Illustration of Yellen and Blinken talking about China challenges

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

Doug Young, Editor in Chief

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Blinken, Yellen Talk Up China Challenge

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

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

China’s Capital Markets in Winter

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

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

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

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

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


China Carmakers Strut Their EVs at Auto Show

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

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

EU Investigates Chinese Medical Device Market

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

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

Huawei Completes Its Smartphone Comeback

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

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


Clock Begins Ticking on TikTok

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

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

Bubble Tea Maker Chabaidao Fizzles in Hong Kong IPO

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

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

Ex-Bank of China Chairman Admits to Bribes

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

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


Leading Used Car Dealer Files for IPO

While new cars get all the headlines these days, especially EVs, last week we bought you the story of Autostreets, one of China’s leading used car traders, which has filed to list in Hong Kong. While new cars have become a bit of a bloodbath these days due to overcapacity, China’s used car market is still quite fragmented and posting some impressive growth.

Beijing is trying to juice up the market even more with various policy moves, which appear to be picking up momentum as it aims to boost consumption while also encouraging more recycling. At the same time, increasingly cautious consumers are also looking for better value, which bodes well for used car purchasing and should also benefit companies like Autostreets.
Hillhouse Under Fire for Undisclosed Trades

We also brought you the story of Hillhouse, one of China’s premier private equity investors, which was in an uncomfortable spotlight last week after the nation’s securities regulator gave it a rap on the knuckles for trading without necessary disclosure. The bottom line was that Hillhouse sold shares in solar company Longi without submitting a required stock market disclosure.

Such disclosures are always problematic for the listed company, since some investors will take them as signals of lack of confidence. In this case, it’s also quite understandable why Longi might be even more vulnerable to such negative signals, since the company’s stock is down by more than half over the last year as a bloody solar module price war hits its business.

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