CHINA BULLETIN: China Frets Over Trade

In this week’s issue growing trade troubles, sagging smartphone sales and British Airways jets back to China. On a scale of 1 to 100, we give the week a 50 for offshore-listed China stocks.

Doug Young, Editor in Chief

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China Frets Over Trade

A couple of headlines from the past week are shining a spotlight on what’s likely to become a major theme in the next few years, namely China’s ability to maintain its place as the world’s workshop. That status is captured in the country’s huge foreign trade volume, which is showing early signs of coming under pressure as other countries look to diversify their dependence on Chinese goods.

One headline shows how China is losing a growing share of U.S. imports to lower cost Asian rivals, while the other has China mapping out a plan to boost foreign trade. Both come as China’s exports have remained weak for much of the past half year, in no small part due to a growing drive by major manufacturers to diversify from too much reliance on China.

As Goes Guizhou…?

One of China’s poorest provinces, Guizhou, was in headlines last week as it edges closer to insolvency, potentially requiring a major government bailout. The province that’s home to the famous Moutai liquor is reportedly sending out growing distress signals, including its recent signing of a cooperation agreement with Cinda, one of China’s leading bad asset managers.

A delegation from the province also recently met with top officials from Agricultural Bank of China to seek their help. Guizhou has been having problems for the last few years due to its backward status and lack of resources. But other provinces aren’t far behind after overextending themselves to prop up their local economies during the pandemic.

China Stocks Track Sideways on Mixed Earnings 

Offshore listed China stocks were relatively rudderless last week, despite a flood of company updates tied to the April 30 deadline for A-share listed companies to release their first quarter results. The Hang Seng China Enterprises Index and broader Hang Seng Index both dropped by 0.9%, while the iShares MSCI China ETF fell 0.6%.

The latest company results are generally upbeat, which isn’t too surprising since they represent the first full quarter since China officially scrapped its “zero Covid” policy that was crippling the economy. Many investors are probably waiting for more outlook on the second quarter to see if the first-quarter rebound is sustainable, or just a blip of “revenge spending.”

Industry

Easy Come, Easy Go in the Metaverse

China is the land of the “next big thing,” especially when it comes to tech, with the caveat that today’s “big thing” can quickly become yesterday’s news. That appears to be the case with the metaverse, which has gone from “flavor of the day” when Facebook notoriously hyped the concept two years ago, to “nowhere to be found” more recently.

A story in financial media Caixin details how two of China’s biggest tech names, Tencent and ByteDance, have recently gutted their metaverse divisions due to patchy demand and lack of direction. That isn’t all that surprising, since many at Facebook, which now goes by Meta, are also questioning company founder Mark Zuckerberg’s decision to bet so heavily on the concept.

China’s Shifting Cloud

A couple of new developments in China’s cloud show how this emerging area is quickly shifting, with implications both at home and abroad. The first of those has a group of Republican senators calling on U.S. President Joe Biden to impose sanctions on Chinese cloud services providers. The second has China’s big state-owned telcos boosting their cloud presence.

The Republic senators’ action extends a recent wave of calls from U.S. politicians to firewall the U.S. off from anything to do with China tech infrastructure. Meantime, the second story shows how China may be wanting to claim back more such domestic infrastructure, which is used to store sensitive data, from private firms that now have a strong presence in the space.

Smartphone Sales Continue Sagging

The latest quarterly smartphone data shows that sales continued to sag in China during the first quarter. Specifically, China’s smartphone sales fell 12% in the first three months of the year, similar to the mostly low double-digit declines the market has seen for the last year.

The biggest sufferer continues to be Xiaomi, whose sales fell 22.9% during the quarter as it seems to be experiencing a bit of an identity crisis not only in China but also globally. Honor, the low-end smartphone brand spun off by Huawei, also looked quite weak with sales down by a similar 22.8%. IDC blamed the weakness on cautious consumer sentiment.

Company

British Airways Jets Back to China

UK flagship carrier British Airways was in headlines last week as it resumed flying to China after a hiatus of more than two years during the country’s notorious “circuit breaker” phase characterized by draconian moves to keep Covid out of China. The airline restarted its daily service between Shanghai and London, and will reinstate service to Beijing in June.

While foreigners and Chinese alike will welcome this development, the return of such international flights has been coming very slowly with the end of China’s Covid restrictions. As a result, air fares remain extremely high, putting a heavy damper on international activity as the country slowly reopens to the outside world.

Alibaba Slashes Cloud Prices

We wrote earlier how big state-owned telcos were encroaching on China’s cloud services industry that is currently dominated by private enterprises. One of those, Alibaba Cloud, was in a separate headline last week after it slashed prices for its core cloud services by as much as 50% and launched a number of other major promotions.

This particular move comes just weeks after Alibaba announced it was splitting itself up into six business groups, each to be run separately and responsible for its own profits. This latest step by the cloud unit hardly looks aimed at becoming profitable, but rather seems like a brazen play at gaining market share that could quite possibly ignite a broader price war.

Evergrande Gives Creditors More Time

Evergrande, which will go down as the poster child for excesses of China’s building boom of the early 2000s, was back in headlines last week by extending a deadline for its creditors to accept a restructuring deal. The company is now giving its bondholders until May 18 to review its proposal, which has been accepted by 77% and 30% of its class-A and class-C debt holders, respectively.

This story has been going on for quite a while, as Evergrande tries to find a way forward that will allow it to survive and service its $300 billion in debt, some of which is in default. Many creditors may be balking at the new proposals, probably worried the company may go under well before they can collect repayments, many scheduled for years from now.

AND FROM THE PAGES OF BAMBOO WORKS