Illustration of a container ship leaving Shanghai

In this week’s issue exports continue to tumble, big tech gets boost from Beijing, and Imax lowers the curtain on its Hong Kong listing. On a scale of 1 to 100, we give the week a 55 for offshore-listed China stocks.

Doug Young, Editor in Chief

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MACRO

China Finds Weak Demand at Home and Overseas

The latest economic indicators are showing more weakness all around, reflecting sluggish demand at home and overseas. Exports for June tumbled 12.4%, their biggest decline since just after the pandemic began, extending a 7.5% drop in May. Meantime, the consumer price index (CPI) was flat in June, reflecting weak demand at home. The producer price index also fell 5.4%.

The weak domestic demand isn’t a surprise, since Chinese consumers and businesses have been reining in their spending due to the uncertain economic outlook. What’s slightly more surprising is the plunging exports, since the global economy doesn’t seem that bad. At least part of the decline could be permanent as more countries diversify their overseas suppliers.

China-U.S. Rapprochement Marches On

Signs of concerted efforts to put U.S.-China ties on a more stable footing continued in earnest last week, following recent visits to Beijing by U.S. Secretary of State Antony Blinken and Treasury Secretary Janet Yellen. U.S. Climate envoy John Kerry is set to visit Beijing this week, while last week Blinken met with top diplomat Wang Yi on the sidelines of an ASEAN event.

And the list of high-level meetings doesn’t end there. China’s U.S. ambassador also made a rare visit to the Pentagon for talks related to security, and Beijing also said it’s open to a visit by U.S. Commerce Secretary Gina Raimondo. The sudden diplomatic frenzy seems mostly driven by the U.S., but it’s also noteworthy that China is playing along, as both sides seek more stable relations.

China Stocks Rally on Signs of Improving U.S. Ties

If weak exports and warming U.S. relations were the top two macro stories last week, then investors were clearly focused on the former, at least based on the strong gains for offshore Chinese stocks. The Hang Seng China Enterprises Index jumped 5.8% during the week, while the iShares MSCI China ETF rose 3.8%, and the broader Hang Seng Index gained 5.4%.

The rally reverses similar-sized declines the previous week, indicating the market is blowing hot and cold over what to make of China’s economic outlook. The growing positive signs on U.S.-China relations could show that Beijing wants to mend ties as part of its growing broader campaign to breathe new life into the country’s sputtering economy.

Bytedance headquarter in Beijing

Industry

Big-Tech Crackdown Finally Over?

Another major story that may have heartened investors was a meeting between Chinese Premier Li Qiang and leaders from some of China’s top tech firms, including Alibaba and ByteDance. During the meeting, Li stressed the importance of such internet platform companies to China’s economy, and urged local governments to also show their support.

A related story shows just how much big tech suffered under the crackdown over the last few years, saying major companies collectively lost more than $1 trillion in market value as their shares tanked. The meeting with Li does seem to be the latest signal that the crackdown may be near an end, as Beijing turns its attention to supporting the nation’s sluggish economy.

Car Sales Surge Overseas, Sputter at Home

China’s overall exports may be running on empty, but overseas auto sales remain one area that’s humming along. China’s car exports charged ahead by 75.7% in the first half of the year compared with the year-ago period, while a government official said the figure is expected to rise 40% for the entire year. But domestic auto sales only managed 2.7% growth in the first half.

So, what’s happening here? The domestic story isn’t all that new, as car sales in China have been sluggish for quite some time now after years of breakneck growth. The export surge is being driven by car makers looking for new growth as sales slow at home, and is getting an extra push from China’s bumper crop of new energy vehicle makers.

Beijing Lightens Up on Generative AI

Artificial intelligence may be a key government priority in China, but Beijing is far less certain about the generative AI segment that has become a global hot topic with the sudden rise of ChatGPT. After initially rolling out harsh guidelines for development of the technology, Beijing issued a revised draft rule last week that observers say is more supportive.

Beijing isn’t quite sure what generative AI might create in China, since such technology generally synthesizes the huge volumes of data on the internet, which is highly curated in China but isn’t abroad. But officials may worry that being too heavy-handed could cause China to rapidly fall behind in this critical technology of the future.

A McDonald's restaurant in Beijing

Company

McDonald’s China Owners Look to Cash Out

On the corporate front, one of last week’s biggest stories was a Bloomberg report saying private equity giants Carlyle and China’s own Citic were looking to sell part of their stake in McDonald’s China operations. The pair bought the stake from McDonald’s six years ago as part of the fast food giant’s strategy of shifting to a more franchising-style strategy in China.

Bloomberg said the pair are aiming to raise $4 billion from other private equity sources to buy the unspecified stake. They reportedly paid $2.1 billion for the entire McDonald’s China operation back in 2017, meaning they likely doubled their money from the investment. Not a bad return for six years!

Curtain Falls on Imax China Listing

Big-screen movie specialist Imax is calling it quits on China, or more precisely, on the separate Hong Kong listing for its China business. The Canadian company proposed the privatization at HK$10 per share, representing a hefty 49% premium to its average price over the last 30 days. The deal would value the company at a relatively modest $124 million.

Imax said the buyout will give its China operations greater flexibility. Here, it’s worth noting the buyout price is about a third of the HK$31 that Imax China sold shares for when it first listed in 2015. All this shows that China’s film market is quite tricky, especially when it comes to imported films that are a staple for Imax’s trademark big screens.

Fitness App Makes Anemic Hong Kong Listing

Its focus is fitness, but last week’s Hong Kong IPO for fitness app Keep was outright sluggish. The popular app backed by SoftBank and Tencent managed to raise just $38 million from its listing, less than it previously hoped. The stock also priced at the lower end of its range, though it managed to eke out a modest 2% rise in its first two trading days.

In all fairness, we can’t really blame Keep for the poor performance, since the overall IPO market has been quite weak this year. And truth be told, the company should have relatively strong prospects as demand grows from increasingly health-conscious Chinese interested in the company’s wide range of workout videos and other fitness products.

AND FROM THE PAGES OF BAMBOO WORKS

China’s ‘Vaping Queen’ Makes Comeback

Last week we featured a closer look at a woman known as China’s “Vaping Queen,” even though Zhu Linyao, also known as Chu Lam Yiu, is lowering her focus on e-cigarettes these days at her listed company, Huabao International. Zhu made headlines earlier this month when she resurfaced after more than a year in detention, igniting a rally for Huabao’s stock.

Her story is all about China’s tobacco industry, which has many special qualities that we’ve detailed in our story. Her company makes flavoring products for both conventional tobacco products as well as e-cigarettes. Her disappearance may be linked to the corruption case involving a high government official who was placed under investigation just a week after Zhu’s reappearance.
Autonomous Driving Tech Firm Test Drives Into Hong Kong

We also featured a deep dive into Black Sesame, an autonomous driving technology firm that has become the first to apply for a Hong Kong IPO under newly relaxed rules for cutting-edge tech companies. Hong Kong typically only allows profitable companies to list on its main board, but waived that requirement earlier this year to welcome money-losing tech firms.

The shift takes direct aim at New York, which had become the preferred listing choice for Chinese tech firms over the years due to greater liquidity and no prohibitions on loss-making companies. We’ll need to wait to see if Black Sesame actually completes its IPO. But the chances are probably high as the Hong Kong Stock Exchange tries to attract more such high-growth companies.

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