cite it as cover for economic protectionism and job defense. We’re observing similar resistance across Europe: France has long resisted foreign acquisitions, while Germany has steadily hardened its stance over the past two years, exacerbated by Beijing’s perceived diplomatic support for Russia in Ukraine.

A grim reckoning for China’s fintech pioneers

Meanwhile back in China, an entire private industry is falling apart. China’s private online lenders were once high-flying market darlings, but their latest quarterly reports look outright scary, marked by steep declines in top-line revenue and cratering profits.

Investor sentiment soured further after CreditEase (YRD.US) suspended principal and interest payments on $4.4 billion worth of wealth management products in May in a suspected fraud case. Although wealth management operated alongside consumer credit, an alleged fraud of that scale is staggering, and it seems to have triggered fresh regulatory crackdowns on China’s beleaguered fintech lenders.

This clampdown reflects a broader, decade-long reassertion of state control over the Chinese economy. While policymakers in Beijing acknowledge they need private enterprise to foster development of advanced technology, they’ve increasingly decided they don’t need private players in retail finance. The lending sector has shrunk from roughly 4,000 active platforms during its peak between 2017 and 2019 to fewer than 100 today.

These platforms originally boomed because state-owned banks preferred safe, guaranteed returns lending to state-owned enterprises rather than doing the hard work of assessing consumer credit risk. But as private platforms flourished — charging all-in fees and borrowing costs that frequently topped 30% to 35% — state banks pushed back. State lenders resented that private fintech upstarts operated without mandatory capital reserve cushions and grew envious of their immense profits.

Regulators stepped in, repeatedly lowering caps on permissible interest rates and service charges. A further tightening late last year and earlier this year made it nearly impossible for these companies to turn a meaningful profit. Compounding their misery, China’s sluggish consumer economy has prompted shoppers to curtail spending and rein in debt. We think investors should stay away from these names. While a tiny handful might survive, picking the rare survivor from this wreckage is a risk not worth taking.

"With things like this in China, there's always an element of surprise to some extent simply because the system is so opaque that nobody knows what's going on." – on the sudden legal actions in the Evergrande case

Key Takeaways:

• Chinese state subsidies driving the humanoid robot sector are likely to prompt protectionist steps in the West
• The coordinated liquidation of Evergrande and sentencing of its founder reflect Beijing's priority of maintaining social stability

By Rene Vanguestaine and Doug Young

We're currently witnessing two very different, yet equally telling, chapters of China's state-managed economy playing out simultaneously. On one hand, Beijing is heavily subsidizing a futuristic humanoid robot industry, utilizing a familiar playbook that has previously upended global markets. On the other, the government is finally closing the book on fallen real estate titan Evergrande (3333.HK), liquidating it after years of careful, behind-the-scenes management. These two developments perfectly illustrate how the Chinese government pulls the levers of its economy to manufacture technological dominance while engineering social stability.

A recent eye-opening report from the Financial Times revealed exactly who is buying up many of the dancing and leaping humanoid robots suddenly coming out of China. Unsurprisingly, it turns out the answer is the government. A sizable portion of these companies' revenues comes from government-owned training centers. These centers buy the robots, generate vast amounts of operational data using them, and send that data back to the manufacturers to rapidly improve their performance. In one case, a company called Leju received 45% of the revenue for its flagship humanoid model last year directly from these government centers.

In China's humanoid robot industry, this kind of comprehensive state support undeniably works. Chinese companies receive substantial subsidies at the central, provincial, and local government levels. Throwing such substantial amounts of money directly and indirectly at these efforts helps to build a highly efficient supply chain and ecosystem. Inevitably, some companies thrive in this environment and decide to conquer the world, armed with highly competitive prices.

But this common refrain isn't going to make robot makers outside of China very happy. We've seen this exact Chinese playbook unfold in the solar and EV industries. Western governments repeatedly complain about unfair state support, even if it isn't always the most efficient use of capital. In response to this new wave of robots, we expect to see inevitable pushback. Governments in the U.S., Europe, and Japan will likely take belated measures to protect their domestic manufacturers, such as Tesla (TSLA.US) with its Optimus humanoid, from total obliteration.

Despite the glitzy videos of kung fu robots and machines breaking human running records, the reality is less glamorous. Away from the hype, these robots may still be very prone to making mistakes. There's not a whole lot of use for a kung fu robot in daily life. We believe the industry will split into two paths: industrial and personal use. On the industrial side, there are plenty of applications that can tolerate occasional, or even multiple, failures because the risk of harming humans is incredibly low.

However, on the personal usage front, we're far from mass adoption. All it will take is one spectacular incident — we wouldn't call it an accident, but an incident — where a robot beats up an elderly person in a hospital bed, for the industry to face massive trouble. We shouldn't forget how the Segway at the turn of the century was supposed to revolutionize the world. Similarly, the low-altitude economy of flying machines lost its momentum the moment a small plane crashed into a building in Beijing. Visionaries will always promise that technology will make life entirely peachy, but the safeguards simply aren't there yet for mass adoption.

A carefully orchestrated end for a real estate giant

Moving from the industries of tomorrow to the problems of yesterday, we're also watching the final act of a long-running saga in China's suffering property sector. In late August, Chinese courts suddenly found Hui Ka Yan, the founder of Evergrande, guilty of massive fraud and financial mismanagement, sentencing him to life in prison. Almost immediately after, a Chinese court accepted a bankruptcy petition to liquidate Evergrande — a move the company's creditors have been requesting forever.

Many are speculating that the close timing of these two events isn't a coincidence. With things like this in China, there's always an element of surprise because the system is so opaque that nobody truly knows what's going on behind the scenes. But in reality, everyone should have expected Hui to end up in serious trouble eventually.

Evergrande defaulted back in 2021 after years of growing skepticism in Western financial markets regarding the health of its finances. The real estate sector's troubles actually began before Covid, when the central government tightened borrowing rules to rein in companies that were building endlessly with cheap money in a market where everyone believed prices would always rise. When order comes to a bubble, it typically crashes.

Over the last five years, the government has slowly worked to stabilize the sector. Because the overriding concern in China is always potential social impact, Beijing never moves aggressively. Instead, the government took its time progressively transferring domestic assets to domestic creditors, local governments, and unfinished housing projects. Now, it appears the government feels the fallout has been contained enough to let the system work. This means forcing shareholders, certain creditors, and banks to absorb the remaining losses. Government-owned banks at various levels, of course, have less visible back-door channels to absorb these hits.

From a political and public relations standpoint, orchestrating the liquidation alongside Hui's sentencing makes perfect sense. It ensures that any remaining victims, such as those still waiting for their apartments, see that this isn't the government's fault. They can pin it all on the "bad guy." As detailed in previous reports on Evergrande's liquidation, this marks the first time Chinese courts have accepted a liquidation petition for such a major company. Will this trigger a wave of liquidations for other big companies like Country Garden (2007.HK) or Vanke (2202.HK; 000002.SZ)? We think there will have to be some more, but it's going to be a very slow process. The government's primary concerns remain employment and local tax revenues. Some companies will be cleaned up if the social impact is deemed nil, but others, we're afraid, will be kept on life support to maintain stability.

"Inevitably, at some point in time, order had to be restored to that market, and definitely some of the projects have been caught with their pants down." — commenting on the fallout from China stripping away green energy subsidies.

Key Takeaways:

• A Chinese solar executive's arrest in Australia for bribery highlights the clash between Chinese and overseas business practices
• China's shift to market-oriented pricing for green energy is exposing massive overcapacity, forcing solar and wind producers to consider curtailment rates

By Rene Vanguestaine and Doug Young

For China's green energy sector, harsh new realities are setting in both at home and abroad. On the international front, Chinese companies are colliding with strict Western anti-corruption standards, underscored by the recent arrest of a solar executive in Australia. On the domestic front, meanwhile, a massive buildup of green energy capacity is slamming into a painful shift toward market-oriented pricing. Both events serve as rude awakenings for an industry accustomed to operating under different rules and generous state support.

We'll start with the overseas reality check. On July 24, Zhu Guoxin, an executive at solar inverter maker Shenzhen Growatt New Energy, was arrested in Australia. He was charged with trying to bribe an official from the Clean Energy Council, which oversees the certification of renewable energy products in Australia, with $20,000 hidden in a bag of tea during a July 9 meeting.

While giving bribes used to be a common business practice in China, the government has taken steps to stamp it out. Under President Xi Jinping, China has spent about 12 years sending people to jail for corruption with plenty of news coverage. Yet, it's a never-ending story, and we're not confident the practice will ever completely stop.

This case is one of the first we've seen of a Chinese businessman arrested overseas for trying to bribe a local official. If you're a Chinese company planning to export products, you need government approval. We would have hoped the Chinese government would educate would-be exporters on Western overseas practices — especially concerning bribes to win business. But apparently that isn't happening, or some executives simply don't believe the warnings. In developing markets like Africa or Southeast Asia, state-owned Chinese companies can often compete by offering favorable trade-offs, like access to the Chinese government, rather than outright cash. But in the Western world, there's a strict level of oversight on who wins these contracts.

It'll be interesting to monitor how Beijing reacts to this trial. The government is famous for getting outraged and engaging in tit-for-tat actions when its citizens are detained overseas. If Beijing is truly serious about eliminating corruption, we'd expect a mild diplomatic reaction calling for due process, rather than noisy outrage. Since news of the arrest will inevitably reach China, it wouldn't look good for Beijing's domestic anti-corruption image if it tried to help a citizen avoid consequences for bribing a foreign official.

Confronting domestic overcapacity and market-oriented pricing

Back in China, the green energy sector is facing its own messy economic situation. The government is moving its solar and wind power producers toward a more market-oriented pricing system, sending shock waves through the industry. These companies thrived for a long time because the government ordered the grid to pay set prices above market rates as a form of subsidy.

But following a massive construction boom of new capacity, the government is rapidly removing many of those subsidies. The shift hasn't happened overnight — there are cases where solar manufacturers supplying panels to these plants were warned well in advance that everything was moving toward market-based pricing. Still, the situation is exacerbated by severe regional mismatches, with supply often far outstripping demand. The overall result is huge amounts of capacity being forced to sit idle. We've seen instances where developers are now building in curtailment assumptions — essentially non-operating capacity — of as much as 40% in their baseline models for new projects. That's a staggering jump from the 5% to 10% seen in the past.

This overproduction mirrors what we've recently seen in the EV sector. Order inevitably had to be restored, and many projects have been caught off guard. When promoters have to assume 40% of their capacity won't be productive while simultaneously receiving lower market prices instead of subsidies, it's not an encouraging environment. As highlighted in a recent story about Xinyi Energy Holdings (3868.HK), profits are diving as the sector suffers from a "solar hangover" caused by the phasing out of subsidies and falling prices. Similarly, Concord New Energy (0182.HK) has seen its profits plunge amid power curtailment and intensifying competition in market-based electricity pricing.

We expect that some weaker projects will simply be abandoned or disappear, which is typically how overheated, irrational markets clean themselves up. Moving forward, new project construction is definitely going to slow down. Developers will be much more cautious. The big unknown in any power generation equation now — in China, as well as the U.S. and Europe — is AI. We wouldn't be surprised if future projects become specifically tied to AI development, as that's where the big new demand is expected.

China is also dealing with a chicken-and-egg situation. While the country committed to green energy emission reduction targets, traditional coal power remains largely in the hands of state-owned enterprises. These entities aren't thrilled about losing sales, creating a distorted environment where wind and solar energy is left idle instead of being absorbed into the national grid.

The implications are grim across the supply chain, from polysilicon at the source all the way up to solar panels. Chinese manufacturers, who produce close to 80% of the world's panels, are already facing overseas sales constraints in the U.S. and increasingly in Europe. This domestic transition only exacerbates their tight situation. We've been expecting consolidation where weaker producers eventually disappear, but it isn't happening as fast as some thought. Consequently, the stock prices of U.S.-listed Chinese solar manufacturers have come down substantially over the last six or seven months. It's a painful adjustment, leaving little room for optimism in the near term.

"As much as the high-tech sector has become national interest in China, the same thing has happened in the U.S." – commenting on perils Apple could face as it explores using Chinese memory chips

Key Takeaways:

• Apple's reported plan to use Chinese memory chips highlights a complex balancing act between commercial needs and geopolitical pressures
• Burger King's turnaround after taking a major state-owned partner demonstrates how the right local alliance can revive a struggling Western brand

By Rene Vanguestaine and Doug Young

Multinationals operating in China are increasingly adopting highly tailored, localized strategies to survive and thrive. Whether navigating supply chain shortages in the tech sector or battling fierce competition in the fast-food arena, the playbook is changing. This is playing out now with two major Western names. Apple (AAPL.US) is exploring a strategy to buy memory chips from a leading Chinese producer, while Burger King is having a renaissance after forming a new alliance with a massive state-owned conglomerate.

We’ll start with Apple. According to The Wall Street Journal, the tech giant is reportedly looking into buying memory chips from CXMT (688825.SH), one of China's leading computer memory makers. For decades, the global memory sector toiled in anonymity, producing a commodity for PCs and smartphones dominated by the South Korean duo of Samsung (005930.KS) and Hynix (000660.KS), alongside U.S. giant Micron (MU.US). However, the sudden explosion of AI has created a massive global shortage, leading to spiking prices.

From a purely commercial standpoint, Apple's move makes sense as the company attempts to solve this supply shortage and potentially secure more favorable pricing. But this is where it gets complicated. Apple is acutely aware of the trade tensions between the U.S. and China. To mitigate this, the company has reportedly developed a regional isolation strategy: using CXMT chips exclusively in devices sold within China, while utilizing other suppliers for the rest of the world. We believe this represents a fascinating potential business template for other multinationals that might hesitate to use Chinese components globally.

Will this satisfy Washington and Beijing? The U.S. government has determined that CXMT works with the Chinese defense industry, which makes any partnership a deeply sensitive issue. Additionally, Washington has been actively trying to build a self-sufficient domestic chip industry. As much as the high-tech sector has become a national interest in China, the exact same thing has happened in the U.S. This shift started during the first Trump administration, continued under Biden, and accelerated during Trump's second term. The message from Washington is clear: don't help China build a growing business in the chip sector, use what's available in the U.S., and invest heavily alongside everybody else.

To soothe these political concerns, Apple has already announced it will help Intel (INTC.US) and Micron grow in the U.S. Ultimately, Washington's primary fear is that American companies might engage in technology transfer. As long as Apple simply uses existing CXMT chips, it may be viewed as the lesser evil. However, if U.S. companies ask these Chinese firms to get involved in custom designs, Washington will likely step in.

A state-owned recipe for fast food success

Shifting from tech to fast food, we're seeing another Western giant make a major tweak in its localized strategy. Burger King had been struggling in China in the face of better-run competition from McDonald's (MCD.US) and KFC (YUMC.US). But the brand appears to be turning a corner after its parent, Restaurant Brands International (QSR.US), partnered with Citic, a major state-owned conglomerate.

On a recent earnings call, Restaurant Brands executives noted that under this new partnership, Burger King China recorded another quarter of “double-digit comparable sales and a sequential improvement in unit economics.” In the current environment, double-digit comparable sales are incredibly strong.

What does a massive state-owned conglomerate like Citic bring to the table? We think it brings unparalleled "fire power." Beyond basic benefits like better sourcing of food ingredients and improved pricing, Citic provides tremendous leverage for securing building leases. Being state-owned also gives Citic an additional aura and the ability to get things done, particularly through better relationships with local governments. For a consumer brand, this looks like a win-win.

This state-backed partnership model contrasts sharply with other routes, such as aligning with private equity firms. We recently saw Starbucks (SBUX.US) choose a major local private equity name called Boyu to help navigate a market where it has fallen behind Luckin Coffee (LKNCY.US) in total outlets. There are cases where private equity firms have been very successful, and they can course-correct very quickly if something goes wrong. However, they historically present less certainty than state-owned giants. Because Starbucks is already an established brand, going with a PE firm represents less risk for them than it would for a smaller player. Sadly, smaller or mid-tier brands don't always have the luxury of choosing a giant like Citic. Brands like Tim Hortons and Dunkin Donuts often end up with smaller partners and ultimately struggle or close. These smaller partners simply aren't as efficient in operating and financing as the bigger PE firms, let alone state-owned conglomerates. It's a classic chicken-and-egg situation: major players like Citic want to partner with the biggest names, leaving smaller brands to take what they can get.

From European regulatory scrutiny to sudden licensee changes, multinational deals are facing new tests of trust and transparency

Key Takeaways:

• European regulatory scrutiny over JD.com’s Ceconomy acquisition reflects a new phase of geopolitical tension and demands for financial transparency
• Western brands operating in China must overcome deep-seated trust issues and cede control to local partners to survive fierce domestic competition

By Brad Burgess and Doug Young

Whether it's a Chinese e-commerce giant venturing West or a U.S. fashion label going East, cross-border business is increasingly fraught with scrutiny and trust deficits. A major European acquisition by a Chinese retailer recently hit a regulatory speed bump, while an American brand conglomerate abruptly swapped one of its Chinese licensees. Both situations highlight growing friction in international deal-making.

JD.com (JD.US; 9618.HK) thought it had a done deal when it agreed to pay $2.5 billion for German retailer Ceconomy last year. But now it seems it may not be so done after all. The European Commission has opened a full-scale investigation into the purchase, scrutinizing whether the Chinese e-commerce titan received unfair state support, such as preferential financing from state-run banks or tax incentives from the government. It said it will make its final determination by Oct. 1.

We believe this serves as a critical pulse check on EU-China relations and might be the harbinger of broader regulatory scrutiny from the EU and Germany. The EU's relatively new foreign subsidies regulation is clearly being used as an additional measure outside standard anti-monopoly rules. In a previous case, a Chinese railroad company proactively pulled out of a public tender in Bulgaria after its ridiculously low bid sparked immediate red flags over state subsidies.

That withdrawal was seen as a victory for the new regulation. But applying this tool to a private company rather than a traditional state-owned enterprise is a noteworthy extension of this scrutiny. JD.com has been aggressively pursuing retail assets across Europe, making this regulatory obstacle even more significant for future M&A.

The geopolitical climate adds to the friction. Germany — where Ceconomy's MediaMarkt and Saturn chains are based — was traditionally conciliatory toward China under former Chancellor Angela Merkel. Today, political concern is mounting, and the dialogue between the EU and China isn't where it was before. If the EU vetoes this deal, China will likely complain of discrimination, claiming its companies are being targeted, and vow to protect its rights. That inevitably ends in retaliation, perhaps targeting European exports like champagne, cognac, or brandy.

The crux of the problem lies in how state support is disclosed. Current Chinese financial statements contain vague disclosures, often bundling financial incentives with other investment gains and losses. Anyone receiving financing from a state-run Chinese bank is technically getting government support. However, defying Beijing by explicitly detailing that government support is like playing with fire, as China routinely denies offering such subsidies. We're curious to see if Western regulators will push companies to be more forthright and specific in their material disclosures moving forward.

Letting go of the reins

On the flip side, Western companies operating in China face their own set of hurdles. U.S. company Authentic Brands, which owns major labels like Reebok, Eddie Bauer, and Brooks Brothers, made recent headlines when it abruptly dumped the China licensee for its Nautica and Spyder brands. Following the announcement, shares of the dumped partner, Tristate Holdings (0458.HK), tanked about 15%.

This kind of partner shifting is a relatively common shortcut for major Western brands to develop the China market. However, identifying a capable partner with enough breadth and execution capability to adapt a product for local tastes is easier said than done. We saw a similar situation recently when Nike (NKE.US) made major changes to its China licensing agreement with long-time partner Topsports (6110.HK), whose stock also tumbled after losing authorizations for online sales.

Decades-long relationships evaporate in some cases, highlighting the extreme fragility of these partnerships. We think multinational companies suffer from a profound trust problem. To succeed, they need to let go a bit and trust their Chinese partners more. Local operators understand the rapidly changing Chinese consumer landscape far better than a remote headquarters ever could. Local managers often complain that running everything through headquarters takes too much time and makes them less competitive. Yet, ceding control and allowing a brand to morph for local tastes — like Yum China (YUMC.US; 9987.HK) successfully offering pizza with corn and shrimp — is deeply uncomfortable for many top multinationals.

While top-tier global brands might still command loyalty among brand-conscious urbanites, mid-tier labels face fierce competition from local players. For investors evaluating these publicly traded partners, diversification is key. If a local licensee is heavily dependent on a single Western brand, the risk of a sudden breakup should prompt extreme caution. Investors must do their homework to understand the importance of each brand relationship.

Ultimately, the ones who do best in China are those willing to let go. The way a business is promoted and operated needs to be flexible and modified according to actual conditions in the Chinese market.

A rumored move by Elon Musk and a controversial acquisition by a Chinese education giant are exposing growing regulatory minefields in cross-border commerce

Key Takeaways:

• Elon Musk's rumored plan to sell Tesla’s China operations underscores the intense governance and technological pressures facing multinational corporations
• TAL Education’s controversial acquisition of an American digital reading company highlights why foreign firms need to prioritize proactive communication

By Brad Burgess and Doug Young

Geopolitical tensions between China and the West are fast becoming a defining force in the global business landscape, reshaping how multinationals operate across borders. This dynamic is currently playing out in two distinct storylines that, while from entirely different sectors, reveal the subtle but mounting pressures on cross-border commerce. On one hand, reports say Elon Musk may be preparing to sell his Tesla (TSLA.US) China operations to pave the way for a merger with SpaceX (SPCX.US). On the other, Chinese private education powerhouse TAL Education Group (TAL.US) recently made a fire-sale purchase of an American digital kids’ literature company, triggering national security scrutiny from U.S. lawmakers.

According to a report in the Wall Street Journal, Musk is reportedly considering a sale of Tesla's Chinese operation to clear the path for a potential merger between the EV maker and his recently listed space company. Musk has publicly dismissed the report as absurd, but, as we’ve seen in the past, a public refutation doesn’t mean strategic gears aren't turning.

The underlying logic for such a move is relatively straightforward. A divestment would remove any China connections from SpaceX’s highly sensitive business ecosystem, which includes critical work for NASA and the Starlink low-orbit global satellite network. There are also compelling technology and governance incentives. For instance, integrating operations would benefit shared technology initiatives, like the Terafab chip development plan in Texas. Musk’s current control over Tesla is also relatively low compared to SpaceX, so a merger would grant him significantly greater control over the automaker.

Divesting the China business, however, would have a massive impact. Tesla China accounts for more than half of the automaker's global production and is a critical export hub for Europe and Asia. The entity’s structure is also unique. Unlike traditional automotive partnerships in China, it is not a joint venture. It was established as a fully owned business — a concession likely granted both to import best practices to China’s EV ecosystem and as a bargaining chip amid pressure from the first Trump administration.

If a sale happens, it would likely be viewed as a significant loss of face for Beijing. The Chinese government could also plead grievance, pointing out the exceptional benefits it originally extended to the U.S. automaker. We don't view Tesla's modular structure as a new template for Western companies; it remains an exception to the rule. Nonetheless, it’s a striking example of how sensitive technology and political risks are forcing a rethink of traditional global integration. European regulators, already viewing China through a skeptical lens, would undoubtedly keep a close watch on whatever independent entity might emerge.

TAL's U.S. acquisition: A double-edged sword

Looking at the reverse flow of capital, TAL’s recent acquisition in the U.S. provides a textbook example of how sudden regulatory transitions can catch a foreign company off guard. TAL purchased Epic, a leading U.S. digital literature provider targeting children, for just $95 million in a bankruptcy sale last year. It was a remarkable discount, considering Epic’s previous Indian owner paid $500 million for the company just four years prior. The deal generated immediate, massive returns, with TAL booking a $400 million gain in its recent quarterly results, highlighting TAL's aggressive pivot toward overseas growth after facing severe domestic crackdowns.

However, this diversification maneuver is shaping up to be a double-edged sword. Almost immediately, U.S. lawmakers called for a national security review of the transaction. Some might intuitively compare this to ByteDance and the forced divestiture of its U.S. TikTok operations. But we believe the nature of this scrutiny is distinctly different. With TikTok, the core geopolitical fear centers on addictive algorithms and the potential for a foreign government to manipulate content in digital echo chambers.

Epic, conversely, is a children’s digital library. The backlash here stems from an entirely different domestic sensitivity in the U.S.: a heated societal debate regarding parental rights and the appropriateness of reading materials in public schools and libraries. It’s less about fear of Chinese authorities injecting Confucian classics into a kids app, and more about who has the authority to curate children's content.

The primary issue here is one of corporate strategy and communication. The U.S. children’s education space is highly regulated and incredibly sensitive. Yet TAL approached the U.S. market much like it might approach the domestic Chinese market: moving swiftly into a gray space with a cheap deal, while hoping to fly under the radar. It didn't proactively check with political consultants or regulators to explain its content controls or assuage parental concerns. While tech veterans like Alibaba (BABA.US) are slowly learning how to proactively navigate foreign regulatory waters, companies like TAL have little experience outside their home market. Culturally, proactive transparency just isn't in their DNA. But as geopolitical tensions mount, there can be severe consequences for acting first and answering questions later. Moving forward, both U.S. and Chinese companies must realize that cross-border deals can no longer afford to be opaque.

"It's always all about money. Anything AI requires a tremendous amount of investment." – on Kuaishou’s decision to spin off its Kling AI video unit

Key Takeaways:

• Kuaishou's Kling spinoff reflects a growing trend of tech giants seeking massive standalone valuations for their AI units to fund rapid development
• A recent light aircraft crash in Beijing has exposed the severe safety risks of China's heavily hyped low-altitude economy, likely triggering intense regulatory scrutiny

By Doug Young and Rene Vanguestaine

China's technology landscape contains a tale of two vastly different frontier sectors. On one hand, we're witnessing an astronomical rush into AI, underscored by a massive new strategic spinoff plan. On the other, an actual small plane crash has brought the heavily hyped low-altitude economy firmly back to earth. While both of these lie at the cutting edge of innovation, they're currently on completely different trajectories.

We’ll start with the high-flying AI sector. Kuaishou (1024.HK) is preparing a major strategic move to spin off Kling, its AI video unit. The short video operator announced it will bring in around 20 new investors to support the service. This group will pump around 20.5 billion yuan — or nearly $3 billion — into Kling in exchange for 17% of the company, valuing the AI unit at around $18 billion. Kuaishou will continue to hold a majority 68% stake, while the remainder will go into various incentive plans.

The rationale here is simple: It's all about money. Anything related to AI requires a tremendous amount of investment. While Kuaishou is already public and could theoretically do a follow-on offering to raise such funds, investors wouldn't necessarily be interested pumping more capital into the parent company. But a pure AI play? Given the current technological climate, that could appear to many investors as the most valuable investment of their lifetimes.

By raising money specifically for the AI-related business, Kuaishou can deliver a much higher valuation than it would get for the company as a whole. And as long as it retains a substantial 68% majority, it's a meaningful way to raise the capital needed to build that business as quickly as possible. In this sector, you want to move fast and keep potential competitors in the rear-view mirror. Without enough money, moving fast is impossible.

Interestingly, this spinoff includes a clause stating that private investors are entitled to a refund if Kling doesn't go public by 2031. While five years down the road might not seem long to some, in terms of AI, that's like an eternity. In the U.S., major players like OpenAI and Anthropic want to move to market with IPOs very quickly. It's too soon to tell exactly how attractive a Kling IPO will be, as the company could either become wildly successful or be entirely out of business by then.

We believe there are going to be more companies doing this. This is one of the first times we've seen this sort of spinoff for an AI company with a wealthy parent, mirroring discussions we've seen surrounding Baidu (BIDU.US; 9888.HK) spinning off and separately listing its AI chip unit. Even highly capitalized giants like Alibaba (BABA.US, 9988.HK) or Tencent (0700.HK) might eventually follow suit. They may not financially need to, but at some point, the market might offer such a high standalone valuation for their AI businesses that it becomes an offer they simply can't refuse.

Grounding the low-altitude economy

While AI soars, China's low-altitude economy is facing a major setback. The sector was already quite slow to lift off despite massive industry and government hype, and a recent incident in Beijing has only deepened those troubles.

On June 26, a light aircraft crashed into Beijing's tallest skyscraper, Citic Tower, known to locals as China Zun. The crash killed the pilot and injured 13 people on the ground. While Beijing hasn't said much publicly, we think central leaders are likely quite alarmed that this type of accident could happen in such highly restricted airspace. The pilot reportedly received his license a few years ago and was known to have mental issues.

This is undeniably bad news for the makers of electric vertical takeoff and landing aircraft (eVTOLs), that were already facing commercialization difficulties. EHang (EH.US), the only publicly traded Chinese company in this space so far, scored a huge milestone last year when it became the first to win a type certificate for its eVTOLs from China's aviation regulator. Its stock initially shot up, but has since fallen back to earth as people realize the skies won't be filled with flying taxis anytime soon.

The Chinese government has long pushed this industry, liking the high-tech aspect that enhances China's global reputation. But putting flying objects into crowded urban environments is a massive risk. We understand that this emerging business needs tremendous amounts of regulation. Historically, aviation everywhere has been extremely regulated, requiring regular physical and mental fitness tests for pilots.

There's a massive disconnect between the hype — delivering packages and conducting building inspections by drone, and offering air taxi services — and reality. On the ground in China, there are very few products actually in use. Like helicopters in the U.S. that occasionally suffer mechanical or human failures despite a century of development, eVTOLs rely on mechanics that can fail. Putting tens of thousands of these objects into the hands of people with varying levels of flying and maintenance skills could be a recipe for disaster. The technology does have valid applications, such as delivering goods faster to inaccessible countryside locations. But mass urban commercialization is currently an illusion best left for the movies. For now, we'll have to wait a little longer for the Jetsons to come to China.

"Nobody wants to miss the boat and not be able to capitalize or capture part of the growth going forward. This is emblematic of China in just about every type of business." – on why price wars are so common in China

Key Takeaways:

• China's parcel delivery sector is finally seeing prices stabilize after government intervention to curtail years of cutthroat price wars
• Hog breeders are suffering massive losses due to plunging prices, yet they continue to expand capacity to grab market share

By Doug Young & Rene Vanguestaine

Oversupply is a common theme in China these days, affecting a wide range of industries. We're currently watching this dynamic play out in two distinctly different areas: the country's express parcel delivery sector and its massive pork industry. In the delivery space, several years of intense price wars may finally be easing under government pressure, while in the hog breeding business, top producers are swinging sharply into the red due to plummeting prices — driven by massive excess capacity. Despite their differences, both sectors highlight a uniquely Chinese business approach: an aggressive, unrelenting drive to capture market share, often at the expense of rational market economics.

China's roughly half-a-dozen major delivery players have spent the last few years duking it out to see who can ship packages the cheapest. After a prolonged period of price declines, including a 6.3% drop last year, things finally appear to be stabilizing. The country's parcel volume rose 5.2% in the first five months of the year, while revenue rose by a faster 7.2%. This implies the average shipping price per parcel rose 1.9% during that time, bolstered by an even bigger 3.6% jump in May alone.

This stabilization is likely the result of government intervention. Authorities have become increasingly concerned about the profitability of these companies. If competition is pushed to the extreme and businesses start going bankrupt, it leads to mass layoffs. For Beijing, maintaining employment and social stability is always paramount. We've seen similar interventions in the instant commerce sector, where regulators routinely instruct giants like JD.com (JD.US; 9618.HK), Alibaba (BABA.US; 9988.HK), and Meituan (3690.HK) to curb their aggressive tactics.

But is this kind of intervention sustainable? History suggests it's difficult. Years ago, the government forced the steel sector to curb irrational competition and halt excess capacity building. It worked briefly, but then the cycle started all over again. The reality of China's market is that local governments, especially those far from Beijing, have their own interests at stake. They prioritize local employment, tax revenues, and civic pride. When central directives filter down, local officials often push back or ignore the instructions, eventually allowing old practices to resume.

There are also structural reasons why China's delivery companies can ship for so little and still remain profitable. During the first five months of the year, the average delivery price was about 7.67 yuan per parcel, or roughly $1. Compare that to the U.S., where a standard delivery costs $7 or $8. First, labor is obviously cheaper. Second, U.S. companies face high costs for insurance coverage, which isn't as burdensome in China. Finally, there are some cases where delivery firms likely receive substantial help from local governments in the form of lower taxes, direct subsidies, or reimbursements, making a strict comparison with the U.S. or Europe almost impossible. Furthermore, we think there's little room for true differentiation. Any new strategy would be replicated by competitors almost instantly.

A deeply cyclical appetite for expansion

We're seeing another glaring example of overcapacity in China's hog breeding business. Within the space of a single week, two leading companies, Dekon Food (2419.HK) and Muyuan Foods (2714.HK; 002714.SZ), announced they fell deeply into the red in the first half of the year, completely reversing their strong profits from last year.

The culprit is plunging prices resulting from massive oversupply. For instance, Dekon collected just 9.63 yuan per kilogram of hog sold in June, a steep 33% decline from the 14.31 yuan it commanded a year earlier. Yet, inexplicably, the company's actual hog sales rose 15% to 5.91 million heads in the first half of the year.

Why are Chinese companies such enthusiastic builders of new capacity when prices are tanking? Pork is a main staple of Chinese consumers, and the sector is historically prone to upheavals from epidemics that periodically decimate hog populations. With living standards generally rising, producers expect long-term demand to increase. The government even maintains a strategic national pork reserve, underscoring the meat's critical importance to the country.

However, the relentless expansion boils down to one primary goal: taking market share from the competition. Nobody wants to miss the boat on future growth. This mindset is emblematic of China across almost every sector — from solar manufacturing to electric vehicles. It's a way of doing business that we don't see as much in the West anymore, where economies grow slower and investors have become a lot more rational.

From an investment standpoint, the reaction to these cycles can be perplexing. After Dekon issued its profit warning detailing huge losses, its stock actually jumped 7% the next trading day, though it remains down 22% for the year. The pork industry is low-tech, mature, and highly cyclical. There are always investors willing to throw money at such sectors, much like the traditional U.S. airline industry, believing they can master the cycle better than anyone else.

But for the average investor, especially those outside the country who lack day-to-day access to local data, it's virtually impossible to fully grasp these dynamics. For those without the appetite for extreme cyclical volatility, we believe it's best to stay away and find something more predictable.

"As Africa develops, the way consumers look at life is very likely aligning more with the way consumers in more developed parts of the world look at life" – on the challenges confronting leading African smartphone maker Transsion

Key Takeaways:

• Transsion's dominance in Africa is facing severe pressure as bigger Chinese smartphone makers target the market
• Cafe de Coral is fighting back against changing consumer dining habits and an influx of Mainland chains in its home Hong Kong market

By Doug Young and Rene Vanguestaine

We're currently witnessing a fascinating intersection of shifting consumer behavior and the expanding reach of Chinese businesses. While they are quite different in terms of product, both the global smartphone market and the local Hong Kong fast-food dining scene are being rapidly reshaped by fierce competition, changing demographics, and evolving consumer tastes. Whether it's tech giants vying for emerging markets or local food stalwarts defending their home turf, established players are finding that past success doesn't guarantee future dominance.

Let's start with Transsion (688036.SH), one of China's biggest smartphone makers that probably isn't known to many outside of Africa. The company, behind brands like Itel and Tecno, has been listed in Shanghai since 2019. It recently renewed its application for a Hong Kong listing after an earlier bid expired, putting the company’s global expansion story back into focus.

Transsion rose to prominence by targeting Africa back in 2008 — an era that almost sounds like a lifetime ago in the fast-moving cellphone world. They became incredibly successful because they targeted the African market with laser focus. Their phones featured long battery life to cope with unreliable electricity, and they provided support in local languages. At the time, larger rivals like Xiaomi (1810.HK), Oppo, and Vivo skipped the continent. It made perfect sense for those brands to focus on the enormous Chinese market, where they could produce at scale for hundreds of millions of consumers with similar tastes and a single shared language, rather than navigating the vast diversity of African nations.

But the landscape is shifting, and Transsion's latest prospectus presents a mixed picture. While it's still growing in Africa, the pace has slowed, and its footprint is shrinking in other emerging markets like Southeast Asia and Eastern Europe. Notably, Transsion hasn't even made any serious attempts in its home market. Meanwhile, the Chinese government is putting more emphasis on commercial cooperation and trade with Africa. With the domestic Chinese market largely saturated, brands like Xiaomi and Vivo are realizing that standards of living in many African nations are rising. As Africa develops, local consumers are adopting lifestyles more aligned with developed regions. It's the perfect time for massive Chinese competitors, armed with huge scale and deep R&D resources, to move in, inevitably growing to the detriment of the established player.

It's an industry that's become quite mature and highly commoditized. While Apple (AAPL.US) and Samsung (005930.KS) remain kings of the premium tier globally, Chinese names dominate everything else. Even in massive emerging markets like India, which some say is 10 or 20 years behind China, local manufacturing champions haven't emerged. Vivo, Oppo, and Xiaomi are doing remarkably well there, proving companies with established scale can prosper in the market. We don't see this hierarchy changing dramatically; the real drama will be watching how these Chinese brands compete against each other.

Changing tastes and new rivals challenge Hong Kong dining

From smartphones, we’ll pivot to the Hong Kong dining scene with Cafe de Coral (0341.HK), a household name that has dominated the city’s fast-food landscape for decades. The company suffered a steep decline in profits for a year and a half before things started to rebound a little in its latest six-month period through March. The early turnaround of Cafe de Coral reflects broader, systemic shifts in the city's dining habits.

Chief among its hurdles are evolving dining trends. Food delivery is becoming more prominent, and people are simply dining out less. In response, Cafe de Coral is downsizing its average restaurant footprint to align with the growing preference for takeout. We think this is a smart strategy to manage costs in a weaker demand environment, and it may have helped restore short-term profits. However, it doesn't solve the core issue of a shrinking dine-in customer base.

Furthermore, the company is battling a new generation of cheaper cafeteria-style rivals and a wave of Mainland Chinese chains setting up shop in Hong Kong. It's a theme we've seen playing out over the last decade: China is churning out its own slick, price-competitive fast-food chains.

There's also a significant geographical shift at play. Hong Kongers are increasingly crossing the border to Shenzhen over weekends and holidays. There are cases of locals taking day trips specifically to get a massage and eat at local restaurants that offer quality food at significantly lower prices. As long as the exchange rate remains relatively stable, this habit is likely here to stay. Finally, we're looking at a structural demographic shift. With a very low birth rate, Hong Kong's population growth relies primarily on immigration from the Mainland, supported by business talent schemes. As the Pearl Delta Greater Bay Area integrates Shenzhen, Zhuhai, Hong Kong and other parts of Guangdong province, these newer residents — and even longtime Mainland expats — naturally favor familiar Mainland brands over local Hong Kong ones. It's a formidable headwind, and traditional stalwarts will need more than just a smaller footprint to maintain their dominance.

"It's the kind of market that has always promised better tomorrows but has never been able to deliver." – on China’s used-car market

Key Takeaways:

• DSC's disastrous Nasdaq debut highlights the structural and economic challenges facing Chinese used-car platforms
• Rumors of Nike cutting online distributor ties in China reflect broader struggles by Western brands to adapt to shifting local consumer preferences

By Doug Young & Rene Vanguestaine

We're currently witnessing a fascinating, albeit painful, recalibration of how companies navigate the Chinese consumer market. Wall Street recently hosted its first major Chinese IPO in over a year — a used-car platform whose disastrous debut underscores the deep vulnerabilities in China's automotive sector. Meanwhile, rumors are swirling that global sportswear giant Nike (NKE.US) might be radically restructuring its online distribution networks in China. Both developments point to a shared reality: operating in the world's second-largest economy has become remarkably unforgiving amid weak consumer confidence, brutal price wars and shifting local tastes.

Consider the landscape on Wall Street. Until recently, the U.S. market had gone for more than a year without a major new Chinese listing. That drought ended when a used-car trader called DSC (DCS.US) made its Nasdaq debut last week, raising a relatively large $50 million. We haven't seen anything that large since robotaxi operators WeRide (WRD.US) and Pony AI (PONY.US) made much bigger listings worth hundreds of millions of dollars in late 2024.

DSC’s listing had quite a few big names attached, chiefly backing from Alibaba's Ant Group financial affiliate, which indicated it would buy more than half of the IPO shares. The company also secured a decent group of underwriters — including Deutsche Bank, CICC, and ICBC — which, while perhaps not tier-one, are still respectable. Yet, in a somewhat ominous sign, the stock cratered. The shares lost nearly half their value on their first trading day, fell another 20% the next day, and by day three were down 65%. Even after this massive sell-off, the stock still trades at a relatively high price-to-sales (P/S) ratio compared to its Chinese peer Auto Home (ATHM.US), which is older and actually profitable.

We believe DSC simply got caught in a perfect storm. Their basic pitch is an AI story — applying artificial intelligence to a fragmented, inefficient market to simplify time-consuming and expensive tasks. Unfortunately, they came to market just as an AI backlash has been growing in the U.S. for several weeks. Furthermore, investors remain highly sensitive to traditional issues affecting Chinese U.S. listings, chiefly the variable interest entity (VIE) structure that most companies use.

More fundamentally, the Chinese car market is in the midst of a ferocious price war. Manufacturers like BYD (1211.HK; 002594.SZ) are selling their cheapest models for the equivalent of less than $10,000. This has brought the cost of new cars down to levels many people can afford, shrinking the once-sizable price differential between new and used cars. Combined with slashed government EV subsidies and consumers worrying about their jobs and the healthcare system, it's a very tough story to sell.

This used-car market has always promised better tomorrows but has never delivered. It's highly fragmented, filled with mom-and-pop shops, and plagued by a lack of trust. There are some cases like Uxin (UXIN.US), which made its U.S. IPO eight years ago. While they made progress in standardizing inspections and recertifications, we don't think they've ever had a sustainably profitable year. They've been kept on life support by local governments and backers like Nio Capital. Another player, Cango (CANG.US), left the market completely. Even after 14 years in business, DSC is also still losing money. Building the necessary infrastructure — super reconditioning centers and upfront inventory — is an incredibly expensive proposition.

Still, there's a silver lining for future listings. DSC noted in its prospectus that it applied for and passed Beijing's required data security review for companies with over 1 million customers. This signals that China is still allowing non-controversial companies — particularly those that don't hold strategic national importance — to list abroad. Moving forward, we might see more listings from consumer-focused companies or those not aligned with national priorities like green energy and chips.

Nike's potential pivot highlights retail woes

Moving from cars to consumer closets, another prominent brand is struggling to find its footing. Last week, Topsports (6110.HK) — one of Nike's oldest and largest distributors in Mainland China — cited media reports in a stock market filing noting the U.S. sportswear giant may stop selling its products through online distributors in China starting next year. Topsports clarified that Nike hasn't officially informed them of such a move. But investors still dumped the stock, which tanked 15% before a trading halt. The company noted that online Nike sales account for about 22% of its revenue.

While this remains a rumor, it aligns with Nike's global and local rough patches. The company changed its CEO about a year and a half ago in late 2024. Under the previous leadership, Nike over-focused on direct-to-consumer sales, lifestyle products, and digital channels, ultimately weakening its relationships with the traditional big box retailers that historically pushed its products.

In China, the dynamic is even more complex. For a long time, Western goods from Nike and Adidas (ADS.DE) were considered premium, must-have brands. But Chinese consumers have realized that domestic brands are getting better. Competitors like Li Ning (2331.HK), 361 Degrees (1361.HK), Anta (2020.HK) and Xtep (1368.HK) have invested heavily in technology and styling, signing top athletes to boost their image. The landscape has shifted so much that Puma is in the process of being acquired by a Chinese brand.

Furthermore, fashion trends have drastically changed. Growing categories now include trail running, hiking, outdoor activities and tennis — none of which have traditionally been a strong suit for Nike. Newer entrants like On Holdings (ONON.US), Hoka, and Lululemon (LULU.US) have swooped in to steal market share.

If Nike is indeed overhauling its partnerships, it isn't alone. We're seeing a growing number of Western brands changing their China management or relying more on domestic partners who possess a much better understanding of today's market. Starbucks and other brands in the food sector have been struggling along those same lines. Ultimately, both DSC's Wall Street woes and Nike's retail recalibration prove that succeeding in China today requires adapting swiftly to a profoundly changed consumer.

"EV manufacturers are now vastly more important to the Chinese economy than legacy combustion-engine automakers." – commenting on why Beijing may be reluctant to levy new taxes on electric vehicles

Key Takeaways:

• China's rapid adoption of EVs is unintentionally eroding gasoline tax revenues needed for highway maintenance
• A central government pause on issuance of securities backed by data assets highlights the ongoing struggle to control local government debt

By Doug Young & Rene Vanguestaine

China's centrally planned economy is renowned for its meticulously crafted five-year plans and top-down policy directives. But even the most carefully orchestrated initiatives can spawn unexpected headaches. We're currently seeing this play out in two different arenas that share a common theme of unintended financial consequences. First, China's booming electric vehicle (EV) market is quietly pulling the rug out from under highway maintenance funding. Second, a sudden surge in an unusual new class of asset-backed securities — backed by data — is sparking fears that local governments are finding a new way to mask their debt.

We'll start with the rapid rise of EVs, which now account for more than 60% of new vehicle sales in China. This boom was heavily policy-driven. Over the last decade, Beijing has sought to convince the world it was doing more than anyone else to address climate change. Promoting EV adoption on the demand side was an obvious strategy, supported initially by substantial government subsidies.

However, this success has created an unintended side effect for the thousands of kilometers of non-toll highways China has built over the last three decades. These roads rely heavily on gasoline taxes for maintenance funding. With gasoline consumption coming down, there's suddenly less money available to fix roads. Meanwhile, the electricity powering these new cars is highly regulated, cheap, and lacks equivalent taxation.

We think officials likely knew this situation was coming, but there isn't a clear backup plan to take up the slack. Eventually, the government will have to introduce new taxes, but we believe they'll wait as long as they possibly can. Consumer confidence in China isn't strong right now, and raising costs could be counterproductive. Furthermore, EV manufacturers are now vastly more important to the Chinese economy than legacy combustion-engine automakers.

Taxing electricity across the board seems unlikely, as power prices are a sensitive topic for consumers. Instead, a sensible solution might be an annual tax for the use of an EV, rather than a point-of-sale fee that could dampen demand in the current climate of consumer caution. Until then, the gap in road maintenance funding remains a looming challenge.

Slamming the brakes on data assets

While physical roads face funding shortages, a much more abstract issue is brewing in China's financial markets. Since last year, local governments and companies have been allowed to use their data as an asset with real value to back a new class of asset-backed securities (ABS). Yet, only a year after launching, the central government is suddenly slamming on the brakes.

The core concern here is that local governments are using these data-backed securities as a way to disguise their debt. From a financial standpoint, this raises massive valuation questions. Who determines that a local government's estimate of future revenue streams from a specific dataset is realistic and not highly exaggerated? In the U.S., rating agencies act as independent third-party referees — even if they sometimes do a horrible job. But that independence is lacking here. Given that local governments have a well-demonstrated ability to use off-balance-sheet tricks, investors ought to be highly cautious.

Retail investors might assume that because these ABS are tied to the government, they'll always get their money back. But the central government is rightly concerned that things might go wrong, potentially hurting individuals and disrupting social stability — Beijing's number one priority.

We're highly skeptical about the future of this whole data securitization push. In the West, it's easier to sue businesses, and the legal ownership of data — especially personal information — is a much more sensitive issue. There are some cases in the U.S. where companies have securitized music royalties, patent income, and trademark licensing revenues. But those are much clearer assets. You can look at years or even decades of revenue history for a patent or franchise fee and get a decent sense of where it's headed. The legal environment is stronger, and the historical data provides comfort to investors. China's data securities lack that tested, historical foundation. Whether it's subsidizing an EV boom that inadvertently drains road funds or allowing creative local governments to securitize untested data, it's clear that pushing the boundaries of policy inevitably brings complications that even the best five-year plans struggle to predict.

"There's no way that this acquisition could help them rebuild their image strongly enough that they could eventually do a listing in the U.S." (speaking on why some Hong Kong-listed AI stocks could soon come under pressure)

Key Takeaways:

• Corporate fear of missing out is driving aggressive acquisitions in China's instant commerce sector, highlighted by Alibaba’s $1.5 billion bid for a regional grocer
• Surging valuations for AI stocks in Hong Kong are facing a harsh reality check as lock-up periods expire and global enthusiasm shifts toward U.S. megadeals

By Doug Young & Rene Vanguestaine

There are two narratives unfolding in China's financial markets right now that perfectly illustrate the current shifting tides of capital. On one front, the country's fast-moving instant commerce war is heating up once again, marked by a surprising $1.5 billion bid for a regional online grocer. On the other, we're seeing the latest signals that the air is coming out of Hong Kong's AI stock bubble. The developments underscore a broader theme: market participants are making aggressive, highly calculated bets — and retreats — in sync with ebbs and flows in the Chinese economy.

On the instant commerce battlefield, Alibaba (BABA.US; 9988.HK) has stunned observers with a hefty $1.5 billion bid for Pupu, a local online grocer dominating the wealthy Southern provinces of Fujian and Guangdong. To put this in perspective, another bidder — the traditional grocery chain Sun Art (6808.HK) — had offered just $600 million in a previous bid. Alibaba essentially went in with a hammer, more than doubling the existing offer to ensure there'd be no contest.

We believe this is a textbook example of corporate fear of missing out. Alibaba, Meituan (3690.HK) and JD.com (JD.US; 9618.HK) have been duking it out for quite a while in the food delivery space. Earlier in February, Meituan abruptly altered the landscape when it agreed to buy national online grocer Dingdong (DDL.US) for about $700 million. Dingdong is renowned for its highly specialized supply chain control, down to the farm level, for fresh produce. After Meituan snatched it out of the blue, it was only a matter of time before a competitor responded. Four months later, Alibaba made its move. Some reports mentioned JD.com might be involved in the bidding, but they've apparently denied it.

Alibaba has a history of overpaying for acquisitions and taking big write-downs later. But securing one of China's last remaining large independent online grocers seems to have justified the premium in their eyes.

However, there's a significant regulatory cloud hanging over these instant commerce consolidations. Market regulators have been repeatedly calling on JD.com, Meituan and Alibaba to tone down their unbridled competition. The government is highly concerned about the relentless "involution" that has affected sectors from autos to solar manufacturing, and now e-commerce.

While this intense rivalry lowers food costs for consumers, authorities clearly want it reined in. Thus far, the companies seem to have mostly ignored these directives. Regulators still haven't approved Meituan's purchase of Dingdong after four and a half months. It's a complicated black box of political and economic considerations. But if Meituan's deal is approved, it'll be very difficult for regulators to veto Alibaba's acquisition of Pupu, despite the historic friction between Beijing and Alibaba.

Deflating Hong Kong AI bubble?

While corporate capital floods into grocery delivery, retail and institutional money looks to be retreating from Hong Kong's AI sector. The market has seen valuations expand significantly over the last year and a half following a deluge of Mainland company IPOs. Now, a sobering correction may be underway.

The most telling sign comes from the Stock Connect program. Mainland investors — an important force behind the recent market rally — sold a combined HK$3.6 billion ($460 million) worth of shares in May. It marked the first time in three years they've been net sellers, as they now chase opportunities on domestic exchanges in Shanghai and Shenzhen. Major global investment banks, including Citigroup, Goldman Sachs, and Morgan Stanley, are also turning cautious on Hong Kong compared with Mainland markets.

The macroeconomic backdrop isn't helping. Consumer spending in May took a dive, further dimming the outlook. But more specifically, there are growing global concerns about how AI companies will actually monetize their technology. In China, this monetization hurdle is exceptionally high. Buyers are reluctant to pay for AI services, and many software applications remain open for free use.

There are some cases illustrating this sharp downturn among pure AI stocks. For instance, Phancy Group (6682.HK) — which used to be called Fourth Paradigm — and SenseTime (0020.HK) are both down about 30% this year. Other names like MiniMax (0100.HK) and Knowledge Atlas (2513.HK),also known asZhipu AI, have also lost quite a bit of value over the last few weeks as they come up on the expiration of their post-IPO lock-up periods. When these thematic AI stocks originally listed, their freely trading floats were extremely small, causing prices to rapidly increase beyond fundamentals. As lock-ups will end soon, and floats of MiniMax and Knowledge Atlas are both under 6% of total equity, massive selling pressure has been created. Finally, we can't ignore the vacuum effect of the U.S. market. Megadeals are sucking up global investment capital. SpaceX (SPCX.US) just executed the biggest IPO of all time last week, and its stock continues to climb, drawing in substantial funds. With OpenAI and Anthropic slated to list before the end of the year, this unprecedented investor enthusiasm in the West is poised to cause massive drawdowns of capital, leaving Hong Kong's overvalued AI stocks further out in the cold. We're witnessing a necessary breather, and investors are correct to step back and reassess where the real value lies.

"There's no way that this acquisition could help them rebuild their image strongly enough that they could eventually do a listing in the U.S."

Key Takeaways:

• Shein's unlikely acquisition of the ethically focused Everlane brand appears to be a cheap image rehabilitation strategy ahead of a potential Hong Kong IPO
• Canadian Solar is expanding its high-tech cell manufacturing in the U.S. to bypass tariffs, but could face pushback from Beijing

By Doug Young & Rene Vanguestaine

We're currently seeing two major companies with deep Chinese roots use very different strategies to bypass Western skepticism and trade frictions. Embattled fast fashion giant Shein is attempting to buy its way to ethical credibility by acquiring U.S.-based Everlane, while Canadian Solar (CSIQ.US) is moving its high-tech manufacturing to American soil to shed its Chinese identity. While these two industries may be unrelated, there's a clear underlying connection — both companies are urgently trying to blend into Western markets to outrun geopolitical resistance.

Shein recently made global headlines with its unlikely purchase of Everlane. For those unfamiliar, Everlane rose to prominence on a strict commitment to transparency and sustainability, making it highly successful with millennial professionals. The brand reportedly fell on hard times financially, which likely drove it into the arms of such an unlikely suitor. While no official price tag was given, one media outlet that broke the news put it at around $100 million.

This is peanuts for Shein — especially considering Everlane was previously valued at around $600 million. But it stands out as the biggest acquisition Shein has done to date. It's an unusual move given Shein's notorious reputation for lack of transparency and reliance on questionable business practices, including accusations of using sweatshop labor. We don't think Everlane would ever get caught doing something like that.

We believe the driving force behind this deal is pure image rehab. When you've been vilified for your practices, buying a company known for ethical behavior is a calculated shortcut. Shein will probably squeeze the Everlane line by dramatically lowering the cost of goods without compromising quality to boost competitiveness, and they're undoubtedly going to try and extract some PR value out of it.

However, we don't think this deal is enough to fix their biggest headache: a perpetually delayed IPO. Shein was essentially ostracized from listing in the U.S. and London due to intense political resistance and ESG concerns. They’ve reportedly made a confidential filing to list in Hong Kong, but that process has stalled for over a year. There's a lot of ESG-focused Western capital circulating in Hong Kong that will demand assurances of significantly changed practices. While adding Everlane's top management to Shein's board could theoretically help turn around its image, integrating Westerners into the board of a Chinese company is notoriously difficult.

Meanwhile, inside Everlane, the mood is likely grim. If you're a young American who joined the company for its ethical mission, only to be acquired by the poster child for fast fashion excess, you're probably furious. Given the current U.S. labor market — where people legitimately fear for their jobs due to AI — some employees will inevitably swallow hard and stay until they find something better. But many will likely leave because the new ownership fundamentally conflicts with their beliefs.

Moving production offshore: Canadian Solar's American pivot

While Shein tries to buy an American identity, Canadian Solar is trying to build one. Despite being technically founded and based in Canada, the company is widely considered Chinese because its founder is from China and its original manufacturing base was located there. Now, the company has revealed major expansion plans at its two U.S. facilities, one of those a new factory producing high-tech solar cells.

This strategy aims to dodge U.S. tariffs and position the company as a non-Chinese alternative to the dominant market players. But is it going to be a case of once Chinese, always Chinese? We think the label matters deeply. Even if governments come and go, local U.S. manufacturers fiercely defend their turf. They're going to loudly argue that this expansion is just a Chinese operation in disguise.

There's also the question of export controls. On its latest earnings call, Canadian Solar claimed it hasn't faced any official resistance from Beijing regarding the export of cutting-edge manufacturing equipment to the U.S. But we think it's only a matter of time before that changes. China is hyper-focused on retaining control of its advanced technology. We've seen it telling EV makers not to manufacture core technology abroad, and there are some cases where offshore tech transfers initially went unnoticed before facing strict clampdowns — just look at Meta (META.US) acquiring Manus. Given how highly sophisticated and automated the solar supply chain has become, the Chinese government would likely prefer to keep those processes strictly in Chinese hands.

Furthermore, producing solar panels or even cells in the U.S. is just the end of a long, complex chain. Earlier steps — producing high-purity polysilicon, turning it into ingots, and then into wafers — are vastly dominated by China, which controls about 80% of global solar manufacturing. Even major companies like JinkoSolar (JKS.US), Trina Solar, and JA Solar face the same reality.

While alternative suppliers are emerging — such as United Solar in Oman, which produces clean, highly traceable polysilicon — they only cover a fraction of the necessary volume. Even if wealthy Middle Eastern nations try to beat China at its own game with abundant capital and sand, they'll still have to rely heavily on Chinese technology and equipment.

Ultimately, both Shein and Canadian Solar are throwing capital at their geopolitical problems. But rewriting your corporate DNA takes more than a cheap acquisition or a new assembly line — and Western markets are watching closely.

"In China it's all about control, especially when it comes to capital."

Key Takeaways:

• China's move to push out cross-border stock brokers underscores the state's desire to control capital allocation and benefit state-owned enterprises
• Wendy's ambitious plan to open 1,000 stores in China faces steep hurdles due to fierce competition and an increasing consumer preference for domestic brands

By Doug Young & Rene Vanguestaine

Recent events highlight two narratives about navigating the Chinese market. On one hand, we're seeing a final crackdown on cross-border trading by Chinese retail stock buyers — a move that reinforces Beijing's tight grip on capital movement. On the other, we're watching a major U.S. fast-food giant attempt to enter the Mainland market decades after its peers. Both developments illustrate the intricate dance of regulation, timing, and local execution required to survive in China today.

We'll start with some big news for Chinese investors who like to buy stocks in offshore markets like the U.S., Hong Kong, Japan and Singapore. China's securities regulator has formally fined the country's two largest cross-border stockbrokers, Futu (FUTU.US) and UP Fintech (TIGR.US), for operating without brokerage licenses. More importantly, the pair must wind down their China business entirely, leaving Chinese stock buyers with highly limited options for overseas trading.

This move wasn't completely out of the blue. Three years ago, the China Securities Regulatory Commission stated the pair were operating illegally and banned them from accepting new clients in China, though it allowed them to keep their existing accounts. Now, even those legacy accounts are coming to an end. It's a regulatory bombshell that effectively ends their domestic operations.

Some observers might've hoped the regulator would offer a path to legal licensing, but we aren't terribly surprised by this outcome. Over the last 15 years, there are numerous cases across different industries where Chinese regulators have taken a similar stepped approach — initial warnings followed by a gradual squeeze — all aimed at reining in what the government considers unruly behavior. It's a method to bring sectors firmly under state control.

The market reaction was swift, with shares of both companies losing about a quarter of their value following the decision. This sell-off might seem disproportionate, considering both firms have spent the last three years diversifying. Today, they only get about 10% to 15% of their business from China. But the reality is they're now completely shut out of their home market, and their overseas growth has so far been mostly limited to ethnic Chinese communities, which puts a ceiling on their potential customer base.

If we look at this with clear eyes, it resembles earlier crackdowns on private financial companies, such as online lenders. While those early crackdowns were partly driven by massive fraud, state-owned banks also complained about unfair competition. In this current crackdown on fintech brokerages, it's really about capital allocation. The Chinese government wants to ensure that capital from domestic institutions and individual investors is directed toward the national economy and state security. The inevitable beneficiaries here are state-owned brokerages like Citic Securities (600030.SH) and Guotai Junan (601211.SH). Ultimately, it's all about control.

A late bite at the fast-food table

Shifting gears, we're also looking at the latest Western brand trying to crack the Chinese market. In a somewhat low-key manner during its recent earnings call, Wendy's (WEN.US) unveiled a plan to finally bring its brand to China. The company didn't provide much detail, simply stating it signed an agreement with a local franchise partner — described as a large restaurant operator with decades of experience. True to the industry's usual lofty style, they announced a goal of opening 1,000 restaurants in the market within a decade.

Our immediate question is: Why now? KFC (YUMC.US; 9987.HK) and McDonald's (MCD.US) have been operating in China for over three decades. Starbucks (SBUX.US) is approaching its 30-year anniversary there. Given the immense head start of these entrenched competitors, why bother?

Wendy's has been struggling in the U.S. for a while, making this move look like a desperate search for growth avenues while its domestic business faces serious challenges. The fact that the announcement was so low-key suggests the C-suite isn't entirely confident about the outcome. Other Western chains like Burger King (QSR.US), Popeyes (QSR.US), and Tim Hortons (THCH.US) have tried and faced significant struggles.

When a Western brand enters China's restaurant sector today, success hinges almost entirely on the local partner and execution. We don't have particular knowledge of Wendy's chosen partner, but their responsibilities — understanding the market, pricing products appropriately, and deciding where to compete — will make or break this venture.

Furthermore, this comes at a very tough time. We've seen a noticeable repositioning of Chinese consumer appetites, shifting away from foreign brands in favor of domestic ones across many sectors, including food and beverage. Even a giant like Starbucks has found itself struggling against local competitors like Luckin Coffee (LKNCY.US). The 1,000-store goal could rely heavily on a franchise model. In China, there're no shortages of individuals looking to get rich quickly, so attracting a first batch of franchisees might work well, enabling rapid initial growth. The real test is sustainability — whether the economics work out and if franchisees can financially afford to stick around. We're a bit skeptical of this ambitious target, but we'll certainly keep an eye out and maybe even try one of their burgers when they finally open their doors.

"To out-license drugs is a very handy and clever way for a win-win… but in terms of acquiring the businesses, that's going to be really tough." – Bradley Burgess

Key Takeaways:

• Chinese biopharma companies are transitioning from licensing Western medicines to out-licensing their own cutting-edge drugs
• Homegrown sportswear brands are cautiously expanding into Southeast Asia and beyond, though they face stiff competition and geopolitical hurdles

By Doug Young & Bradley Burgess

We're currently witnessing a fascinating shift in how Chinese enterprises interact with global markets. On one hand, foreign appetite is rapidly growing for cutting-edge medicines developed by Chinese life sciences startups — a stark reversal from the historical trend of Chinese firms solely licensing treatments from the West. At the same time, homegrown Chinese sportswear makers are taking baby steps onto the international stage, aiming to challenge entrenched global athletic giants.

While biopharma and athletic footwear might seem like entirely disconnected industries, they share a common thread: Chinese companies are no longer content to just serve their domestic market, and they're aggressively testing their ability to compete and do business globally.

We'll start with a look at the growing demand for advanced medicines developed in China by large foreign drugmakers. This process, known as out-licensing, represents the exact opposite of the older practice where Chinese companies would license drugs from foreign enterprises to sell at home.

In recent headlines, 3SBio (1530.HK) reported that its revenue nearly doubled last year. Most of those gains came from out-licensing payments related to a colorectal cancer treatment being developed with Pfizer (PFE.US). In another similar case, an entity established by Keymed Biosciences (2162.HK) to fast-track an immunotherapy drug was acquired by the U.S. giant Gilead Sciences (GILD.US) in March.

We believe Chinese companies are suddenly capable of producing their own cutting-edge drugs due to a confluence of three major factors. First is industrial policy. Beijing's approach toward the life sciences is heavily supportive, epitomized by the "Healthy China 2030" initiative. The U.S. could take a page from this playbook to strengthen its own pharmaceutical industrial policy. Second is the rapid pace of innovation. With a streamlined approval process and faster clinical trials, the creation of these drugs happens much quicker in China than in the U.S. Finally, there's the brain trust of returning experts. These individuals acquired significant industry knowledge working at top multinationals in the U.S. and have now returned home with the dream of making it big in their native country.

However, these out-licensing deals can be a double-edged sword. Much of the money earned comes in the form of one-time, non-recurring payments. A company might post huge income in one quarter, only to see it drop back to zero the next, largely because they're surrendering the rights to sell these drugs outside of China. Some might wonder why these startups don't commercialize the drugs overseas themselves. At present, they lack the commercial infrastructure, capital, and global network required. By out-licensing, they can focus entirely on innovating while tapping into the vastly superior business networks of multinationals.

While out-licensing remains a handy and smart win-win, outright acquisitions by foreign multinationals — like the Gilead purchase — will likely be heavily constrained by geopolitics. Covid was a wake-up call for the U.S. government, triggering "Operation Warp Speed" to develop a vaccine, with the sudden realization regarding domestic manufacturing vulnerabilities. Intellectual property and anything cutting-edge or proprietary consistently set off alarm bells these days. Politics will undoubtedly get in the way of sweeping foreign acquisitions, even if the market logic makes perfect sense.

Racing into Southeast Asia

Moving from the laboratory to the running track, we're seeing similar global ambitions from Chinese consumer brands. Xtep (1368.HK) is one of several homegrown sportswear makers expanding abroad to challenge industry behemoths like Nike (NKE.US), Adidas (ADSGn.DE) and Reebok. Xtep recently announced its entry into Malaysia, a top Southeast Asian market, with the opening of six stores. The company aims to boost its overseas revenue by 50% or more in each of the next three years.

Why are so many Chinese consumer companies targeting Southeast Asia first? We think it boils down to three simple points. First is the diaspora — culturally, Chinese companies feel most at home in the region. Second is geographic proximity. Third is market opportunity, as many claim the current stage of Southeast Asia mirrors China 10 years ago. Exposure to Chinese brands and thinking is simply much higher in that part of the world than in the West.

Yet, familiarity can also breed contempt. Consumers in Southeast Asian markets can occasionally be very anti-China due to political flare-ups, as seen in countries like Vietnam and the Philippines. Trust is also a major hurdle. Global legacy brands have built immense trust over decades and sponsor universally known athletes.

To win over agnostic and price-sensitive consumers, Chinese brands must demonstrate consistent quality and value. There are some cases where local companies are successfully leveraging Western names to build this trust. For example, Xtep owns the licensing rights in China to the popular Saucony running shoe brand. The Saucony stores opening in Shanghai are incredibly well-done, sometimes visually surpassing their U.S. counterparts, which effectively proves their quality on the ground. Similarly, Anta (2020.HK) owns Fila in China and has acquired Amer Sports (AS.US), which owns the premium Arc'teryx as well as the Wilson tennis brand.

Conversely, companies like Li Ning (2331.HK) might struggle globally because their brand is too heavily linked to China. While a hyper-nationalistic strategy plays well with domestic consumers, it doesn't translate outside of the country. For a company to truly go global, it needs to decouple from that hyper-nationalism. Ultimately, while geopolitical friction remains, both the biotech and athletic sectors show that China's ambitious shift to the global stage is well underway.

"Ensuring that they have a stake in the ground but being under the radar and waiting and seeing is probably the wisest path." – Bradley Burgess

Key Takeaways

• The Trump administration's effort to cut subsidies for China-linked solar panels manufactured in the U.S. is forcing Chinese companies to scale back ownership
• A recent flurry of formal U.S. IPO withdrawals by smaller Chinese companies signals a coordinated push by U.S. and Chinese regulators to sift out low-quality stocks

By Doug Young & Bradley Burgess

Donald Trump is creating new headaches for Chinese solar panel makers, just as a slow death seems to be unfolding for new U.S. listings by Chinese companies. We see a shared narrative here. Whether dealing with quiet new policies from the Trump administration or facing intense scrutiny from Wall Street regulators, China Inc. is being forced to adapt. In both areas, Chinese businesses are discovering that flying under the radar and navigating the shifting sands of political and regulatory agendas is the safest way forward.

The solar front has been heating up lately under the Trump administration, which has reportedly tweaked U.S. policies to cut off subsidies for China-linked solar panels, even if they're manufactured in the U.S. These rules dictate that Chinese companies can’t own more than 25% of these U.S. plants. This has led a growing number of solar installers to start shunning U.S.-based Chinese factories operated by names like JinkoSolar (JKS.US), Trina (688599.SH), and Longi (601012.SH).

In what looks like a direct response, JinkoSolar announced last week it's selling 75% of its U.S. subsidiary to a private equity company, though it will retain the remaining 25%. We think this is a highly interesting move. Some fear-oriented Chinese manufacturers might be tempted to jump ship, give up completely, and say they're done with the U.S. We'll skip past the legality of what Trump is doing, as it's almost certain to be challenged in the U.S. courts. But keeping a stake in the ground while waiting and seeing is probably the wisest path for these businesses. It's questionable what value is truly getting added in the U.S., considering a big chunk of the components for these panels are actually made in China at the parent company. Still, profit margins are much better in the U.S.

After all, politics always change. We've seen these winds shifting over the past several years, and that's not going to change. Consider what was going on with cryptocurrency before Trump was elected: the Biden years were notable for a strong agenda against crypto miners, and the SEC was strictly anti-crypto. At the time, Chinese-backed crypto companies needed to be very careful to fly beneath the radar. Once the administration changed, that environment shifted completely because Trump is very pro-crypto.

The current solar policy is clearly agenda oriented. Companies need to be acutely aware of powerful trade lobbies looking to protect U.S. industry, such as those supporting First Solar (FSLR.US). There's a similar dynamic in the battery storage sector, where huge makers like Gotion (002074.SZ) are facing a concerted lobby in certain U.S. regions managed by anti-China politicians. We believe it's smarter for Chinese firms to take measured actions — like Jinko dropping the stake in its U.S. facility to 25% — that align with pending guidance without making radical changes.

A slow death of U.S. listings by Chinese companies

Shifting gears, we're seeing the latest twist in the slow death of U.S. listings by Chinese companies. We've chronicled this story quite a lot, which has seen major listings come to a virtual standstill over the last year. However, the latest development is a flurry of small Chinese companies suddenly formally withdrawing their U.S. IPO applications. In the last month, four companies took that formal step, compared with just two for all the rest of the year. All of these listings were for $20 million or less.

This is somewhat unusual. Typically, most Chinese companies would just quietly abandon their applications without making this kind of formal declaration. This flurry feels like a coordinated response to pressure from both sides. On the U.S. side, neither the exchanges nor the SEC wants meme stocks or penny stocks that lack sufficient quality. U.S. regulators want to protect small retail investors who might open Robinhood at a coffee shop to try and make a quick buck. We've seen a lot of these stocks start off with a small gain and then just crash. There's suspicion that the companies themselves are involved in manipulation behind the scenes, rather than just the mom-and-pop GameStop or Reddit investor crowds.

China is also cracking down on these smaller IPOs. The Chinese securities regulator likely doesn't want poor-quality companies listing in the U.S. because it makes the country look bad. In truth, China would actually prefer higher-quality companies to list on overseas exchanges as an exercise in soft power. A quality business like Chagee (CHA.US) or Pop Mart (9992.HK) reflects much better on society overall, whereas a wave of low-quality equities is a face-losing exercise. We believe there's going to be a refinement — a sifting of the wheat from the chaff. While Hong Kong is emerging as a stronger alternative and picking up many companies that would have previously gone to the U.S., the U.S. market still has the greatest sway and cachet. For mid-sized to large Chinese companies with a true international presence and the ambition to keep expanding outside their home market, the U.S. is still where the global investors are. We'll likely still see serious Chinese companies listing in the U.S., but not as many as we've seen historically.

"Credibility is not just going to result from telling the world you're operating from a place outside China."

Key Takeaways:

• RedNote's separation of its domestic business from the rest of the world highlights growing credibility and data security hurdles Chinese apps face overseas
• Texas Chicken aims to open 600 stores in China, even as such second-tier fast-food brands often struggle against established giants like KFC

By Doug Young & Rene Vanguestaine

We're seeing a fascinating divergence in how businesses navigate the border between China and the rest of the world. As recently reported by Wired, the social media sensation RedNote — also known as Xiaohongshu in China — is taking steps to separate its China business from its global operations, repeating a strategy we've seen from other Chinese internet majors facing geopolitical pressure. On the other side, Texas Chicken, a second-tier fast-food brand previously known as Church's Fried Chicken, recently announced ambitious plans to enter China and quickly open hundreds of stores.

These two developments underscore the immense complexities of cross-border expansion, whether it's Chinese social media platforms trying to reach the world, or Western brands trying to capture a slice of China's 1.4 billion consumers.

RedNote's recent move to carve out its global operations is primarily driven by politics and data security concerns. We've increasingly seen this theme among China's internet companies. The biggest name in that regard is TikTok, the international arm of China's ByteDance, which sold off its U.S. operations to a group dominated by American investors after coming under pressure from Washington. Others are taking similar steps, like PDD (PDD.US) with its Temu international site, and Tencent (0700.HK), whose popular WeChat has different systems for domestic and global users.

These social media platforms have accumulated millions of users in the West, raising the issue of where all the information about individuals — especially in the U.S. — ends up being stored. The fundamental question is whether a Chinese entity or the government could force these platforms to provide data. To go overseas, addressing cybersecurity issues and registering a legal entity outside China is just the first step. But there is a second side to this story besides information security, namely, credibility. A decade ago, when Tencent tried to launch WeChat in the U.S., people simply didn't want to give their information to a Chinese company. While younger people who live on social media might be oblivious to data risks, foreign governments and regulators aren't. They're going to create issues if the fundamental risks aren't addressed.

We believe credibility isn't going to magically result from telling the world you're operating from Singapore or elsewhere outside China. Given the recent Manus fiasco where a company outside China was told by the Chinese government to undo an M&A deal, simply operating abroad doesn't create much comfort. For RedNote to truly expand in the U.S., it would have to do something similar to TikTok, ensuring U.S. citizen data doesn't end up outside the country.

The longer-term implication of this strategy is clear: we're heading towards a reality where China ends up as an island for user-generated content. Platforms like Facebook (META.US) and other U.S. apps aren't available in China at all. While Beijing would likely be happy if Western influences couldn't get in but Chinese content could invade the world, foreign countries don't want a flood of Chinese content when they aren't even sure if it's coming from real people, bots, or is propaganda.

A second-tier chicken chain's big Chinese gamble

On a slightly lighter note, Texas Chicken announced in April that it signed a deal with a local partner to bring its brand to China — the land where rival KFC has found huge success. The company boasts big plans, aiming to open its first store in Shanghai this summer and eventually reach 600 stores in the market.

We think this sounds highly ambitious. Second-tier fast-food brands typically have a hard time in markets like China, which are quite different from what they're used to in the U.S. Take Popeyes, for example. The Louisiana fried chicken chain has been trying to make it in China for almost 25 years. They got in during the early 2000s, pulled out, and are trying again now with a few shops in Shanghai. But they don't seem to be achieving any major penetration. Meanwhile, KFC is historically way ahead of everyone else and is managed very well by Yum China (YUMC.US; 9987.HK), which also operates Pizza Hut.

However, companies keep throwing out big numbers because of China's 1.4 billion consumers and the relatively strong growth of the franchise model. The franchising wave in China is pretty new, really dating back only the last five or six years. If a foreign brand finds a good partner who knows how the system works, finding franchisees isn't that difficult. Many Chinese people are entrepreneurs in their guts, perfectly willing to take a risk and work very hard in the hope of becoming financially successful quickly.

Chinese homegrown chains like Mixue (2097.HK) and Luckin (LKNCY.US) are famous for massive, rapid expansion through aggressive franchising. In the West, chains franchise much more cautiously. But there's a big difference between a coffee shop and a fried chicken restaurant. You don't go to a Luckin shop to sit down and enjoy coffee as you do at Starbucks (SBUX.US). You buy your coffee online, pick it up, and you're on your way. For a chicken business competing with KFC, you need an actual restaurant. The financial implications for investment, upkeep, and reinvestment are much more serious.

When it comes to food and beverage, discretionary spending goes through boom periods until something new comes to town and customers migrate. We believe we're eventually going to see a correction to these massive franchise openings. It's easy for people to think they can make money easily when everything is going well, but franchising requires continuous investment to keep facilities attractive and up to date. If a franchisee isn't in an optimum location, life will become difficult. We've already seen this correction in the hospitality sector, where hotel chains like GreenTree (GHG.US) went the franchise route and eventually threw out a number of franchisees who fell behind, failed to upgrade, and weren't getting enough revenue. At some point, we're going to see a number of these food and beverage franchisees dropping out too. Given these structural challenges, we remain highly skeptical that many of these rapidly expanding franchisers will be able to keep their scale. When it comes to Texas Chicken, we'll be very surprised if they reach that 600-store milestone.

"The one thing that professional investors or sophisticated investors fear the most is uncertainty."

Key Takeaways

• A major portion of China's massive $1.2 trillion trade surplus is flowing into the Hong Kong stock market, according to a Caixin analysis
• The recent passing of legendary investor Mark Mobius underscores a reality that an old guard of early China bulls is dying out and not being replaced

By Doug Young & Rene Vanguestaine

We're currently witnessing a pair of fascinating developments in the Chinese equities space. A recent analysis by Caixin suggests that a significant portion of China's $1.2 trillion trade surplus is unexpectedly flowing into the Hong Kong stock market. At the same time, the death of celebrity investor Mark Mobius this month highlights a broader trend: the legendary China bulls of the past are fading away, and they aren't being replaced. These two stories underscore a profound shift in the Chinese market — one driven by surprising internal capital flows, the other by a structural decline in Western investor optimism.

Caixin’s analysis shows that instead of going into China's forex reserves or domestic infrastructure building, a massive chunk of the country's export surplus is being funneled directly into Hong Kong equities. This is a fascinating revelation. If hundreds of billions of dollars from China's export machine — which really is just thousands of individual companies — are flowing into this offshore market, it helps explain the exchange's prolonged rally and how it's been able to effortlessly absorb so many fairly large IPOs from Mainland firms.

Inevitably, some of this surplus is being used by companies expanding overseas to build manufacturing plants in Southeast Asia, Europe, and Latin America. Yet, a substantial amount is still hitting the stock market. From a broader macro standpoint, one might wonder what this means for the Chinese economy if funds aren't fully directed toward factory expansion or machinery upgrades.

Fortunately, one doesn't necessarily preclude the other. Chinese state-owned banks, whose mission is to execute government policy, are still lending aggressively to companies, particularly in critical sectors like AI and high-end manufacturing. We've seen this dynamic over the past 15 years — money has heavily flowed into either the stock market or real estate at various times, but that hasn't stopped the country's manufacturing sector from growing.

However, there's a looming question. A decade ago, surplus investment money poured into real estate, and we all know that didn't end well. Furthermore, Beijing has a historically strict approach to managing money generated overseas by Chinese companies. It typically twists arms to bring export and IPO proceeds back to the Mainland. This raises the question of whether these current offshore stock flows are happening with the government's approval, or if authorities are simply too busy with other economic issues right now. If it's the latter, we might eventually see a harsh reversal rather than a soft landing once Beijing decides to wake up and intervene.

The end of a legendary era of China bulls

This brings us to the second major shift in the market. Mark Mobius, renowned for his love of emerging markets and his early bullishness on China, died this month in Singapore at the age of 89. He belonged to an elite group of early investors, alongside figures like 83-year-old Jim Rogers, who made substantial profits championing China's growth potential when the country was on the up-and-up.

When reflecting on this bygone era, there are some cases that perfectly illustrate that golden age — like observing early offshore investments in Sinopec (0386.HK) around 2003 or 2004. Back then, it was the perfect time to go heavy into emerging markets because China clearly looked poised for substantial growth. Today, the economic promise is drastically different. In a post-Covid environment hampered by subdued consumer spending and shifting geopolitical tides, we simply don't see younger bulls stepping in. Instead, a new generation of bears has emerged in the West. This includes super investors like Stanley Druckenmiller, who has said he exited his China positions in 2018 and hasn't made a single stock trade there since.

Despite the recent stock market rally fueled by those trade surplus inflows, professional Western investors are hesitant to return. While sectors explicitly favored by the government for national security can still deliver substantial returns, the overarching deterrent is uncertainty. Sophisticated investors fear government-driven uncertainty above all else.

There are some cases even today where authorities abruptly intervene in private deals — such as Beijing stepping in to cancel the acquisition of Manus by Meta (META.US). Such actions destroy investor confidence, signaling that even successful investments can fall victim to interference completely out of their control.

For foreign capital to return, this regulatory heavy hand would need to reliably disappear. Right now, U.S. investors have highly attractive, predictable alternatives. The American AI sector remains a massive draw where the rules are well known and the government doesn't step in to alter them on a whim. Other emerging markets, like India or Vietnam — though Vietnam has its own top-down state control — also appear freer at the moment. Until Beijing can prove it has permanently removed regulatory uncertainty, Western investors will likely stay away, heavily deterred by an increasingly extensive track record of unpredictable reversals.

"There is no way all of these companies are sustainable. There is no way they are making profits."

Key Takeaways:

• The recent contraction in China's overheated new energy vehicle market points to an unavoidable wave of industry consolidation and brand alliances
• A fast-growing online dating company's upcoming Hong Kong IPO relies on thousands of human facilitators, bucking the global trend of AI-driven matchmaking

By Doug Young & Rene Vanguestaine

We're currently witnessing two fascinating shifts in China's corporate landscape — one involving an overdue pause in a booming tech-driven sector, and the other a surprising rejection of modern technology in favor of traditional methods. On one hand, the country's skyrocketing new energy vehicle (NEV) market has suddenly tapped the brakes, forcing a hard look at a needed industry consolidation. On the other hand, a rising star in the online dating world is actively bucking the global AI trend, opting instead for real-life human matchmakers.

We’ll start with the NEV sector, which has been all the rage among Chinese consumers but has hit a sudden speed bump this year. According to the China Passenger Car Association, NEV sales plunged 21% in March. That followed an even weaker start to the year, resulting in a 24% drop in the first quarter. While NEVs still accounted for nearly half of all vehicle sales during the quarter — as traditional internal combustion engine cars also fell sharply — the sudden spin into reverse is impossible to ignore.

We believe this pullback isn't a massive shock. By the end of 2025, at least 50% of all new sales were NEVs. Overall adoption and sales growth have been extraordinary, and it shouldn't be surprising that the market needs a moment to pause and contract. Subsidies have been rolled back or completely eliminated. Furthermore, intense price wars throughout last year pushed massive inventory to dealerships.

While we expect sales to eventually return to growth, the immediate reality is stark: There are still way too many NEV manufacturers in China today. In the U.S., the market operates efficiently with roughly three national brands and a handful of foreign competitors — a landscape historically shaped by the consolidation of brands under umbrellas like Volkswagen and General Motors. In contrast, China boasts more than a hundred NEV manufacturers.

There's no way all of these companies are sustainable or making profits amid a grueling price war. Even some of the bigger, more successful players are losing money. Something needs to give, but we aren't banking on straightforward M&A. Psychologically, many Chinese entrepreneurs equate mergers to defeat. Instead, we're seeing alliances. XPeng has partnered with Volkswagen, Zeekr signed an alliance with the French group that owns Peugeot and Citroen, and Leapmotor (9863.HK) has aligned with Stellantis. While volume leaders like BYD (1211.HK; 002594.SZ) are too far ahead to merge, smaller and weaker companies will likely have to group together rather than simply disappearing.

Finding love the traditional way

Shifting gears to a lighter, yet remarkably profitable market, we're taking a look at a company called Milian. As one of a new generation of online matchmakers for young Chinese, the company has filed for a Hong Kong IPO and boasts impressive financials, including 74% revenue growth last year and a tripling of its profit.

What makes Milian uniquely Chinese — and particularly fascinating — is its business model. Rather than relying heavily on algorithms, the company employs thousands of real-life facilitators. These human matchmakers join the online dating process to keep conversations going and ease newly matched couples through the awkward getting-to-know-you phases.

In a world where AI is everywhere and investors generally demand its usage, we think Milian's human-centric approach is a brilliant strategy for diversification. It solves a specific cultural dilemma: Chinese youth are famous for lacking dating skills because their parents often discourage romantic pursuits until they finish their education. Having a third-party advisor provides a necessary social bridge.

Other platforms, such as the dating app Momo (MOMO.US), have used a similar advisory approach but rely on AI as the advisor. Western counterparts like Tinder (MTCH.US) also increasingly lean on AI to analyze photos, enhance safety, and determine optimum matches. Yet, Milian is actively going against the automated grain. In a market where tech IPOs usually revolve around AI chips and circuit boards, this contrarian model will likely appeal to a very specific type of institutional investor focused strictly on financials and novelty. Its ultimate success will depend on whether users remain satisfied with this distinct human touch over the convenience of traditional apps. Only time will tell, but it's an intriguing story we'll continue to watch.

"Young Chinese today think nothing of buying just anything that they need on an app and getting it delivered to their door 30 minutes later."

Key Takeaways:

• A new crackdown on private lenders highlights a broader government strategy to lower living costs for young Chinese to revive spending
• A domestic toothpaste maker's rapid rise shows how local consumer brands are leveraging e-commerce and influencers to challenge established rivals

By Doug Young & Rene Vanguestaine

We're currently watching two unfolding stories that capture the shifting realities of China's consumer economy. On one hand, a fresh regulatory crackdown is sweeping through China's private financial sector, pressuring the last surviving fintech lenders. On the other, an up-and-coming toothpaste maker is brushing up for a Hong Kong IPO, riding the waves of China’s fast-paced, digital-first retail environment. Both stories reveal a changing consumer landscape where the government intervenes to lower financial burdens on young people, while agile domestic startups invent aggressive new ways to sell to them.

The latest regulatory tightening is all about interest rates. The government is capping the maximum that fintech companies can charge for loans at 24%, with suggestions they could eventually force companies to go as low as 12%. This move is partly aimed at clamping down on hidden fees that drive up effective interest rates for consumer and small business loans to as much as 36%. In the West, credit cards and check-cashing services are famous for charging similarly high rates. But in China, we're looking at a totally different environment.

This crackdown is one of many steps the Chinese government has taken to lower the financial burden on consumers, especially younger people. Three or four years ago, Beijing realized the overall cost of living was one reason why the younger generation was reluctant to have kids. Raising the one-child limit to two, and eventually three, didn't really help the falling birth rate. To combat this, regulators started taking measures to lower housing costs and killed the after-school education sector to eliminate an expensive cost for educating children. Capping loan rates is just an additional effort in that direction, part of a crusade to get consumers to spend more again to revive the overall consumer economy.

From the lender perspective, this spells serious trouble. The few remaining publicly traded fintech lenders have extremely low valuations, way down from where they were at the end of last year. We'll likely see companies get out of this particular business, pivot to other areas, or fold altogether. We've seen attempts like this from Qudian, a top performer five or six years ago, which ended up folding that business to try logistics and built a venture in Australia that didn't work. Yiren Digital (YRD.US), which used to be called Yirendai in the peer-to-peer (P2P) lending days, started diversifying into insurance brokerage, social e-commerce, and AI. And FinVolution (FINV.US) began expanding outside China, going to Indonesia and recently setting up shop in Australia. But overall, as an investor, we'd be reluctant to put much money into this sector. It doesn't look like there's a lot of big potential left.

Social e-commerce and influencers build toothpaste brand

While the fintech space is contracting, the consumer products space is writing a much different growth story. We're looking closely at Xiaokuo Technology, which has just filed to list in Hong Kong. The company is better known for its Canban toothpaste brand, which launched only four years ago but already holds 9.2% of the massive Chinese market. Getting to that share in less than four years is pretty remarkable.

Canban's rapid rise isn't unique. It's part of a larger consumer brand story that's quite different in China from the West. While famous Western consumer brands like Colgate (CL.US) or Crest have decades of history, many Chinese brands are quite young. To compete with these global giants, you've got to be different and go at it with a very different strategy. Over the last six to eight years, social e-commerce and influencers — key opinion leaders, or KOLs — have developed much quicker as a marketing tool for promoting and selling consumer goods. There's also a growing favor towards Chinese as opposed to Western brands.

We think this dynamic has become somewhat cultural. Young Chinese people today live in a world where they think nothing of buying just about anything they need on an app and having it delivered to their door 30 minutes later. You don't have any real Western equivalent of that speed. Some of that was enhanced through the three years of Covid lockdowns, which almost forced people to quickly adopt that new way of consuming. Throw in the influencers, who were already active in selling goods online well before the pandemic, and we're seeing a new consumer culture. Influencers here aren't shy at all about hawking products. If you listen to somebody, see a product, and decide you like it, you click and buy, and an hour later it shows up at your doorstep.

We’re mixed on how this company's IPO should do. The Hong Kong market is still pretty hot, but it's mostly catering to tech, healthcare, and biotech companies. Pure consumer plays haven't been as attractive. However, this is a bit of a special story. If the company can sustain its rapid growth, we could see people buying the stock. The bigger issue for investors is whether the company can execute flawlessly at the same time it's scaling up very fast. There's also the question of whether they really have a unique product or just a strong KOL strategy that other companies might be able to copy just as easily. But being first to market gives you some momentum, even if people eventually realize there are pretty strong competitors emerging.

"This seems like involution taken to a new level, as it's one of the first cases we've seen of a company taking a major step that's almost certain to undermine itself."

Key Takeaways:

• A Chinese toymaker is finding big profits by ditching premium pricing and selling licensed blind box toys for just $1.50
• KFC is introducing pizzas costing as little as $3.30, straying from its core chicken menu and highlighting a fierce price war to capture cautious consumers

By Doug Young & Rene Vanguestaine

We're witnessing a couple of new so-called “races to the bottom” on China's retail scene, driven by irrational competition, also known as “involution,” that’s quite common in the country. Whether it's the trendy toy sector or the fast-food industry, companies are finding extreme ways to entice thrifty consumers. On one end, a toymaker called Bloks (0325.HK) has rolled out a new line of opaque blind boxes costing just 10 yuan, or about $1.50. On the other end, a much higher-profile name, Yum China (YUMC.US; 9987.HK), has seen its flagship KFC chain roll out a new line of cheap pizzas for as little as 23 yuan. Both moves highlight how brands are frantically cutting prices to survive in a tough consumer market.

We'll start with Bloks, which is one of a new generation of Chinese toymakers finding big business in their home market. Unlike the higher-profile Pop Mart (9992.HK), creator of the Labubu sensation, Bloks is decidedly focused on the lower end of the market. Pop Mart owns Labubu and most of its other characters, which it sells at premium prices. In contrast, Bloks licenses characters from other creators — including Transformers, Ultraman, and Disney (DIS.US) properties like Toy Story and Zootopia — and sells them at rock-bottom prices.

We wrote about this company not so long ago, and one of the things that struck us was its dramatic financial turnaround. The company lost money for years while selling higher-priced items. But after changing its strategy to target smaller-tier cities with cheaper toys, it experienced a massive profit swing of about 1 billion yuan. We think they've successfully found a niche where it's a lot easier for parents to afford toys than in major hubs like Shanghai or Beijing.

There are questions about whether this will pressure peers like Pop Mart, Miniso (MNSO.US; 9896.HK) with its Top Toy brand, or another competitor called 52Toys, to follow suit. Pop Mart has established a premium brand and likely wouldn't gain much by going down market. Miniso, however, is already in the business of selling cheap goods, making it a potential follower.

We're also watching how this plays out overseas. Bloks is expanding into non-China markets in Asia, particularly Indonesia, where its revenues more than tripled within a year. While markets like Vietnam might be difficult to compete in due to cheaper local production, these affordable toys are gaining traction in countries with lower living standards, such as Malaysia and Thailand.

KFC's surprising pivot to pizza highlights fast food involution

Next, we look at fast-food. KFC is rolling out a new line of pizzas priced as low as around $3.30 to keep attracting Chinese customers. The move might leave some scratching their heads, as it's quite a distance from the Southern U.S. fried chicken products that Colonel Sanders pioneered. More surprisingly, these pizzas look almost certain to compete directly with Pizza Hut, the company's other main brand.

It feels like involution taken to a new level. However, we believe Yum China's management is highly savvy and has a great track record. They've surely conducted market studies and wouldn't build a business that completely cannibalizes an existing one. It's possible that KFC has a stronger physical presence in certain cities compared to Pizza Hut. Pushing a brand in a new geography requires expensive investments in facilities and advertising — a tough sell when the Chinese consumer has become very financially cautious. Leveraging KFC's existing footprint and cooking technology to offer pizza might simply be the most efficient solution.

We don't view this as a traditional localization story — where foreign chains adapt menus to local tastes, like KFC's popular rice dishes — because pizza isn't a Chinese staple. Instead, this is the result of a strong focus on exactly what the consumer base currently wants. Looking at broader trends, big chains in China collectively grew just 2% in revenue terms last year, underperforming a 3.2% increase for the whole restaurant sector. This counterintuitive data suggests that fast food is adjusting to a new Chinese consumer frugality. When things start going bad globally — as we're seeing in Europe and the U.S. — consumers default to cheaper options. This triggers a price war to attract and retain them. McDonald's (MCD.US) recently rolled out a much cheaper meal option in the U.S. after years of not offering it for exactly the same reason. Ultimately, even the biggest chains have to adapt and come up with better-priced options to survive.

"I think that the regulators and Nasdaq have been asleep at the switch for quite a while."

Key Takeaways:

• China is aggressively pressing companies to unwind opaque offshore variable interest entity structures to stem capital flight and enforce domestic taxation
• U.S. lawmakers are targeting boutique investment banks over their underwriting practices in a bid to rein in pump-and-dump schemes by Chinese firms

By Doug Young & Rene Vanguestaine

A pair of separate regulatory moves from opposite sides of the Pacific — one driven by Beijing’s financial watchdog and the other by U.S. lawmakers — are converging to further pressure the already fading market for U.S. IPOs by Chinese companies.

We believe these coordinated pressures are effectively hammering the latest nail into the coffin for a once-lucrative pipeline, fundamentally reshaping how these enterprises access foreign capital.

We’ll start with the view from China, where the China Securities Regulatory Commission is increasingly pressuring Chinese companies listed in the U.S. and Hong Kong to unwind their offshore corporate registrations. For decades, founders circumvented Chinese government prohibitions on foreign ownership in the telecom and internet sectors by using the variable interest entity (VIE) structure, routinely registering their businesses in offshore havens like the Cayman Islands or the British Virgin Islands (BVI).

This offshore setup functioned as an elegant workaround that allowed foreign investors to buy stock without ever holding a direct interest in the underlying Chinese operations. However, these structures offered a suite of other benefits that founders eagerly embraced. They provided significant tax advantages, created a veneer of North American incorporation, and permitted founders to distance their wealth from the domestic tax system. The foreign jurisdictions were also vastly more lax regarding shareholder engagement, with some entities entirely avoiding the requirement to file quarterly earnings with the SEC.

That freewheeling era is ending. Starting April 1, China will require the proceeds of any offshore IPO or subsequent follow-on offering — including founder share sales — to be repatriated to China. We believe this represents a clear initiative to prevent capital flight and curb domestic tax avoidance. The days of the VIE structure are numbered, and we expect it will eventually be prohibited entirely.

Interestingly, while this could eventually spell the end of tax-free wealth accumulation for some entrepreneurs, we think it could actually prove beneficial for international investors. Under a dismantled VIE structure, a U.S. investor could essentially buy into a domestic Chinese company and hold a direct claim on its actual underlying assets. This presents a fundamentally stronger economic position than holding shares in a shell company with no direct ownership of the actual money-producing assets in China.

U.S. House committee targets boutique banks over pump-and-dump IPOs

On the other side of the Pacific, the squeeze on Chinese listings is highly political. A U.S. House committee recently demanded explanations from three obscure boutique investment banks regarding their underwriting of small Chinese listings. A substantial number of these offerings appear to be classic "pump and dump" schemes, where a stock briefly pops upon its debut and crashes dramatically soon after.

There're some cases, such as one involving a company called Pomdoctor, where shares were sold for $4 and briefly rose to $5, only to crash in a single day two months later to just 50 cents.

Lawmakers are now using these small boutique underwriters like Boral Capital and Revere Securities as wedges to expose flawed due diligence and potential collusion. We believe politicians are stepping into this arena primarily because the SEC and Nasdaq have been asleep at the switch. While the Nasdaq announced last year that it would tighten IPO listing rules for these companies, the action arrived far too late, coming only after massive losses by U.S. retail investors. Genuine, well-established Chinese businesses with solid financial performance will likely survive these new constraints, but their numbers have already severely dwindled. Driven by a volatile mix of geopolitics, strict Chinese controls over cybersecurity, and U.S. anxieties regarding technology and espionage, we anticipate only a handful of respectable Chinese companies will successfully brave the U.S. market going forward.

Key Takeaways:

• Chinese consumers are finding emotional satisfaction in an emerging ‘joy economy’ built on affordable indulgences rather than big-ticket purchases
• The government is co-opting this trend by prioritizing psychological contentment and soft power over historically aggressive GDP growth targets

By Doug Young & Bradley Burgess

In these economically troubled times, many ordinary retailers in China are suffering. Yet in this difficult environment, we are witnessing profound success for a segment within the "emotional economy" that is being called the “joy economy.” At the same time, we believe the Chinese government is undertaking a notable policy pivot, shifting its focus away from traditional economic drivers to explicitly encourage spending on products and services that boost consumer mood.

Faced with economic uncertainty, Chinese consumers are finding it difficult to open their wallets for large, big-ticket items like new cars and even smartphones. Instead, people are finding moments of pleasure in little things that don’t make them feel financially guilty. This affordable happiness model is resonating strongly across nearly all demographics. Whether it’s an unemployed college graduate living with their parents, a 30-something white-collar worker hanging a fuzzy creature on her bag, or children using their red envelope money from their grandparents, small splurges are deeply relevant right now.

We see this playing out heavily with domestic consumer brands. Companies like Mixue, which sells bubble tea for as little as a dollar a cup, and Chagee (CHA.US) are thriving. Miniso (MNSO.US) is seeing success with its inexpensive lifestyle goods, and Pop Mart (9992.HK) has captured the market for affordable collectible toys, most notably through its immensely popular Labubu dolls.

We can compare this to the "lipstick effect," where consumers trade down from big purchases to small indulgences during downturns. However, we think this is a more fundamental, long-term shift in consumer behavior driven by generational replacement. The older generation of Chinese citizens was heavily focused on "chiku" — eating bitterness — and doing whatever it took to improve their lives, without much thought for personal satisfaction. Decades ago, couches in Chinese homes were notoriously uncomfortable because function mattered more than form. Today, as society becomes more prosperous, the younger generation is demanding experiences and emotional contentment, a desire they will likely retain as they age.

Shifting from aggressive growth to building a healthy China

The Chinese government seems to be actively co-opting this joy-based consumption drive. Emerging from the recent “Two Sessions” — the annual plenary meetings of China's top legislative and advisory bodies — China’s GDP growth target is historically lower, sitting at 4.5% to 5%. For the first time in decades, the government appears comfortable toning down its aggressive focus on hardcore growth metrics. Policymakers seem to realize that you need to sell a massive number of bubble tea cups to equal the economic impact of selling just one car. As a result, they are working to transition the economy from a manufacturing and export-led model to one driven by domestic consumption, services, and retail.

But beyond the obvious economic stimulus, we believe there is a deeper, more spiritual motivation: psychological contentment. State media recently highlighted a five-year initiative to create a "healthy China." The government recognizes that domestic brands can deliver happiness while also exporting soft cultural values abroad and building national pride. The success of Labubu is a prime example of China building its soft power in a highly acceptable and enjoyable way.

Looking ahead, we expect several sectors beyond food and beverage to benefit from this policy shift. Entertainment and gaming — powered by AI and what the government calls "new productive forces" — represent massive industries. That said, the government is likely to try to carefully balance psychological health with the challenges of online addiction and phenomena like AI boyfriends and girlfriends.

We also anticipate growth in experiential services like tourism, leisure, fashion, and the rising pet economy. Much like the therapy dog trend in the U.S., the increasing pet-friendliness of Chinese coffee and tea shops highlights a new focus on psychological health. Ultimately, it’s refreshing to see the government — which previously prioritized catching up with the West through raw manufacturing capacity — finally caring about the emotional and spiritual needs of its people as they seek contentment with Chinese characteristics.

Key Takeaways:

• China’s coffee market faces consolidation pressure as premium players try to capture a niche demographic seeking a slower, more prestigious experience
• Private medical providers must innovate and articulate clear long-term narratives to survive amid economic headwinds and overwhelming state hospital dominance

By Doug Young & Bradley Burgess

The Chinese consumer landscape is currently presenting a tale of stark contrasts, perhaps best exemplified by the shifting dynamics within two vastly different sectors: the highly saturated premium beverage market and the increasingly challenging private healthcare industry. Both arenas were once heralded as prime beneficiaries of China’s expanding middle class, yet they are now navigating profound structural and economic changes.

We recently observed the $400 million acquisition of the upscale coffee chain Blue Bottle by Centurium Capital, the Chinese private equity firm that is also the controlling stakeholder of Luckin (LKNCY.US). This purchase price was notably below the $700 million its previous owner, the Swiss food giant Nestle (NESN.SW), was reportedly seeking. The transaction brings two radically different players under the same ownership. Blue Bottle operates a mere 100 high-end locations across the U.S., Canada, Japan, South Korea, and China, selling cups for roughly $7. By comparison, Luckin operates a vast network of more than 30,000 stores, predominantly in China, prioritizing convenience with $2 offerings.

We believe this acquisition highlights a deliberate strategy to segment the market. Last year, Centurium and Luckin reportedly explored acquiring the more affordable Costa Coffee chain from Coca-Cola (KO.US), which operates 4,000 stores globally. The failure of those talks and the subsequent pivot to Blue Bottle suggests a desire to capture a distinct, elite demographic. Our new guest today, Bradley Burgess, witnessed the opening of the Blue Bottle location at the Jing'an Kerry Centre in Shanghai, where the minimalist decor initially gave him the impression of a Japanese brand. More importantly, the space was filled with a younger, stylish, white-collar demographic seeking a premium social experience — heavily driven by social media visibility and prestige.

This dynamic is reminiscent of high-end fragrance boutiques in Shanghai’s trendy Xintiandi area, where crowds gather for photographs but few make actual purchases. To succeed, premium coffee brands must rely on white-collar professionals utilizing the space for meetings and work, effectively rejecting the ultra-fast convenience model popularized by Luckin and increasingly adopted by Starbucks (SBUX.US). However, we anticipate significant industry consolidation ahead. The market is vastly oversaturated; independent proprietors and boutique cafes are highly vulnerable to price sensitivities and will likely suffer as stronger, better capitalized players dominate the landscape.

Extracting value in a challenging healthcare market

A similarly complex correction is unfolding in the private medical sector. Huge Dental, a manufacturer of dental materials used in dentures and replacement teeth, recently applied for a Hong Kong listing after failing to list on China’s domestic exchanges in Shanghai or Shenzhen. Historically, private healthcare providers were expected to thrive as consumers willingly paid premiums for discretionary medical services. Yet, Huge Dental's growth stalled last year, hindered by a slowing economy, intensifying competition, and margin-compressing bulk procurement by China's national health plan.

It is markedly easier for medical technology firms to list in Hong Kong due to less stringent profitability requirements. However, investor reception remains exceptionally chilly. While sectors like semiconductors and autonomous driving command inflated IPO valuations, dental companies are trading at depressed P/E ratios, with the three firms listed since 2022 experiencing significant stock declines.

We think these challenges are symptomatic of a broader malaise within private healthcare, including private hospitals. The core issue lies in competing against pervasive, heavily supported state-owned hospitals.

Bradley recently navigated a major health issue for a family member at a highly regarded state hospital in China. The physical infrastructure and surgical expertise were exceptional, but the administrative management and patient experience were profoundly deficient — so much so that he curtailed the treatment and opted to pay out-of-pocket for completion in the United States.

Although the broader Chinese public may possess a higher tolerance for poor customer service, there remains an undeniable, willingness to pay for superior care among some. It is a smaller segment, to be sure, but savvy private operators have found a highly effective way to serve it. Rather than competing directly with the ubiquitous public system, they are finding proven success through collaborative, hybrid models that successfully bridge premium private service with state infrastructure. Ultimately, it is no longer sufficient for medical companies to merely secure a public ticker; they must clearly articulate a differentiated, best-in-class product and a compelling strategic vision for the next decade.

"Geopolitics and the aftermath of Covid provided conditions for Chinese consumers to start favoring domestic brands, to the detriment of Western brands that were not sufficiently or strongly established in China."

Key Takeaways:

• Domestic Chinese food and beverage chains are utilizing rapid franchising to overtake global giants
• Mid-tier Western brands are struggling to maintain their footing in China due to a lack of localization and sufficient scale

By Doug Young & Rene Vanguestaine

China's food and beverage sector is experiencing a massive franchising boom, led by homegrown brands expanding at lightning speed. Meanwhile, a number of major foreign chains and their franchisees are simultaneously hitting a rough patch, forcing a broader overhaul of their operations. We believe these two trends are closely connected by a shifting consumer landscape, evolving tastes, and the brutal necessity of scale.

The sheer scale of the domestic franchising boom is staggering. The relatively unknown Mixue has overtaken McDonald’s (MCD.US) to become the world's biggest food and beverage chain. Serving bubble tea and soft serve ice cream at very low prices, Mixue recently reached around 45,300 shops globally, beating McDonald's 43,100 stores. And it’s not alone. Other Chinese companies in the global top 10 include coffee chain Luckin (LKNCY.US) as the world's sixth-largest, and homegrown hamburger chain Wallace at eighth.

These companies have grown at lightning speed, adding franchisees far faster than Western counterparts that took decades to reach their current size. Franchising offers a relatively simple mechanism to grow quickly without tremendous capital expenditures at the corporate level. When paired with China’s massive consumer market of 1.4 billion people, the numbers heavily favor enterprising domestic companies with products suitable for national consumption and the operational ability to manage an ever-growing network.

Historically, Western goods — from Volkswagen to Buick, and across fashion and food — were highly sought after as Chinese purchasing power grew. However, geopolitics and the aftermath of the Covid pandemic have shifted consumer preferences toward domestic brands.

Yet, we believe this rapid domestic expansion might be moving too fast. Chinese franchisers often appear less careful than their Western peers in vetting franchisees, researching locations, and providing financial assistance. With many eager entrepreneurs falsely believing that opening a restaurant is an easy path to quick riches, we expect to inevitably see a correction and cleanup in the sector. We’ve already seen Chinese hotel chains that utilize the franchise model run into severe financial difficulties during Covid. As in the West, rapid franchise growth can lead to bankruptcies if not managed carefully.

Foreign mid-tier chains hit a rough patch

As domestic brands surge, some prominent foreign chains are struggling. Private equity firm FountainVest is reportedly looking to sell its CFB Group for around $500 million. CFB operates the Papa John’s (PZZA.US) pizza and Dairy Queen ice cream chains in China. This potential sale appears to be part of a broader overhaul among foreign fast-food chains and their operating partners, with Starbucks (SBUX.US) and Burger King (QSR.US) also experiencing simultaneous rough patches after roughly two decades of relative success in the country.

The core issue for many of these companies — particularly mid-tier Western brands — is a failure to achieve scale and adapt to changing tastes. Papa John’s arrived early in Beijing around two decades ago, yet failed to grow fast enough to compete with aggressive localizers like Pizza Hut, part of Yum China (YUMC.US). Dairy Queen, despite its nostalgic appeal in the U.S. and backing from Warren Buffett, has also struggled to establish a sufficiently strong presence in modern Chinese cities.

Other mid-tier brands like Dunkin Donuts and Popeyes have faced similar difficulties after failing to excite Chinese consumers. Dunkin may perform well in India due to a local preference for sugar, but the identical approach falls flat in China. In contrast, highly successful operators like KFC and Pizza Hut have essentially been managed as Chinese operations for quite a while, meticulously catering to local palates. Ultimately, some U.S. brands entered China merely because it was a boardroom trend — a box to tick for CEOs and chairmen to avoid appearing incompetent. Without the financial resources and operational expertise to heavily localize and rapidly achieve scale, these mid-tier foreign players are finding themselves outpaced by homegrown competitors.

"Every major country in the world today has become extremely protective of know-how."

Key Takeaways

• Dingdong's decision to sell its domestic operations to Meituan highlights the brutal reality of China's instant commerce price wars
• India's rejection of a Chinese private equity investment in an Italian firm signals a new era of global protectionism over advanced technology

By Doug Young & Rene Vanguestaine

The global M&A landscape is shifting rapidly, shaped by harsh new realities on both domestic and international fronts. Two recent major developments perfectly encapsulate these modern challenges. In one case, a major acquisition in China’s internet sector highlights the brutal wars taking place as companies try to gain scale in an underperforming post-Covid economy. In the other, a collapsed cross-border deal with an Indian element underscores how geopolitical tensions are increasingly erecting roadblocks for global investments. Both events reflect a broader theme: companies are being forced to navigate an increasingly complex competitive environment.

In the domestic arena, we look at one of the bigger M&A deals on the Chinese internet in quite a while. Dingdong (DDL.US), an early pioneer in online-to-offline (O2O) services, specifically online groceries, is being swallowed by food delivery giant Meituan (3690.HK) in a $717 million deal.

Lately, Dingdong was being overwhelmed by larger internet companies encroaching on its space, most notably Alibaba (BABA.US; 9988.HK), JD.com (JD.US; 9618.HK), Meituan, and Pinduoduo (PDD.US). We believe this deal was primarily driven by market share considerations. The Chinese economy hasn’t performed as strongly as expected post-Covid, with consumers becoming significantly more concerned about the cost of both discretionary items and necessities, spending less than anticipated.

In this kind of business, it’s all about scale. To grow market share, companies offer incentives and cut prices, prompting their rivals to jump in and do exactly the same. We’ve seen similar price wars in other sectors, such as electric vehicles and solar panels. However, while EV and solar manufacturers can export their goods overseas to find growth, O2O e-commerce relies on fresh food and prepared meals. Replicating this at scale overseas takes time, making it easier for these giants to compete aggressively at home first.

What’s particularly surprising about this deal is that it happened at all. Chinese entrepreneurs are famous for not wanting to sell their companies even when the odds are highly against them, often staying in the game until their businesses fail and shareholders are left with worthless shares. We think Dingdong’s founder, Liang Changlin, deserves tremendous credit for recognizing the inevitable. He chose to sell the China business while it still held value.

Dingdong will remain a publicly traded company, retaining its global market businesses and roughly $1.2 billion in cash. While there’s speculation about expanding grocery deliveries in other markets, we remain cautious. Meituan is already pushing into the Middle East and Latin America, meaning Dingdong might just be transferring its domestic competition to foreign markets. For investors, the proof will be in the pudding — it is a waiting game to see what the new Dingdong does next.

Geopolitics kills a cross-border deal in India

Shifting to the international stage, we examine one of the first cross-border M&A deals killed by India over apparent concerns regarding the buyer’s China ties. EuroGroup Laminations, an Italian firm, was looking to sell a 45% stake to FountainVest, a Chinese-owned private equity firm based in Hong Kong.

The deal required India’s approval because EuroGroup owns 40% of Kumar Precision Stampings, which it bought in 2024. Even though the two sides offered to carve out the Indian operations to satisfy regulators, India effectively killed the deal without giving a specific reason.

We believe this has all the markings of geopolitics. Relations between China and India have been strained in recent years. Kumar Precision Stampings is involved in advanced technology, which has become a substantial economic and strategic priority for India, just as it is for China and the U.S. By rejecting the carve-out offer, the Indian government likely wanted to protect not just Kumar, but its ongoing access to high-quality Western technology. Carving the unit out would have left Kumar on its own, potentially unable to move forward with the never-ending upgrades required in high tech.

FountainVest likely pursued this minority interest for either financial gain or strategic considerations on the part of China — either of which would be enough reason for India to block the transaction.

In the past, vetoes of M&A deals on national security grounds were rare, largely because massive deals occurred between friendly Western nations. Today, we believe we will definitely see more of these vetoes. Every major country — including the U.S., India, China, and a newly awakened Europe — has become extremely protective of its know-how and national champions. The world is becoming much more competitive geopolitically, and cross-border M&A deals will increasingly find themselves caught in the crossfire.

“AI is the darling. You have a lot of people who are absolutely willing to pay valuations that do not really, in my view, hold water.”

Key Takeaways:

• Alibaba plans to spin off its T-Head unit for a separate listing amid high market valuations for AI chip makers
• LVMH is handing over its Greater China duty-free operations to a state-owned enterprise as the sector struggles with declining financials

By Doug Young & Rene Vanguestaine

Today we examine two major strategic shifts involving global giants navigating the complex Chinese market. On one hand, we have a push by Alibaba (BABA.US) into the overheated semiconductor sector, and on the other, a strategic retreat by LVMH (MC.PA) from the Chinese retail travel space, both reflecting how companies are adapting to capital demands and state-dominated market structures in China.

We start with the semiconductor industry, specifically the rush for AI chips, or GPUs. These components, once largely in the domain of gaming computers, now power capital-hungry AI models, lifting Nvidia (NVDA.US) to stratospheric heights. Chinese companies are eager to join the fray. Alibaba is considering a spinoff and separate listing for its T-Head unit, which makes AI chips, just a year after scrapping a broader plan to split the company into six parts.

Alibaba is the second internet major to explore this path, following a similar move by search giant Baidu (BIDU.US) last year. We believe valuations are a clear driver here. The market for AI chips is strong, but the industry requires enormous amounts of capital — tens to hundreds of billions of dollars — to build the infrastructure that promises to revolutionize our lives. While Alibaba has significant financial resources, spinning off T-Head makes sense to attract third-party external capital to fund this expensive growth.

However, we must look at the valuations with a critical eye. Currently, listed Chinese AI chip companies trade at triple-digit P/S ratios despite being unprofitable. By comparison, Nvidia — which is profitable and dominates the sector — trades at a P/S ratio of only 24. We think the Chinese market functions on different beliefs than Western markets; AI is the currently "hot property," and investors are willing to pay valuations that are not really justifiable anywhere outside China.

The government’s desire for "national champions" to reduce reliance on Western chips ensures there will be plenty of domestic competition. However, history in the China market suggests that when competition saturates a sector — as seen with EVs and solar panels — it usually doesn’t end well. While a listing in Hong Kong might offer more realistic pricing and access to foreign capital compared to the A-share market in Shenzhen or Shanghai, it is hard to feel comfortable with triple-digit valuations for unprofitable ventures.

Luxury meets state control

Switching gears to the consumer sector, we look at a significant deal in the luxury space. LVMH has handed off operations of its Duty Free Shoppers (DFS) business in Greater China to the locally run China Tourism Group Duty Free Corp. (1880.HK; 601888.SH). As part of the $400 million deal, LVMH will become a shareholder in the Chinese company, while China Tourism Group acquires DFS stores in Hong Kong and Macao, along with brand rights in Greater China.

This appears to be a retreat for LVMH, but we believe it highlights a strategic mismatch. Duty-free shopping, which attracts bargain hunters, is the opposite of true luxury goods, which rely on high margins, exclusivity, and emotion. Real luxury brands, like Hermes, do not discount their products in duty-free shops. Furthermore, the duty-free business in China is primarily a state-owned affair. With Hong Kong and Macao firmly within China, this deal represents a state-owned enterprise (SOE) buying from a private luxury house. Whether this was a strategic decision by LVMH to exit a non-core business or a result of political pressure to cede ground to an SOE remains an open question.

The backdrop for this deal is a struggling sector. Despite aggressive government promotion to turn tourist favorite Hainan Island into a duty-free haven, China Tourism Group saw its revenue and profit fall between 16% and 20% in 2024. We hear constant proclamations about liberalizing rules, yet the financial reports suggest these policies haven't done much for the company’s top or bottom lines. Ultimately, LVMH may be securing cash and a strategic stake, but the synergy of such a merger is often corporate jargon used to justify spending shareholder money. We will have to wait for future financial reports to see if this realignment pays off, but for now, the data suggests the "booming" duty-free narrative conflicts with a harsher reality.

“The big state-owned lenders in China are essentially ‘GDP banks’—they will do anything to boost the GDP numbers.”

Key Takeaways:

• Anta and TCL are leading a new wave of foreign acquisitions to offset a soft domestic consumer market
• China Merchants Bank’s profit growth has flattened as it prioritizes loan quality over aggressive expansion in a low interest rate environment

By Doug Young & Rene Vanguestaine

We are witnessing two diverging narratives in China’s corporate landscape that, upon closer inspection, stem from the same root cause: a sluggish post-Covid economy. On one front, major Chinese consumer brands are looking outward, resuming a trend of purchasing foreign assets to secure growth that’s currently hard to find at home. On the other, the nation’s banking sector — represented by its most commercially oriented player — is turning inward, tapping the brakes on growth to navigate a landscape of squeezed margins and cautious borrowers.

We see these trends crystallized in recent moves by TCL (1070.HK) and Anta Sports (2020.HK), as well as the latest financial results from China Merchants Bank (3968.HK; 600036.SH). While one sector is seeking to buy its way into new markets, the other is hunkering down to weather the domestic storm.

A return to global shopping

The first trend marks a resurgence of Chinese companies acquiring foreign brands, a strategy that was hot in the first decade of the 21st century — epitomized by Lenovo’s (0992.HK) purchase of the PC business of IBM — but had largely disappeared over the last decade after mixed results.

Two significant deals have brought this strategy back into focus. First, TV giant TCL has taken over the home entertainment division of Sony (6758.T), a Japanese legend that has lost some of its luster. The two sides announced a joint venture to manufacture and sell products under both the Sony and Bravia brands. Second, up-and-coming sportswear giant Anta has purchased a 29% stake in Germany’s Puma (PUM.DE) from the Pinault family, becoming the brand’s largest single shareholder.

We believe these acquisitions are driven by strategic necessity. The Pinault family’s portfolio has underperformed recently, and Puma has consistently trailed its German competitor Adidas (ADS.DE) and American giant Nike (NKE.US). Furthermore, new challengers are rising, such as On (ONON.US), which boasts the backing of former tennis world number one Roger Federer.

However, the primary driver for the Chinese buyers appears to be the domestic environment. As we all know, the consumer economy in China is not performing extremely well. We are now in the fourth year post-Covid, yet the expected substantial bounce-back has not materialized. Despite government announcements regarding measures to improve consumption, the sector remains subdued. For companies like Anta, which has done reasonably well with past foreign acquisitions, buying into a global brand is a way to push for growth and revenues overseas when Chinese consumers are unwilling to spend.

We expect this to be the beginning of a bandwagon effect. In China, when a business move looks economically viable, imitators often follow. We have already heard rumors of names like Luckin (LKNCY.US) potentially looking at assets like Costa Coffee. If the domestic market remains soft, this new wave of outbound M&A is likely just getting started.

A bellwether bank turns cautious

While consumer brands look abroad, the domestic financial reality is starkly illustrated by the latest figures from China Merchants Bank. Generally considered one of China’s best-run lenders and a barometer for the sector, the bank is based in Shenzhen and is far more commercial than its state-owned peers.

The bank reported that profit growth came to a virtual standstill last year, rising just 1.2%. Operating income was even flatter, rising by a scant 0.01%. Most telling was that net interest income rose just 2%, lagging well behind a 5.4% rise in its loan book. This discrepancy highlights how the bank’s interest margin is being squeezed by the low-interest-rate environment — a policy the government likely wants to maintain to stimulate the economy.

We view these numbers as a sign of prudent management rather than failure. The bank appears to be navigating uncertain times by being extremely cautious about which new borrowers it brings on board. Expanding the client base too aggressively in this environment could lower the quality of its loan book.

Remarkably, the bank’s non-performing loan (NPL) ratio remained below 1%. While we often take the NPL ratios of China’s big state-owned banks with a grain of salt — viewing them as "GDP banks" that follow political directives and may hesitate to report bad news — we place more trust in China Merchants Bank. Its low NPL ratio likely reflects a strategic decision to limit exposure rather than statistical manipulation. However, it’s worth noting that expanding a loan portfolio can artificially depress NPL ratios in the short term, so time will tell if these figures hold. Ultimately, both the aggressive acquisitions by Anta and TCL and the defensive posture by China Merchants Bank tell the same story: China’s domestic economy is sputtering, and companies are adapting their strategies — either by leaving the country to find sales or tightening their belts to survive the squeeze.

“You're going to need a spark. And you're going to need one company to get into serious trouble and then everybody's going to start paying attention, including the government.”

Key Takeaways:

• China’s office sector is facing extreme oversupply and rising vacancy rates, yet government support for developers is staving off major bankruptcies
• Fast-growing dumpling chain Yuen Kee offers a promising value play for investors despite potential challenges in exporting its model

By Doug Young & Rene Vanguestaine

China’s economy currently presents a stark dichotomy between its infrastructure ambitions and the daily realities of its consumers. On one side, we see an ailing property market with a massive glut of office space. On the other, we see the resilience of the low-cost dining sector, exemplified by a dumpling chain hoping to become the fast-food answer to the hamburger. One grappling with past overbuilding while consumers hunt for value.

We start with the commercial property sector, which is often overlooked due to its smaller size compared to the massive residential market. Like its residential counterpart, the office market has been massively overbuilt over the last two decades. This is most evident in the southern boomtown of Shenzhen, where the supply-to-demand ratio soared to 2.7 to 1 last year.

The slowing economy is certainly partly to blame. The net absorption rate — a measure of the net change in occupied office space — has dropped from a peak of 3.34 million square meters in 2021 to just 1.1 million to 1.2 million square meters in each of the last three years. Despite these growing vacancies, new glass towers continue to rise.

In a Western market, such a situation would typically lead to a halt in new building lasting years, or even a decade. Market discipline would force developers to stop. However, in China, many office developers are owned or supported by central, provincial, or municipal governments. These entities often feel they have the "wind in their sails" to build continuously to support economic growth.

Consequently, we haven't seen any high-profile bankruptcies in this sector yet. We believe there is a mechanism at play here that doesn't exist in freer markets like Europe or the U.S. Governments can support these developers by forcing their other state-owned companies to abandon older buildings and move into newer ones. While this artificial support helps, the dreaded rise of AI and its potential to reduce workforces looms as a future cloud over office demand. Eventually, just as with the residential sector, we suspect a "spark" could cause a crisis, forcing the government to step in and freeze development activity.

The ‘McDonald’s of dumplings’

While office towers sit empty, the business of feeding China’s 1.4 billion people remains robust, specifically at the value end of the spectrum. This brings us to Yuen Kee, a dumpling chain that filed this month to list in Hong Kong. Founded in 2017, the company has quickly become China’s dumpling king with 4,266 stores as of last September.

We view Yuen Kee as a potential winner in the current climate. As consumer sentiment remains weak, diners are constantly looking for value. Yuen Kee operates with a level of scalability and efficiency comparable to McDonald’s (MCD.US), offering a popular basic food in a clean environment.

The chain is also looking abroad, having opened its first store outside China in Singapore in 2024, growing to 10 stores there. However, we believe global expansion poses a challenge. We have seen this with hotpot chain Haidilao (6862.HK) when they expanded to the U.S.

At first, there was a lot of excitement. Now the excitement is still around — but they don't have the buzz that they used to.

While dumplings are a hit within ethnic Chinese communities globally, getting non-Asians to move past initial curiosity is a different issue. We believe Yuen Kee would be smart to focus on Southeast Asian markets like Indonesia and Malaysia, where there are big ethnic Chinese communities and standards of living align with their pricing model.

Ultimately, whether it’s filling empty offices or selling dumplings, the key lies in discipline. For the property sector, it requires a halt to the "build and they will come" mentality. For Yuen Kee, it means growing measurably without destroying its reputation for quality.

“Once companies start resorting to special accounting and financial tricks, you have to wonder, is there something else that we haven't seen yet.”

Key takeaways:

• Beijing’s decision to scrap or lower export tax rebates for solar and battery makers is likely a move to boost government revenue and force industry consolidation
• BYD has surpassed Tesla in unit sales volume but faces scrutiny over high debt ratios disguised by complex financial instruments

By Doug Young and Rene Vanguestaine

In the fast-moving world of China’s new energy sector, two major narratives have collided this month: a significant pullback in state support for some exporters and a changing of the guard at the top of the global sales charts for new energy vehicles (NEVs). On the policy front, Beijing has announced major tweaks to its value-added tax refunds for exports, specifically targeting solar products and electric vehicle (EV) batteries. Simultaneously, domestic giant BYD(1211.HK) has officially overtaken Tesla (TSLA.US) to become the world’s top NEV seller. Both stories signal maturing markets where government guardrails are shifting, and financial transparency is becoming paramount.

We begin with the policy reversal, which has dominated headlines. China has completely scrapped export tax rebates for solar energy products and lowered the rate for EV batteries to 6% from the previous 9%. The State Council cited a desire to "restore rational pricing" and reduce trade frictions. However, we believe one must read between the lines when decoding government communication.

Historically, China has not been particularly concerned with the impact of its manufacturers on foreign markets, where cheap prices have often eliminated competition in sectors ranging from solar panels to EVs. We suspect the primary motivation here is domestic. The Chinese government is seeking to boost tax revenues — or at least reduce expenses — by cutting off incentives that are no longer necessary. With Chinese companies manufacturing roughly 80% of the world's solar panels, the industry is robust enough to survive without this specific lifeline.

Furthermore, this move appears to be an effort to end the "irrational price competition" that has plagued the sector. For months, manufacturers have engaged in cutthroat price wars, often selling products at a loss. By removing these rebates, Beijing may be forcing companies to raise prices and return to profitability, thereby stabilizing employment and tax revenue. While this might conveniently address some complaints from Europe and the U.S. regarding unfair competition, we remain skeptical that it will fully appease Western governments, as other local and provincial subsidies still likely remain in place.

A volume victory with accounting caveats

Turning to the corporate battlefield, BYD reached a historic milestone in 2025, selling 2.26 million NEVs to beat Tesla’s 1.6 million. This victory was driven by a staggering 145% growth in overseas sales for BYD, while Tesla saw an 8.6% overall sales decline. However, we think investors should look past the headline numbers to understand the nuance of this achievement.

BYD’s success is built squarely on the lower end of the market, offering price points — such as $8,000 vehicles — that Western competitors can’t match due to production costs. This is a different business strategy compared to Tesla’s focus on the mid- to upper-end of the market. But of greater concern to us is the financial engineering underpinning BYD’s rise.

While the company reports being profitable, it has relied on an internal "IOU system" to delay payments to suppliers, sometimes for up to eight or nine months. If these financial instruments are factored in, BYD’s debt ratio balloons to nearly 100%, significantly higher than the reported 71%. We note that Warren Buffett’s Berkshire Hathaway, a long-time backer, sold its remaining stake last year. Given Buffett’s penchant for scrutinizing financial filings, his exit suggests he may have spotted these risks early.

It is telling that the Chinese government has ordered BYD to dismantle this IOU system, granting it a two-year window to clean up the mess — a timeline that suggests fears of what a sudden correction might trigger. This brings us back to the core concern: when companies create their own financial instruments to manage their balance sheets too aggressively, it destroys investor trust.

History offers grim precedents, from Enron and Wirecard to the more recent collapse of Evergrande. In all these cases, the initial lack of transparency was a precursor to deeper structural failures. If BYD is indeed hiding the true state of its financial health behind these payment delays, the risk to investors is substantial. For those who do not have an appetite for such uncertainty, we believe the prudent move is to stay away and wait to see how this accounting drama plays out.

“In China, bankruptcy is inextricably linked to the concept of ‘face’.”

Key Takeaways:

• Vanke has secured a temporary reprieve on repayment of its foreign debt, as a full bankruptcy reorganization remains unlikely
• Pet hospital operator Ringpai is seeking a Hong Kong listing despite a difficult path to profitability caused by high operational costs and consumer caution

By Doug Young & Rene Vanguestaine

We’re looking at two distinct corners of China’s economy this week that tell similar stories of adjusted expectations and financial endurance. First, we examine the latest reprieve for embattled property developer Vanke (2202.HK; 000002.SHE), which is battling to stay solvent in a liquidity crisis. We also turn our attention to the consumer sector to discuss Ringpai, a pet hospital operator lining up for a Hong Kong IPO that looks like a bit of a barker — no pun intended.

The long, slow grind for Vanke

Vanke, like many of its peers, has fallen on hard times after once booming in tandem with the Chinese real estate market. The company has been gradually taken over by its hometown government in the southern boomtown of Shenzhen, yet even that state backing hasn't guaranteed its future as creditors line up.

In the latest twist, a group holding maturing Vanke bonds worth about 3.7 billion yuan, or more than $500 million, granted the company a 30-day grace period from a previous Dec. 28 deadline. This is just the latest delay in a string of similar moves as the company attempts to reorganize its massive debt.

What’s interesting to us is that Vanke and its peers seem intent on a strategy of "death by 1,000 cuts" rather than taking the more obvious route of declaring bankruptcy to work things out under court protection. We believe this aversion to bankruptcy is largely cultural. In China, bankruptcy is inextricably linked to the concept of "face." When a company goes bust, the immediate assumption is management failure. It is extremely rare for senior executives — founders, chairmen or CEOs — to admit they did something wrong.

While we could debate whether the current debacle stems from management recklessly growing too fast or from regulatory interventions that distorted the market, the outcome remains the same.

There is also a political dimension. The Shenzhen government, through Shenzhen Metro, is a major shareholder. They previously came to Vanke's rescue with money and power, leading many to believe the developer would survive unscathed. However, the government recently indicated it would not throw good money after bad, signaling that Vanke must navigate these difficult times on its own.

We think the reluctance to file for bankruptcy also stems from the unique "human dimension" of China’s real estate sector. Unlike a factory producing steel rods, a developer’s collapse affects individuals who have paid for apartments that are not yet delivered. Many of these people are paying mortgages on homes they do not possess. In a Western-style Chapter 11 reorganization, a company is protected from creditors. But in China, these would-be homeowners are creditors. We doubt the Chinese legal system would allow a bankruptcy proceeding to say these individuals have no claim.

Consequently, while foreign creditors have petitioned courts in Hong Kong to seize assets outside the Mainland, the vast majority of Vanke's assets remain inside China, largely untouchable by foreign entities. Domestic investors, meanwhile, may be pressured to give the company breathing space rather than rock the boat.

A dog-eat-dog world for pet hospitals

Switching gears to the consumer market, Ringpai has become the latest in a long list of companies trying to seize on Hong Kong’s hot IPO market. As China’s second-largest operator of pet hospitals, Ringpai boasts 548 centers in 70 cities. Despite its scale, the company was losing money until recently, reporting only a small profit in the first half of last year.

We see a company hamstrung by high costs. Ringpai relies heavily on expensive equipment and imported pet drugs because China lacks many domestic alternatives for animals. Furthermore, the sector faces a high talent cost to keep veterinarians happy in a hyper-competitive market. The company’s rapid growth through acquisitions has also come with significant associated costs, which we believe is a primary reason they have struggled to maintain sustainable profitability.

This situation reflects a classic "consumer story" in China that has lost some of its shine. Years ago, investors were enchanted by the math: 1.4 billion people with growing discretionary income equals a massive pet market. However, that growth story has hit a wall of reality.

China’s post-Covid recovery has been slow, and consumer sentiment is weak. People have become very cautious, focusing on saving money due to uncertainties about life. We suspect that many who wanted pets have decided the timing is unfavorable.

While some still spend ridiculously on premium food and pet toys, the reality of ownership — specifically the big cost of healthcare — is daunting. Without the health insurance available to humans, treating a sick pet can become horribly expensive very quickly. Pet owners are often at the mercy of veterinarians, and we have noted dissatisfaction among consumers who feel services and drugs are overpriced.

Ultimately, whether it’s a property giant or a pet hospital chain, the economic narrative is similar: rapid expansion and high expectations are now facing a period of painful adjustment.

“You can also go play in Macao with your money. You'll get the same odds as investing in a state-owned bank.”

Key Takeaways:

• Meta’s acquisition of AI startup Manus explicitly excludes Manus’ Chinese operations, signaling a trend of Chinese entrepreneurs moving to Singapore
• A local government’s decision to buy Weihai Bank shares at a premium rather than a discount is aimed at maintaining confidence in the lender

By Doug Young & Rene Vanguestaine

In the latest edition of China Inc., we examine a massive acquisition by a global tech giant that explicitly excludes Chinese assets, alongside a peculiar bailout of a regional lender in Northeastern Shandong province. On one side, we see highflying tech entrepreneurs maneuvering to exit the Chinese regulatory sphere; on the other, we see a regional bank inextricably bound to local government policy, regardless of market logic.

The great decoupling: Meta and Manus

The big business headline last week was Meta’s (META.US) decision to purchase AI company Manus in a deal valuing the startup at between $2 billion and $3 billion. Manus made waves last March by unveiling what it described as the world’s first general AI agent — a digital assistant capable of performing multiple tasks across various platforms.

However, the deal comes with a significant twist: Meta does not want any of Manus’ Chinese operations, nor will the company have any Chinese ownership post-transaction. While Manus was originally based in both Beijing and Singapore, it is now officially headquartered only in Singapore.

We believe this separation makes perfect sense for the Facebook parent. Meta is essentially unable to operate any of its products — be it Instagram or Facebook — within China. Acquiring a domestic Chinese business would likely only result in that division being banned by the government, mirroring the fate of other foreign internet services.

This move by Manus is part of a broader trend of Chinese tech companies moving their headquarters to Singapore, similar to the path taken by fast-fashion giant Shein. However, unlike Shein, which retains a vast supply chain in China, Manus appears to be cutting ties more thoroughly. We view this as a clear signal that Chinese entrepreneurs are increasingly looking to build successful businesses outside the Mainland to avoid perceived heavy-handed regulation, oversight or control. This exodus mirrors the crypto industry, where companies were forced to relocate to Singapore or beyond after Beijing banned the sector.

We expect to see more entrepreneurs following this type of “success story” as company founders witness the wealth generated by Manus’ exit and its ability to get paid outside of China.

However, the deal is not yet closed. We suspect Beijing may try to interfere. The Chinese government has made a concerted effort to develop advanced technology, and losing a successful AI business is not in its interest. Until the transaction closes, Manus still has Chinese shareholders and business operations, characteristics the government could seize upon to have a say in the approval process.

Local government pays premium to prop up a regional lender

Turning to the financial sector, we look at the latest in a growing string of bailouts for regional lenders. Weihai Bank (9677.HK), located in the coastal city of Weihai in Northeastern Shandong province, announced a 1 billion yuan ($140 million) infusion from an investment vehicle attached to the local government.

In a move that defies standard market logic, the government is buying newly issued Weihai Bank stock at a premium to its latest closing price. Typically, such cash-raising efforts occur at a discount.

We believe this unusual pricing is less about economics and more about confidence. State-owned enterprises (SOEs) and government-owned banks are primarily instruments of government policy. In the post-Covid economic slowdown, banks like Weihai Bank have likely been strongly encouraged to lend to local companies to support the provincial economy, regardless of a borrowers' health. This has created a vicious cycle where a bank’s assets grow, but its profitability stagnates due to non-performing loans.

By injecting equity at a premium, the local government is improving the bank's Tier 1 capital ratio while sending a powerful message to depositors in Shandong: The bank has the government's backing. This is a strategic move to prevent panic and stop a potential run on the bank. For investors, however, this underscores the risks of the sector. As we noted, investing in state-owned banks is akin to gambling in Macao. Third-party investors will always find themselves low in the pecking order behind government policy objectives. While these entities may offer yields — as the government mandates dividend payments — they are not designed for shareholder growth. Whether it’s banks, oil companies, or airlines, the primary mandate of Chinese SOEs is to execute government policy, leaving independent investors in for a bumpy ride.

“The people who typically benefit from SPACs are the SPAC sponsors. And they always end up much better than the investors who come in later on.”

Key Takeaways:

• Hong Kong's cautious regulatory environment has stifled an expected boom in SPAC listings, protecting investors but limiting market activity
• Foreign consumer brands in China face increasing challenges from a resurgent domestic market and changing consumer preferences

By Doug Young & Rene Vanguestaine

Hong Kong’s ambition to replicate America’s once-booming special purpose acquisition company (SPAC) market has largely fallen flat, with just a handful of listings since its program launched in 2022. A different sort of struggle is also playing out with foreign consumer brands in China, exemplified by Mannings' recent exit, highlighting two distinct but equally challenging facets of navigating complex Chinese markets.

Hong Kong's stalled SPAC market

SPACs, essentially shell companies raising capital to acquire real private businesses, became wildly popular in the U.S. during the pandemic. Their appeal stemmed from offering a faster and cheaper route to public listing compared to traditional IPOs. However, this exuberance often came at a cost. The U.S. market saw values for a significant number of SPACs drop sharply after completing their de-SPAC mergers — sometimes 80% to 90% — with some acquired companies even going bankrupt. This was largely due to less rigorous vetting compared to traditional IPOs, where disclosure requirements are far more rigorous.

Hong Kong, in a bid not to be left behind, launched its own SPAC program with considerable fanfare at the beginning of 2022. Yet, the outcome has been starkly different. As we step into the New Year, a mere three companies have managed to complete SPAC listings in the past four years. The latest, autonomous driving technology company Seyond (2665.HK), took a full year from its initial announcement in December 2023 to complete its listing in mid-December. This miserable record stands in sharp contrast to Hong Kong's generally robust market for traditional IPOs in 2025.

We believe the primary reason for this lukewarm performance lies in a more generalized investor wariness toward SPACs following the U.S. experience. Additionally, Hong Kong regulators have adopted a notably more vigilant and cautious approach. Unlike the "buyer beware" ethos prevalent in some markets, Hong Kong's regulators prioritize investor protection, even if it means slowing down market activity. While SPACs typically promise a cheaper and faster route to public markets, this hasn't materialized in Hong Kong, where the regulatory oversight has effectively negated those advantages.

SPACs are often viewed as a "risk on" instrument, thriving on market exuberance and abundant cheap money. Historically, the main beneficiaries tend to be the SPAC sponsors, who typically exit with decent returns and warrants, often leaving later-arriving investors holding the bag. This inherent structure is a poor fit for a strict regulatory regime focused on safeguarding investors. We've observed a resurgence of SPACs in the U.S. in the current bull market, suggesting that cycles of this type of financial engineering continue to find traction when conditions are ripe. However, in Hong Kong, the gates remain guarded, reflecting a commitment to prudence over speculative fervor.

Foreign brands retreat from China

In a separate, yet equally revealing market shift, Hong Kong-based health and beauty chain Mannings has announced its withdrawal from Mainland China, effective Jan. 15. After more than two decades and once boasting 200 stores in the market, its departure repeats a familiar pattern for many Hong Kong and other Western retail and food and beverage brands that once held high hopes for the vast Chinese market. Initial optimism was often fueled by cultural similarities and Hong Kong's perceived deeper experience in running businesses.

However, the landscape has profoundly changed. The once-dominant appeal of global brands as symbols of higher quality and cultural aspiration has significantly eroded. Over decades, domestic Chinese brands have notably upped their game, improving quality, design, and tailoring products to local tastes. This transformation has led to a palpable shift in consumer sentiment. Chinese consumers are increasingly favoring local brands, a trend further accelerated by factors such as the pandemic and evolving geopolitical dynamics. Unless a foreign brand offers something truly unique and special, its attractiveness to the modern Chinese consumer is diminished. This trend is particularly evident in sectors like beauty products, where consumers have migrated from Japanese, European and Korean brands to domestic alternatives.

For foreign brands still eyeing the Mainland Chinese market, the advice is clear and unequivocal: do your research 10 times over. It is crucial to understand the contemporary Chinese consumer and the current market mood, which is vastly different from 20 or 30 years ago when the sheer scale of 1.4 billion people mesmerized many. If a brand cannot offer a genuinely unique or top-tier product or service that stands out against increasingly sophisticated domestic competition, then, frankly, we believe it’s not worth the effort. The days of simply riding the wave of China’s economic growth and burgeoning middle class are over. Success now demands deep local insight and an unparalleled value proposition.

“There’s inevitably a bit of a herd instinct driving this wave of IPOs in Hong Kong.”

Key Takeaways:

• Hong Kong regulators are tightening their oversight of listing applications following a $28.4 billion IPO boom that is expected to extend into 2026
• ZTE faces a potential $1 billion fine over bribery allegations in Brazil as the U.S. moves to crack down on unfair competition by non-Western firms

By Doug Young & Rene Vanguestaine

As we head into the end of 2025, two distinct narratives are emerging from the world of China Inc. One involves a vibrant, albeit highly scrutinized, capital market in Hong Kong, while the other revisits the regulatory tribulations of a telecommunications giant. We believe these stories, though seemingly disconnected, highlight the evolving complexities of compliance and capital in the current geopolitical climate. While the Hong Kong Stock Exchange fights to maintain the integrity of its financial plumbing, Chinese companies abroad, especially ZTE (0763.HK; 000063.SHE) are being reminded that the reach of U.S. regulators remains long and unforgiving.

We start with outlook for the Hong Kong IPO market, following a banner year with impressive numbers for 2025. As of the end of November, 86 companies had raised a whopping $28.4 billion through Hong Kong IPOs this year. With a robust pipeline of more offerings on the way, this boom is likely to continue into the start of 2026. However, in an unusual development, the Hong Kong Stock Exchange and the Securities and Futures Commission issued a rare joint letter to underwriters warning of the declining quality of listing applications and urging them to address growing irregularities.

We think that’s nothing really new here. There’s precedent for this: years ago, before the pandemic, regulators contacted investment banks to make them more accountable for the quality of companies they brought to market. We view this recent letter not as a red flag, but as a refresher — a necessary reminder to keep the market in good order after it suddenly became hot in 2025.

The fundamental drivers for this rally remain unchanged as we look toward 2026. Capital needs in China are high, and for sectors favored by the government for national security, domestic markets are the main fundraising option. For everyone else, Hong Kong has become the de facto default avenue. The U.S. route remains blocked by a "dual barrier": Beijing’s wariness of sharing sensitive economic data, and Washington’s attempt to prevent U.S. capital from funding Chinese technology with dual-purpose military or surveillance capabilities.

Furthermore, we believe a "herd instinct" is fueling the Hong Kong rush. When companies in a specific sector list and achieve decent valuations, their competitors rush to market to avoid being left behind, fearing that a higher cost of capital could become a competitive disadvantage.

However, a potential headwind looms for new listings in Hong Kong next year from across the Pacific. While 2025 saw few visible IPOs in the U.S., 2026 is likely to be different. We expect huge listings, such as SpaceX – rumored to be a $30 billion IPO – and OpenAI, to hit the U.S. market. Unless something negative occurs in American markets, this demand for capital in the U.S. could negatively impact the amount of liquidity available for Hong Kong.

Washington targets global corruption

Shifting gears, we examine the latest chapter in the saga of ZTE. The telecoms equipment giant, often viewed as the "little brother" to Huawei, is back in the U.S. doghouse. Years after paying a massive $1.19 billion fine for illegally selling products to Iran, ZTE is now facing allegations that it bribed officials to win contracts in Brazil. The company could face another fine of around $1 billion.

While cynicism might suggest such bribery is common in developing countries, we believe this case signals a shift. The U.S. is leveraging its economic power – specifically ZTE's reliance on U.S. software and components – to enforce anti-corruption standards on non-U.S. companies. This is not unprecedented. European firms like Siemens have faced similar reckonings.

We believe the U.S. motivation here is rooted in fair competition. American companies are barred from such practices, and Washington views bribery by foreign competitors as counterproductive to U.S. interests. When U.S. manufacturers lose bids to Chinese or European companies, they often employ investigative units to uncover irregularities. Once reported, the wheels of justice turn.

While Beijing may construct a political narrative accusing the U.S. of bullying, the reality is that ZTE competes for significant contracts involving annual upgrades. We expect the U.S. to continue watching these activities closely. ZTE will likely survive – non-U.S. manufacturing alternatives exist, albeit perhaps at a higher cost or lower quality. But the message is clear: the U.S. intends to use its leverage to police the playing field, regardless of where the game is played.

“It’s not just about Chinese manufacturers competing with foreign manufacturers… even the Chinese government views that as disruptive, value-destroying competition.”

Key Takeaways:

• Foreign companies are facing a new era of "involution" characterized by savage price cuts by local rivals
• Knowledge platform Zhihu faces an existential crisis as users shift towards AI-driven search engines that offer faster and often more comprehensive answers

By Doug Young & Rene Vanguestaine

For years, the narrative regarding foreign business in China was consistent: the market was vast and lucrative, but bureaucracy was a big bottleneck. But now the ground is shifting beneath the feet of foreign and domestic companies alike, as they face existential threats from rapid, disruptive changes in the local landscape. On one hand, foreign manufacturers are being squeezed out by a ferocious mix of rising local quality and savage price wars. On the other, internet companies like Zhihu (ZH.US; 2390.HK) are finding their hard-won profitability eroded by the sudden ubiquity of artificial intelligence.

We’ve long heard complaints from the foreign community about government obstacles blocking their market access. But a recent survey by the German Chamber of Commerce in China highlights a stark change in recent sentiment. According to the data, 58% of companies cited intense domestic competition as the biggest barrier holding them back from investing more in China.

This is no longer just about standard market rivalry. We believe this reflects a phenomenon known in China as "involution" – a state of intense, disruptive, and value-eroding competition. Until a few years ago, foreign companies could rely on a distinct advantage over domestic peers in quality, reliability, and technology. That gap has closed. Chinese competitors have upped their game, particularly in sectors like electric vehicles (EVs), reaching parity with or exceeding foreign standards.

However, the progress of Chinese domestic products in quality and attractiveness is only half the story. The other half is ferocious price wars. Chinese companies are competing by savagely cutting prices rather than solely focusing on technological advantages. In a normal market, such a distorted environment would force a correction; companies losing money would eventually rationalize or exit. Yet, in China, the financial system – often with government encouragement – appears to continue funding this destructive game.

For giants like Volkswagen (VOW.DE), General Motors (GM.US), and even Tesla (TSLA.US), the environment is becoming increasingly inhospitable. It is difficult to compete against rivals who are willing to drop margins and lose money indefinitely. While we have seen the government step in to rationalize specific industries, such as solar, the damage for foreign companies across other sectors is largely done.

Compounding this is a shift in consumer sentiment. Chinese buyers are increasingly enamored with domestic brands, moving away from the historic captivation with foreign names. When you add the long-standing exclusion of foreigners from state procurement, the picture becomes clear. Despite lip service from Beijing about welcoming foreign companies, foreign direct investment (FDI) is on a downward slope. We don’t expect a rebound to previous golden-era levels; the trend is simply no longer in favor of building investments in China.

AI poses existential threat to knowledge-sharing darling Zhihu

The disruptive force of technology is not limited to manufacturing. We are also looking at Zhihu, often called the "Quora of China," which is facing its own crisis. After finally finding a path to profitability last year by monetizing its Q&A and content service, the company is sliding back into the red. Its revenue plunged 22% in the third quarter.

The rise of generative AI models has fundamentally altered how users seek information. In the U.S. and China alike, users are increasingly defaulting to AI engines rather than traditional search or Q&A platforms. Zhihu’s founder has attempted to pivot, claiming the company will evolve into a "trusted information infrastructure" provider, leveraging its community for diverse, reliable perspectives.

We find this argument difficult to swallow. While it’s true that AI models aggregate data from across the web – including unverified social media content – the idea that Zhihu is inherently more "trustworthy" is debatable. All content is curated, whether by an algorithm or the people designing it. Furthermore, the economics are challenging. Users who can get "good enough" information for free or cheaply via AI are less likely to remain captive in Zhihu’s paid ecosystem.

Investors must also consider the perennial regulatory risk. As a content provider in China, Zhihu faces constant scrutiny. Unlike a pure tech play, they are feeding information to the public, which invites significant regulatory exposure – a risk that has destroyed shareholder value in the past.

Ultimately, both topics point to a tougher reality in China Inc. Whether it’s a manufacturer facing "involution" or a tech platform fighting AI algorithms, the era of easy growth appears to be over for domestic and foreign firms alike.

“I wonder to what extent Buffett’s exit was actually driven by BYD’s financial position.”

Key Takeaways

• Regulators are dismantling a massive digital voucher system used by BYD that obscured liabilities and squeezed cash-strapped suppliers
• Hong Kong brokerage GoFintech exemplifies a worrying trend of Chinese companies making desperate, value-destroying pivots into unrelated industries

By Doug Young and Rene Vanguestaine

Scrutinizing the financial health of Chinese companies often requires looking past the headline figures to understand the machinery generating them. Recent developments have exposed cracks in the foundations of two very different market players. One of those is a regulatory crackdown on a shadowy financing practice at the country’s leading electric vehicle (EV) manufacturer, BYD. The other comes in a radical, margin-crushing business transformation by a Hong Kong financial services firm, GoFintech.

While the first involves an industry titan and the other a tiny brokerage, both stories underscore a recurring theme of financial opacity and the lengths to which companies will go to manage their cash flow and growth narratives.

We begin with a complex financial instrument that has permeated the supply chain of BYD (1211.HK; 002594.SZ). According to a recent in-depth report by Caixin, the EV giant is quietly dismantling a massive digital payment system used to settle obligations with its suppliers. The system involves "Dilian" (or “BYD Chain”), a system of self-created digital vouchers backed by BYD’s own credit.

In most parts of the world, a company typically has 60 to 90 days to pay a supplier. However, BYD found a convenient way — abusing its dominant power, morally speaking — to extend that timeline to eight months or longer. In the interim, they issue a piece of paper effectively stating, "I owe you."

If a supplier is desperate for cash, they can try to secure funds against this promise to pay, but only at a discount. If traditional financial institutions balk, suppliers can turn to a BYD subsidiary, which might offer cash at an even steeper discount. By mid-2023, BYD had issued more than 400 billion yuan ($56 billion) worth of these instruments.

It’s a lucrative arrangement for the issuer, but it looks uncomfortably like a scam and an abuse of suppliers in a tight economy. It’s surprising that Chinese regulators took this long to intervene, though the central bank has now given companies two years to comply with new rules. We recall reports from at least six months ago indicating government pressure on big manufacturers to accelerate payments to their SME suppliers. The delay in cracking down will likely force smaller enterprises to close shops or fire workers due to liquidity struggles.

For investors, the implications are significant. This system was a convenient method for BYD to keep obligations off its balance sheet, obscuring the company's actual financial condition. As this unwinds, we expect to see an increase in liabilities on BYD's published balance sheet. This transparency could make creditors and public investors increase the company's borrowing costs.

It’s worth noting that Warren Buffett’s Berkshire Hathaway fully exited its position in BYD earlier this year. In light of these revelations, we wonder if that departure was linked to the realization that the company's financial position was not as robust as it appeared. If the situation deteriorates, this financing scheme may well be viewed as the canary in China’s EV coal mine.

The risky business of constant reinvention

While BYD grapples with its balance sheet, a smaller player in Hong Kong is engaging in a different kind of financial alchemy. GoFintech (0290.HK) recently reported that its revenue skyrocketed to HK$1 billion ($128 million) in the first half of its latest fiscal year — a 40-fold increase from just HK$28 million a year earlier.

The catalyst was a move into commodities trading, acting as a middleman between buyers and sellers. However, this revenue surge came at a brutal cost, as the company’s gross margin crashed from 75% to just 6.6%. Previously a financial services provider offering stock brokerage and margin financing, GoFintech is now venturing into commodities, as well as artwork trading and tokenization.

We view this move as risky, to say the least. The pivot suggests that even in a bull market with increased trading volumes, GoFintech was likely losing market share to more aggressive platforms like Futu and Tiger Brokers.

Diversification is one thing, but we question whether the company possesses the expertise to manage the inherent risks of commodities trading. History is littered with cases where brokers are left holding the bag, discovering that the physical assets they thought they possessed were not there. Trading commodities is fundamentally different from trading stocks. If we were investors, we would either stay away or demand deep due diligence on their risk management capabilities.

This reflects a broader, troubling tendency among Chinese companies to constantly reinvent their business models. We’ve seen similar patterns with companies like Qudian, which began as a fintech lender, pivoted to prepared meals, and then attempted last-mile delivery in Australia.

Such radical shifts often signal that a company has failed in its core business. In Qudian’s case, they entered Australia simply to escape hyper-competition in China. These pivots rarely end well. When a company sits on hundreds of millions in cash, as Qudian did, management often finds creative ways to destroy that value rather than returning it to shareholders.

We believe investors should avoid companies that abandon the core businesses they mastered to venture into unknown territory. Whether it’s an EV giant squeezing suppliers with shadow currency or a brokerage chasing low-margin revenue to mask a failing strategy, the lack of transparency and strategic discipline presents a risk that is best avoided.

“The days of unlimited spending on Western luxury items by the Chinese public at large are gone, I think, forever.”

Key Takeaways:

• The departure of Harrods signals a permanent shift away from broad-based "conspicuous consumption," though top-tier brands and tech giants like Apple retain their allure
• Private university operators like XJ International are struggling as the economic value of a degree fades, prompting a shift toward government-aligned vocational training

By Doug Young & Rene Vanguestaine

Disparate market signals often coalesce into a singular narrative of change. Two recent developments illuminate a distinct shift in China’s economic psyche: a move away from the pursuit of prestige for prestige’s sake, and toward a starker, more pragmatic reality.

We begin with the news that Harrods, the legendary British department store brand, is shuttering its Shanghai operations come January. This includes the Harrods Tea Rooms and its private club, Harrods the Residence. The closure ends a five-year experiment that began in 2020, not as a typical retail play, but as an attempt to sell a "British lifestyle." The offering included curated social experiences and a steep 150,000 yuan ($21,000) membership fee.

In retrospect, we believe this was a case of profound bad timing and perhaps a misunderstanding of the market. The concept relied heavily on the allure of "conspicuous consumption" that defined an earlier, booming era of China’s economy. Charging astronomical fees for the privilege of drinking tea – even with Harrods teddy bears – makes sense only when cheap money is abundant. Furthermore, while French or Italian culture often sells itself as a luxury lifestyle in China, the appeal of a purely British social experience is arguably more niche.

There is also a demographic reality to this exit. The club model likely made sense when Shanghai was teeming with Western business executives mingling with wealthy Chinese entrepreneurs. However, geopolitical mayhem and the pandemic have driven many expatriates away, and they simply have not returned.

Does this signal a total collapse of Western luxury in China? We don’t think so. While "second-tier" luxury brands are scaling down, the top-tier players – like Hermes and Louis Vuitton – retain their ability to command high prices. Even Apple, despite headlines of dismaying sales, has seen a rebound; the iPhone 17 recently captured 25% market share. We observe this resilience on the ground, noting that airline crews and consumers in Beijing are still opting for the latest Apple hardware. The market is shrinking, but appetite for the absolute best remains. The days of unlimited spending by the public at large are gone, but the wealthy will continue to buy.

Diminishing returns of a university degree

While the wealthy rethink their club memberships, the middle class is rethinking its path to prosperity. This brings us to XJ International (1765.HK), a company running private universities, which is currently selling off underperforming campuses to service its heavy debt. Unlike the primary education sector, which was decimated by a regulatory crackdown in 2021, XJ is suffering from a shift in market demand.

There was a time when a college degree was viewed as the golden key to a successful future in China. That sentiment is reversing. We believe the economy, compounded by the looming specter of artificial intelligence, has fundamentally altered the value proposition of higher education. Today, a generic college degree is too often a direct route to unemployment.

Youth unemployment remains stubbornly high. Anecdotally, we hear constant reports from Beijing and Shanghai of graduates struggling to find well-paid work. When we look back on 2007, the going salary for a university graduate was around 3,000 yuan. Nearly two decades later, starting salaries haven’t risen significantly enough to justify the investment.

Consequently, we are seeing a pivot toward vocational education — a sector explicitly encouraged by President Xi. There is a growing realization that skilled trade jobs, such as electricians or plumbers, offer better protection against the AI revolution than lower-level white-collar corporate roles.

For investors looking at the education sector, the lesson is clear: align with government priorities or face existential risk. The 'in-between' private universities – those lacking the state-backed clout of elites like Peking University or Tsinghua University – are in a precarious position. Without the “Iron Rice Bowl” funding that protects those top-tier giants, these private institutions are vulnerable to demographic shifts and regulatory changes. The smart money, we believe, will steer clear of this squeezed middle and instead follow the state’s roadmap: investing in vocational training, high-tech, AI, and green energy education. Ultimately, both Harrods and XJ International are casualties of a maturing, tightening environment. Whether it is a 150,000 yuan social club or a four-year degree, Chinese consumers are no longer buying the brand; they are scrutinizing the value.

The operator of KFC and Pizza Hut restaurants in China aims to operate 30,000 stores by 2030, up more than 70% from current levels, it said at its recent investor day

Key Takeaways:

• Yum China plans to boost its store count by more than 40% over the next three years to 25,000 by the end of 2028
• The company aims to boost its restaurant margin to at least 16.7% by 2028 from 16.2% to 16.3% this year by using flexible store formats and other efficiency-boosting measures

By Doug Young

After years of building up a dominant position in China’s restaurant market, Yum China Holdings Inc. (YUMC.US; 9987.HK) is getting down to the nitty-gritty to fill in the many gaps it has yet to penetrate in the massive market. It’s also focusing on key technology and other upgrades to keep its operations lean, as it enters a new stage of using flexible store formats to enhance penetration in higher-tier cities and accelerate expansion in lower-tier cities.

Those were two of the key messages coming from the operator of KFC and Pizza Hut restaurants in China at its latest investor day on Nov. 17 in the southern boomtown of Shenzhen, where it laid out an ambitious goal of expanding its overall store count. The company said it aims to operate over 25,000 stores by 2028 and more than 30,000 by 2030, up from 17,514 at the end of September. By comparison, global rival McDonald’s (MCD.US) is a distant second in China’s fast-food space with about 6,800 stores at the end of last year.

An important part of the growth for Yum China, the country’s oldest fast-food operator whose history dates back to the opening of its first KFC in Beijing in 1987, will come from a new generation of KFC and Pizza Hut stores with lower cost formats suited to China’s lower-tier cities.

An example is the company’s Pizza Hut WOW store format, which has grown rapidly since its launch last year. Individual stores using the format typically cost just 650,000 yuan ($91,000) to 850,000 yuan each to open, far less than traditional stores costing up to 1.2 million yuan, Yum China told investors. That means franchisees – a key group that will help Yum China reach its rapid growth targets – should be able to recoup their investment in just two to three years.

“On the front end, we are innovating new modules and offerings to cater to a wide range of customer segments and occasions. On the back end, we are consolidating our resources to unlock synergies in and across stores, regions and even brands,” CEO Joey Wat told investors.

Yum China gave out the aggressive store targets as it detailed other steps it is taking to achieve such growth without sacrificing margins, and to keep boosting its overall profits. It said it is aiming for mid- to high-single digit compound annual system sales growth over the next three years, and high single-digit annual compound operating profit growth. At the same time, it is also aiming to boost its restaurant margins to at least 16.7% in 2028 from around 16.2% this year.

To reward existing shareholders for their loyalty and attract new ones, Yum China said it plans to return 100% of its free cash flow after dividend payments to non-controlling interests of its subsidiaries from 2027 onwards. That should translate into an average annual return of $900 million to over $1 billion in 2027 and 2028, and exceed $1 billion in 2028. 

Investors applaud

The bullish plans come as China’s economy slows after years of breakneck growth, making many consumers more cautious. That may actually be working to Yum China’s advantage, as a “consumption downgrade” leads many to choose more budget friendly restaurants that are Yum China’s specialty.

Yum China’s shares rose about 3% over the two trading sessions after the investor day, leaving them largely unchanged year-to-date. While that may not look inspiring, it’s better than many of its peers, whose shares have fallen as investors worry about growing consumer caution in China.

Among its top two brands, Yum China has the most aggressive expansion plan for Pizza Hut, which is represented in just 1,000 Chinese cities, less than half the more than 2,500 for KFC. Following an overhaul of the pizza chain to make it more efficient, and development of the Pizza Hut WOW format, Yum China plans to boost the brand by about a third to more than 6,000 stores over the next three years from 4,022 at the end of September. Pizza Hut’s operating profit is also expected to double from 2024 levels by 2029.

KFC is targeted for steadier growth, with plans to raise the chain to 17,000 stores by the end of 2028, up by about a third from 12,640 at the end of September. With the expansion, Yum China also aims to boost the chain’s operating profit to more than 10 billion yuan, or around $1.4 billion, becoming the first restaurant chain in China to cross that threshold.

To achieve this, KFC has promoted its “small town” model that requires less than half the capital expenditure needed for a standard store, aiming to accelerate franchise expansion in lower-tier cities.

Another important growth area associated with the chain will be two separate modules, KCOFFEE and KPRO, which are being built side-by-side with KFCs to share resources like kitchens and staff. KPRO restaurants offer items like energy bowls, superfood smoothies, salads and wraps, targeting a light food market expected to break 500 billion yuan by 2026.

The company plans to sharply expand KCOFFEE to more than 5,000 locations by 2029, nearly triple the roughly 1,800 at the end of September, and is experimenting with standalone stores separate from the side-by-side format.

Yum China is also placing KFC and Pizza Hut stores adjacent to each other in another side-by-side format to drive synergies between the brands, an approach called its “Gemini” model, developed primarily for lower-tier cities.

Yum China also operates the higher-end Lavazza coffee chain in China with the Italian company, and is aiming to boost that brand to 1,000 stores by 2029 from around 120 at the end of September, partly by using a new more cost-effective store format and enticing customers with locally developed products like its popular buffalo milk coffee.

Last but not least, Yum China outlined its ongoing campaigns to boost efficiency. It discussed efforts to manage its complex supply chains more efficiently to control prices and its use of a “mega RGM” initiative, whereby restaurant general managers oversee two to four stores with their teams of typically 60 to 90 staff, which also helps to keep cultivating new talent.

The company also detailed three new AI programs now being trialed, including an in-store management assistant called Q-Smart, a delivery operations assistant called D-Smart, and a customer service assistant called C-Smart.

The company detailed the three-year roadmap just days after reporting its latest financial results, which included a 4% year-on-year revenue rise to $3.2 billion in the third quarter. Its operating profit for the period rose 8% to $400 million.

The Bamboo Works offers a wide-ranging mix of coverage on U.S.- and Hong Kong-listed Chinese companies, including some sponsored content. For additional queries, including questions on individual articles, please contact us by clicking here

To subscribe to Bamboo Works free weekly newsletter, click here

“In the current economy… this whole thing seems to me to be almost a zero-sum game. There's a finite amount of money that Chinese consumers can or are willing to spend on discretionary items.”

By Doug Young & Rene Vanguestaine

Diverging fortunes on China’s retail landscape have been on full display recently, characterized by a coffee giant’s audacious global ambitions and the quiet fizzling of what was once the world’s largest shopping extravaganza. On one hand, Luckin Coffee, having already eclipsed Starbucks domestically, looks poised for a massive international breakout with reports linking it to a bid for the British chain Costa Coffee. On the other, the "Double 11" shopping festival – once billed as China’s answer to Black Friday – rang hollow this year, marked by muted media coverage and a lack of concrete sales data. They offer a combined snapshot of the current Chinese economy: a saturated, cautious domestic consumer market driving fierce competition at home, compelling the strongest players to seek growth beyond China's borders.

A caffeinated global ambition

Luckin Coffee’s (LKNCY.US) growth has been nothing short of lightning-fast. With more than 29,000 stores globally – the vast majority in China – it has firmly established itself as the nation's largest coffee chain. However, reports suggesting Luckin may bid for Costa Coffee, currently owned by Coca-Cola (KO.US), indicate a strategic pivot. While Costa is significantly smaller by store count, with roughly 4,000 shops, its footprint spanning 52 countries and regions would immediately propel Luckin onto the global stage.

We believe such a deal is plausible, despite the ghosts of Luckin’s past. It’s true that the company faced a major accounting scandal in 2020 involving fabricated sales. However, that occurred under a previous management regime. The individuals responsible for that era's strategy and malfeasance are long gone. The current leadership has spent years cleaning up the business and pursuing an aggressive expansion strategy, not only to compete with Starbucks but to distance themselves definitively from domestic rivals like Cotti Coffee.

There’s a limit to expansion within China, particularly given the depressed state of consumer sentiment. For a company pursuing high growth, international expansion is the logical next step. While Luckin has begun opening stores in Southeast Asia and the United States, organic growth is slow. Acquiring a well-established chain in Europe offers a shortcut to a global logistics network and 4,000 points of sale.

If this deal proceeds, we suspect Coca-Cola would prioritize two things: valuation and a clean break. Given Luckin’s history, a cash deal seems most likely, as the seller would presumably wish to avoid holding Luckin stock. Luckin appears cash-rich and capable of securing financing, making a purchase feasible.

The question remains: What would Luckin do with Costa? The British brand has struggled to thrive under Coke’s ownership, often criticized for closing stores rather than opening them. We see multiple paths forward. Luckin could leverage its superior technology – particularly in mobile ordering – to modernize Costa’s operations. While rebranding is risky given Costa’s existing following, a co-branding strategy or a holding company structure could allow Luckin to manage the assets without alienating European customers or investors wary of the Luckin name.

However, challenges abound. Expanding into Europe involves navigating a cultural landscape vastly different from China’s. European unions are powerful, and we have seen many Chinese companies stumble in the region due to challenging labor relations. Furthermore, while Costa has a presence, the brand quality is debatable.

The fading glory of the shopping marathon

While Luckin looks outward, the domestic retail scene is suffering from fatigue. This year’s Double 11 festival might be dubbed as "Dud Ball 11." In the past, this event was a sensation, with e-commerce giants releasing breathless updates on sales figures. This year, the silence was deafening. JD.com vaguely claimed turnover reached a new high, and Alibaba noted that 35 brands logged more than 100 million yuan ($14 million) in sales during the first hour, but specific gross merchandise value (GMV) totals were largely withheld.

We view this not merely as a temporary blip, but as a sign that the novelty has worn off. The "ship has sailed" on the excitement that once defined the event. While consumers everywhere love a bargain, the Chinese consumer economy is not in the robust shape it was pre-Covid. Shoppers are significantly more cautious.

Furthermore, the event itself has diluted its own impact. What began as a single day of frenzied shopping has morphed into a marathon lasting over a month, filled with confusing pre-sales and post-sales. Much like Black Friday in the U.S., which has extended into a longer seasonal promotion, Double 11 has become a routine part of the calendar rather than a "circus." The days of Jack Ma dressing like a rock star to celebrate sales records are over, partly due to the government’s crackdown on such extravagance in recent years.

Ultimately, in the current economic climate, Double 11 has become a zero-sum game. There is a finite amount of money Chinese consumers are willing to spend on discretionary items. With more platforms joining the fray, they are simply taking business from one another rather than growing the overall pie. This saturation explains the muted numbers and suggests that we should not expect the festival to bounce back to its former glory anytime soon.

“Ele.me actually means 'Are you hungry?' So it's definitely associated with eating and probably wouldn't be a great brand if you were buying some toilet paper.”

By Doug Young & Rene Vanguestaine

Two recent, seemingly unrelated corporate maneuvers offer a telling glimpse into the strategic pivots major Chinese companies are making in response to shifting consumer habits and global political currents. In one corner is e-commerce giant Alibaba (BABA.US; 9988.HK), which is overhauling its local delivery strategy by retiring a household brand. In another, biotech champion WuXi AppTec, squeezed by U.S.-China tensions, is turning its attention and investment toward the Middle East.

Ele.me, a name synonymous with food delivery for over a decade in China, is being retired. Its iconic blue-clad riders are being refitted into Taobao Instant Commerce orange, signaling a significant strategic shift by parent company Alibaba. We believe this is more than just a cosmetic change. It’s a logical and necessary evolution from food-focused delivery to a broader "instant commerce" future. The name Ele.me, which translates to "Are you hungry?", is simply too narrow for an ambition that now includes delivering everything from groceries to toilet paper within an hour.

This move brings Alibaba in line with competitors like JD.com (JD.US; 9618.HK) and Meituan (3690.HK), which have long operated their delivery services under a single, unified brand. We think there’s a clear logic in bringing all of Alibaba's flash delivery commerce under the powerful and widely recognized Taobao brand. Until now, customers in the Alibaba ecosystem navigated one brand for general e-commerce and another for food.

The rebranding also seems to acknowledge past shortcomings. As observers on the ground in China, we’ve noted that since its acquisition by Alibaba in 2018, Ele.me has often been a laggard compared to the more sharply focused Meituan, which steadily gained market share. We believe Alibaba may have lost focus on the Ele.me business as it diversified into a wide array of ventures, from cloud computing to entertainment.

This strategic shift signals a renewed focus. The decision indicates that top management recognizes the need to do a much better job and is willing to unify the business under the successful Taobao management structure. But will it be enough to put Alibaba back in the race against Meituan and a newly aggressive JD.com? We think there’s an opportunity, but it won’t be easy. Coming from behind requires significant capital. Our guess is that Alibaba will have to throw a fair amount of money into the effort to regain lost ground. While the goal may not be to reclaim the top position, they certainly have the financial muscle to turn the business around and become a much stronger competitor in the burgeoning instant commerce arena.

Geopolitics and money drive biotech's Saudi move

Meanwhile, a very different strategic pivot is unfolding with WuXi AppTec (2359.HK), one of the biggest corporate names you’ve never heard of. The company, which provides essential services for drug development and manufacturing, has become a poster child for the collateral damage of the U.S.-China trade war. Facing growing restrictions in the U.S. due to the sensitive nature of its work, WuXi AppTec has begun selling off non-core assets and has announced potential plans to build a major new facility in Saudi Arabia.

The drivers behind this move are twofold: money and geopolitics.

On the money front, Saudi Arabia and other Gulf nations have made it abundantly clear they are using their vast energy wealth to try to diversify their economies away from oil and gas. They are actively creating programs and offering incentives to attract what we would call forward-looking industries, including high-tech, AI, and biotechnology.

On the geopolitical front, the move aligns with Beijing’s broader push to forge stronger economic and political ties with the Middle East. For WuXi AppTec, it’s a pragmatic solution to its troubles in the U.S. The pandemic served as a stark wakeup call for Washington, revealing a critical dependence on China for everything from medical equipment to essential drugs. Consequently, the U.S. has been working to rebuild its domestic capabilities and reduce its reliance on Chinese partners.

We think it makes perfect sense for a Chinese company like WuXi AppTec to establish a manufacturing base in a third country. Building a new facility in the U.S. is likely untenable, whereas Saudi Arabia is offering financial incentives and a path to de-risk from direct U.S.-China friction. Producing in the kingdom will allow its products to be labeled as made in Saudi Arabia, creating a degree of separation from Beijing.

It's worth remembering how this dependency arose in the first place. A significant portion of drug research moved to China historically due to strong opposition to animal testing in the U.S., a critical component of pharmaceutical development. Now, as Chinese firms look to the Middle East, we believe that for some, the move may be as much about "fashion" or aligning with government policy as it is about pure business strategy. And companies should not be naïve: they are trading one sphere of influence for another, as the Saudi government will undoubtedly have a say over operations on its soil.

“Well, Chinese women are supposed to hold half of the sky, aren't they?”

By Doug Young & Rene Vanguestaine

Two recent developments in China, one in the capital markets and the other in the airline industry, appear disconnected at first glance. Yet, together they tell a larger story of a nation grappling with the consequences of past policies and adapting to profound demographic shifts. The tentative return of private education companies to the stock market and a budget airline's novel recruitment strategy both highlight an environment of unpredictable policy and the unavoidable pressures of a changing society.

A new Hong Kong IPO application from a vocational educator called Hiducation is noteworthy simply for its existence. The private education sector has been largely absent from capital markets since a brutal 2021 government crackdown. That campaign, aimed at easing the financial and academic burden on families to encourage higher birth rates, effectively wiped out the lucrative after-school tutoring industry by banning for-profit operations in core school subjects. The policy was intended to solve a demographic problem but created another: the collapse of these companies led to the loss of hundreds of thousands of jobs, many held by recent university graduates, which in turn contributed to soaring youth unemployment.

We believe the government has recognized this unintended consequence. Over the last year or so, without any official reversal, Beijing has quietly allowed these education companies to get going again, likely as a pragmatic move to create jobs for young people. This has led to a tentative investor return, though we think it is defined by selectivity and a short-term horizon. The policy ground can shift without warning, making long-term bets a risky proposition.

Hiducation’s focus on vocational training for the construction industry seems smart on the surface, as Beijing supports practical skills training. However, its connection to China's sluggish property market makes its future uncertain. Even the sector leader, New Oriental, illustrates the ongoing volatility. After a strong rebound built on its study-abroad services — a business line exempt from the original crackdown — the company's growth is now flatlining. This new headwind comes not from Beijing, but from anti-immigrant rhetoric in the U.S., which could dampen demand for American university education. It’s a stark reminder that for Chinese companies, regulatory and political risks are both domestic and international.

An airline breaks the mold

In a separate but equally telling development, budget carrier Spring Airlines is making waves by announcing it will hire "older women" as flight attendants. The company is considering women up to age 40, including those who are married and have children — a stark departure from the industry norm across Asia, where flight attendants are typically young and single. While Western travelers are accustomed to seeing flight attendants of all ages, this is a rarity in China.

Spring Airlines stated it wants more experienced people for the roles. However, we believe deeper forces are at play. First, there are simply fewer young people in China today due to decades of falling birth rates. Second, educated young women now have far more career options and are increasingly pursuing professions in fields like law, finance, and accounting that were once dominated by men. The pool of young women available for flight attendant jobs is shrinking just as domestic air travel is growing, creating a labor crunch.

The move has generated some backlash online, with one commenter bizarrely calling it "disrespectful" for highlighting that the women are older and married. This reaction underscores a contradiction in modern China, where official laws against employment discrimination often clash with widely accepted, albeit illegal, ageist hiring practices.

From our perspective, what Spring Airlines is doing is likely the beginning of a broader trend for airlines in Asia. The demographic and social changes that prompted this move in China are also present in other parts of the region, such as Japan and South Korea. Just as the industry evolved in the U.S. and Europe, we expect Asian carriers will increasingly have to adapt to a new reality where experience and professionalism take precedence over youth.

Taken together, the cautious re-emergence of education companies and the shifting hiring practices in the airline industry reveal a China in transition. Both are market-driven responses to the complex interplay of government policy, economic pressures, and powerful demographic trends that will continue to shape the nation’s future.

“This looks like a bit of a shell game… the business is going to magically disappear from the listed company's financial statements.”

By Doug Young & Rene Vanguestaine

Two recent corporate maneuvers, though modest in scale, offer a revealing glimpse into some of the many strategic pivots happening in China. One involves a solar company, Xinte Energy (1799.HK; ), tapping into sophisticated financial instruments to fund its green energy ambitions. The other is seeing state-owned travel giant China Travel International (0308.HK) shed its troubled real estate assets to refocus on its core business. Both moves, though in very different sectors, highlight a growing pragmatism in how Chinese companies are navigating capital constraints and past strategic missteps.

We believe the case of Xinte is an interesting story of strategic adaptation. Once a producer of solar materials, the company faced a market requiring enormous investment to compete with industry giants. It wisely shifted into building and operating solar and wind farms, a move that aligned perfectly with Beijing's ambitious goals for green energy generation. This transition, however, requires constant capital for new construction.

For a company without unlimited funding, this presents a challenge. Xinte’s solution is to securitize its assets. The company recently announced a plan to issue around 3 billion yuan ($421 million) in asset-backed securities (ABS) backed by its green energy projects, which will trade on the Shanghai Stock Exchange. This is a mechanism to unlock capital, allowing the company to recoup its investment and reinvest in new farm construction.

The decision to list these securities in Shanghai, rather than the more international market of Hong Kong where Xinte is listed, is significant. We see this as part of the Chinese government's broader desire to build a larger, more diversified domestic capital market. For years, Beijing has understood the need to provide investors with more options beyond equities, government bonds, and a once-booming real estate market. This move helps achieve that by introducing new products while channeling capital toward national priorities like the green transition.

This being China, we are convinced we will see other companies jump on this bandwagon, likely quite quickly. Using ABS to inject liquidity makes sense for many parts of the Chinese economy. It will be particularly interesting to watch how the nation's massive state-owned banks react. Culturally, bigger has always been better in Chinese banking, with a focus on having the largest balance sheet. This stands in contrast to the evolution of Western banking, where firms realized decades ago that an "asset-light" model of originating, syndicating, and selling off loans could be more profitable. Whether Chinese banks will embrace this fee-generating model over asset accumulation remains to be seen.

Unwinding the past: a return to core business

Our second case looks at China Travel International, which has announced it will spin off its real estate business from its Hong Kong-listed entity. This move will leave the public company with its core travel operations, including the development and management of tourism sites. The real estate division, once a major profit driver during China's property boom, has lately become an albatross around the company's neck as the market has soured.

On the surface, this might look like a shell game, as the real estate assets will simply be moved to China Travel International's unlisted state-owned parent. Yet, we believe it is a practical and realistic solution. Dumping the assets on the open market would be difficult and could run counter to government efforts to stabilize the property sector. This internal transfer allows the listed company to cleanse its balance sheet and return its full focus to its core capabilities in the tourism sector.

This maneuver highlights a key distinction in the Chinese corporate landscape. China Travel International can perform this asset shuffle because it is a state-owned enterprise. Many private companies, which also enthusiastically diversified into real estate during the boom years, do not have this luxury. There was a time when it seemed every company, regardless of its core expertise, was a part-time property investor. Before that, it was a rush into mining. Such gold rushes are a recurring theme.

These private firms now find themselves in a difficult position. There are cases where companies are stuck with non-performing real estate assets they cannot easily get rid of. Admitting a mistake is difficult, especially in a business culture where the chairman is often seen as infallible and may have been in place for decades. For anyone in management to acknowledge a past decision was wrong and deal with the consequences takes time, and sometimes it never happens.

Furthermore, some are likely still holding out hope that government intervention will eventually stabilize the property market, allowing them to avoid booking major losses. For investors, this creates a landscape fraught with hidden risks. The key takeaway is clear: one must look at each company very specifically. Now more than ever, it is crucial to check the balance sheet.

“Beijing has demonstrated time and again in various industries that it has a big appetite for losing money.”

By Doug Young & Rene Vanguestaine

Two recent developments, one concerning word processing software and the other a homegrown passenger jet, are providing a revealing snapshot of Beijing's campaign for technological independence. The incidents highlight a recurring theme: the clash between political ambition and market logic. We believe they reveal the considerable hurdles China faces in its effort to replace leading Western technologies, from the software on its computers to the planes in its skies.

The first signal emerged from what some are calling Beijing’s "delete America" campaign. Astute observers noticed that a recent policy document on rare earth export limits was created not with Microsoft Word, but with software from a domestic player, Kingsoft (3888.HK). This immediately fueled speculation that government agencies and state-owned enterprises might be ordered to replace American software with homegrown alternatives like Kingsoft’s WPS. While the company’s shares saw a brief, sharp rally, the excitement subsided as others dismissed the event as a potential one-off.

We think this is more than just a bureaucratic anomaly. The move fits squarely within the major theme of China's current Five-Year Plan: achieving technological self-sufficiency. The use of homegrown software could represent a multi-pronged strategy. On one hand, it may be a negotiating tactic aimed at the U.S., a message that China can inflict pain on American tech giants like Microsoft. On the other, it mirrors actions from Washington to protect its own government institutions from foreign technology, in this case reflecting Beijing’s belief that Microsoft could be a conduit for Chinese data to reach the U.S. government.

The Chinese government is a dominant force not just in regulation but in business, making its purchasing decisions profoundly important. It has previously sent clear messages to Chinese companies, both state-owned and private, to prioritize domestic products, such as favoring locally made chips over those from Nvidia (NVDA.US). While the corporate world tends to make decisions based on economic reality, government influence is a powerful factor. However, this push may face headwinds in the consumer market. We have heard from Chinese friends who complain about the "nickel and dime" nature of WPS, which, though technically free, requires numerous small payments for full functionality.

Grounded ambitions

Moving from software to aviation, a setback for China’s homegrown C919 passenger jet offers another case study in the collision of politics and economics. The aircraft, Beijing’s answer to the Boeing 737 and Airbus A320, has been slowly integrated into the fleets of China’s state-owned airlines since its first commercial flight in 2023. However, its overseas ambitions just hit a significant snag. Vietnamese budget airline VietJet (VJC.VN) has reportedly decided against continuing its lease for two C919s after a six-month trial.

Sources emphasized the decision was cost-related, not due to the jet's performance. The leasing arrangement included crew from Chengdu, whose labor costs were reportedly much higher than what VietJet would pay a local crew. The initial deal itself appeared politically motivated, announced shortly after a visit to Vietnam by Chinese President Xi Jinping. Now, economic reality has prevailed.

We believe this outcome was predictable. The business model of successful budget airlines like Ryanair is built on radical simplicity, most notably by relying on a single family of aircraft. This strategy creates massive economies of scale by streamlining maintenance, spare parts inventory, and pilot and crew training. VietJet, which already operates both Boeing and Airbus jets, was stretching its own model by adding a third aircraft type. From a purely business standpoint, the decision to diversify into the C919 made little sense for a low-cost carrier.

So, is this truly a setback? In our view, it is primarily an economic decision. The domestic situation in China is entirely different. The country’s massive state-owned airlines will continue to be forced to buy the C919. This is not about economics; it’s about politics, national pride, and global ambition. The Chinese government has demonstrated time and again that it has a big stomach for losing money to prop up industries of national interest.

To sell the C919 to the world, China must first prove its viability at home. You cannot tell global airlines to buy your plane if your own carriers are not using it extensively. Therefore, we expect Chinese airlines will keep buying the C919 to build a track record. From there, Beijing will likely use its political leverage and offer incentives like cheap loans to pressure nations in the Global South to become customers. It’s a matter of face: the project cannot be allowed to fail.

“This is the Chinese government seeking redemption for having destroyed value in the real estate market.”

By Doug Young & Rene Vanguestaine

Two narratives are currently unfolding in China that speak volumes about the state's priorities and the public's anxieties. The first is a staggering, direct intervention by Beijing to prop up its domestic stock markets, a move of a scale that would be unheard of in the West. The second, a seemingly minor social media tempest, involves a public outcry over a popular restaurant chain’s use of pre-made food. While one is a multi-billion-dollar macroeconomic strategy and the other a debate over dinner, both reveal a fundamental challenge for China: the difficult task of building and maintaining public confidence, whether in financial markets or the food on one's plate.

We were struck by a recent report from Chinese brokerage Huatai Securities, which estimated that state-owned entities, led by top government investment arm Central Huijin, now hold nearly 4 trillion yuan — or more than $550 billion — in Chinese stocks. This quiet buying binge amounts to a staggering 4.8% of the entire market capitalization of the Shanghai and Shenzhen exchanges. The fundamental question is not whether this is happening, but why.

We believe this is Beijing’s attempt at redemption. Having presided over a crisis that destroyed immense value in the real estate market, the government is now faced with a population that is saving, not spending. With persistent deflationary pressures threatening to stall the economy, a new engine for wealth creation is needed. For the average Chinese citizen, who would have to be a glutton for punishment to pour more money into property, the stock market is being positioned as the next best alternative.

The logic is twofold. First, a rising stock market makes people feel wealthier, which in turn should unlock the vast reservoir of household savings and spur the consumption the economy desperately needs. Second, a healthy, performing domestic market is essential for funding the companies in sectors Beijing deems critical for national security and future growth — namely technology, AI, chips, and healthcare. With access to U.S. capital markets largely severed, building a robust domestic alternative is not just a choice, but a necessity.

This is not Beijing’s first attempt. Since the post-Covid reopening, the government has tried to guide the market with supportive policies and encouraging words. Each time, the market would rally briefly before running out of steam. It seems officials have decided that words are not enough and have moved on to a much stronger effort: deploying the "national team" with massive amounts of state capital. This is the equivalent of manually cranking an old-time car engine, hoping that after enough effort, it will start running on its own.

To support this, regulators have also pushed reforms to incentivize dividend payments and improve corporate transparency. Yet, the crank is turning against a strong headwind of public anxiety. After years of economic uncertainty, job losses, salary cuts, and high youth unemployment, it could take more than a rising index to convince people to invest their life savings. The market is up substantially this year, but for this strategy to be truly sustainable, the economic engine must eventually fire on its own. If the hype around sectors like AI fades before real profits materialize, we believe investors will inevitably start asking, "Where's the beef?"

A tempest in a central kitchen

While the government attempts to engineer confidence on a macro scale, a recent brouhaha over pre-made food shows how easily trust can be shaken at the consumer level. A popular blogger recently "outed" the restaurant chain Xibei for using pre-made dishes, sparking a wave of online criticism. The company’s response was to deny the practice, stating all its dishes are prepared fresh in its restaurants.

Frankly, our reaction to the initial criticism is: So what?

The use of central kitchens by large restaurant chains is not a scandal. It’s an industry best practice, one that Beijing itself encourages to improve standardization and quality control. The outrage seems to stem from a romanticized notion of "freshness," even if on-site preparation can lead to inconsistency and dishes that are too oily, salty, or overcooked.

What this debate misses is the most crucial benefit of a centralized model: enhanced food safety. In a country with a well-documented history of food safety issues, including the infamous use of "gutter oil" in smaller restaurants, the consistency and traceability offered by a central kitchen are invaluable. We believe that for any large chain with hundreds or thousands of outlets, this model is the only way to ensure consistency of taste, quality, and, most importantly, safety at a reasonable cost. Global giants operating in China, like Yum China and McDonald's, have followed this model for decades for this very reason.

The real problem here is a profound lack of consumer education. Instead of issuing a defensive denial, a company like Xibei has a golden opportunity to lead and educate. It should proudly explain why it uses this model — to deliver food that is safer and more consistent than what many smaller kitchens can offer. It is a chance to turn a perceived negative into a powerful statement about its commitment to quality.

In our view, both the state's market intervention and the restaurant's PR fumble highlight a shared theme. Beijing is using its financial might to crank-start economic confidence, while businesses are struggling to communicate the merits of their modernizing practices to a skeptical public. In both cases, success will ultimately depend not just on the action itself, but on the ability to build genuine, lasting trust.

“For a market that basically prides itself on protecting investors… I have to say I'm amazed that it has taken so long.”

By Doug Young & Rene Vanguestaine

Two powerful forces are currently reshaping the landscape for Chinese companies in global capital markets. The first is a long-overdue regulatory tightening by the Nasdaq, aimed at curbing a flood of small, problematic IPOs from China that have plagued the exchange for years. At the same time, a sudden, frenzied investor rush into the energy storage sector — a boom fueled by the immense power demands of the AI revolution — is creating a new frontier of opportunity and potential speculative excess.

For years, we have watched as a parade of small Chinese companies completed IPOs on the Nasdaq, and we could not always understand why the exchange was so willing to accommodate them. The exchange first detailed its new, tougher stance last month. Under the proposed rules, which are still being vetted, new listings from all offshore companies will need to raise a minimum of $25 million and maintain a public float of at least $5 million. While technically applicable to all foreign firms, these rules appear squarely aimed at the wave of small Chinese IPOs that have occurred since 2020.

This move by Nasdaq is, in our view, a necessary and belated response to a pattern of highly problematic listings. Since 2021, the U.S. has seen between 20 and 50 such IPOs annually, typically raising trivial sums — often less than $10 million. These deals were frequently brought to market by third-tier underwriters who, as we’ve been told by company CFOs, brought virtually no U.S. investors to the table. The offerings were cobbled together with "friends and family" money from the Chinese companies, resulting in tiny public floats that were extremely vulnerable to price manipulation.

The consequences have been damaging. We have seen numerous cases where a stock’s price would skyrocket upon trading, only to collapse days or weeks later, leaving retail investors with substantial losses. The most egregious example was AMTD, a Hong Kong financial firm that listed in 2022. Its stock price surged an unbelievable 21,000% in a short period before crashing back to earth, where it now trades for about $1 a share.

This isn't the first time this has happened. A similar wave of so-called reverse takeovers by Chinese companies in the 2000s ended disastrously, with investors losing billions. For a market that prides itself on protecting individual investors, we are amazed it has taken so long for regulators and the exchange to act decisively.

This crackdown is the latest nail in the coffin for the once-thriving pipeline of Chinese IPOs in the U.S. That pipeline was already under pressure due to Beijing’s clear preference that its tech champions not list in America, where they are subject to U.S. oversight. This was underscored when China’s state-owned enterprises voluntarily delisted from U.S. exchanges to avoid scrutiny. While Nasdaq’s mission to nurture small, growing companies is admirable, applying that mission to firms from a vastly different regulatory and economic environment without proper safeguards has proven to be a mistake. The market is now correcting for it.

AI sparks an energy storage gold rush

As one door for Chinese capital-raising closes, another is swinging wide open. A new class of companies involved in energy storage is capturing the market’s imagination, driven by the AI revolution. As we wrote recently, firms like Hithium, an energy storage systems maker preparing to list in Hong Kong, and Sungrow, a solar equipment maker touting energy storage as its next growth area, are in the spotlight.

The connection is straightforward: AI applications are hosted in data centers that consume enormous amounts of power. To meet sustainability goals, these centers are increasingly powered by on-site renewable sources like solar. But to ensure uninterrupted, 24/7 operations, excess power generated during the day must be stored in batteries for use at night or on cloudy days.

While the technology is undoubtedly important, we believe investors should be wary. There are signs that a bubble is forming around all things AI, and at some point, the returns may not justify the massive investments being made. If that happens, the forecast demand for energy could prove to be inflated.

Furthermore, energy storage is a scale business. A number of major, well-established solar companies — such as JinkoSolar, Trina Solar, and Canadian Solar — already have energy storage business lines, deep technological know-how, and global production facilities. Newcomers will face intense competition from these giants. Investors must carefully assess whether a new listing has a realistic chance of success in such a crowded field.

Unsurprisingly, China appears poised to dominate this emerging sector, thanks in large part to massive government support. This is a natural extension of Beijing’s strategic push to build a world-leading battery industry. However, history suggests that such dominance is not permanent. Technology evolves, and if one nation abuses its position, other countries will eventually find a way to develop the technology they need.

We see a parallel in the rare earths industry. For decades, the U.S. was content to rely on foreign sources. But with its back against the wall geopolitically, the government and private companies are now scrambling to build a domestic supply chain. Europe is making a similar effort to ensure its solar industry does not die. Eventually, geopolitics and national interest compel countries to act. While China’s state-sponsorship may give it a powerful head start in energy storage, other nations will inevitably work to secure their own footing in a technology this critical to the future.

By Doug Young & Juliet Ye

Cango's (CANG.US) public relations and investor relations director Juliet Ye details the company's strategic pivot to transform from a pure-play crypto miner into an integrated energy and high-performance computing (HPC) platform. The multi-phase strategy leverages Cango's existing energy and computing infrastructure as a foundation to build a more diverse business model with revenues from mining, AI client services, and energy trading.