CHINA BULLETIN: Consumers Say ‘No’ to Chinese Goods

 In this week’s issue exports and factory prices sag, Huawei takes a new blow and Sequoia splits. On a scale of 1 to 100, we give the week a 60 for offshore-listed China stocks.

Doug Young, Editor in Chief

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MACRO

Consumers Say ‘No’ to Chinese Goods

The latest economic indicators are showing more gloom, as consumers continue giving China’s manufacturers the cold shoulder. The producer price index, considered a measure of factory prices, fell 4.6% in May, its eighth consecutive monthly decline. Meantime, China’s exports fell by an even larger 7.5% for the month, far worse than market forecasts.

The PPI figure reflects slumping demand for Chinese goods in general, both at home and abroad, while exports obviously just reflect overseas demand. The bigger drop for exports seems to show that foreign demand for Chinese goods is slumping more than demand at home. But Chinese consumers aren’t spending much either amid concerns about their own slowing economy.

U.S.-China Ties on Improving Track

A growing flurry of stories point to rapidly improving U.S.-China ties, or at least efforts by both sides to move what’s arguably the world’s most consequential bilateral relation back onto a more positive track. China’s Foreign Ministry confirmed one of its deputies met with senior China policy officials from the U.S. last week, holding “candid, constructive and productive talks.”

That meeting comes after U.S. CIA Director Bill Burns reportedly made a secret trip to China last month. All this could be building up to a rescheduled visit to Beijing by U.S. Secretary of State Antony Blinken as soon as this week. The rapid warming comes as another spoiler could be on the horizon, with reports that China may be setting up a base to spy on the U.S. from Cuba.

Improving U.S.-China Ties Warm Investors

The sudden thaw in U.S.-China relations was likely the main catalyst that helped to boost offshore-listed China shares last week, since the economic news was mostly gloomy. The Hang Seng China Enterprises Index and broader Hang Seng Index rose 2.5% and 2.3% during the week, respectively, while the iShares MSCI China ETF was unchanged.

Truth be told, a U.S.-China thaw could potentially ignite the next rally for battered Chinese stocks, since so many Chinese companies are dependent on the U.S. and other western markets, including dependence on western technology. So, we can probably expect more rallying in the weeks ahead if signs of a thaw keep coming. But that could be a big “if.”

Industry

Please Be Patient, State Media Tell Property Owners

The latest signals on China’s ailing property market are coming from state media, which are telling people to be patient for Beijing’s raft of measures to stimulate the market to take effect. The Economic Daily, which is backed by China’s cabinet, said in a commentary that moves like making money more available and relaxing buying restrictions will need “some time” to revive the market.

What’s perhaps most interesting about this commentary is the fact that it’s one of the first to acknowledge that all of China’s numerous measures to stimulate the market are having very little effect. That’s probably because the causes of the slowdown aren’t related to the availability of money, but rather to the big oversupply of housing and overinflated home prices.

New Government Fuel Coming to EV Market

While the property market may be tough to fix, China’s sputtering electric vehicle market may be a bit easier. That’s because plenty of people still would like to buy EVs, if only the prices were a little lower. Beijing looks set to address that issue by extending some government incentives targeted at people looking to buy lower-end EVs.

State radio reported members of China’s State Council decided at a recent meeting to extend and hone policies designed to stimulate new energy vehicle sales through measures such as tax exemptions. New energy vehicle sales have slowed sharply this year after some earlier incentives ended in December, though China is still easily the world’s largest market for such vehicles.

Huawei Takes Yet Another Blow

As if former telecoms superstar Huawei weren’t suffering enough, a new media report last week says the entire EU is considering a mandatory ban on using the company’s equipment for 5G networks in all its member states. Frankly speaking, we suspect that many of the EU’s most advanced economies have already stopped buying Huawei equipment after sensing this was coming.

Instead, it’s more likely that developing-type EU members, typically in Eastern Europe, have probably continued to buy Huawei equipment, which is known for its reliability and also low costs. We’re including this item in our “industry” rather than “company” section, as it seems like only a matter of time before other Chinese telecoms equipment makers face similar bans.

Company

Sequoia Split

When it comes to venture capital and private equity, one of the biggest and oldest players in China is Sequoia Capital, whose name seems to appear on just about every noteworthy high-tech deal these days. But the Sequoia name is about to leave China, as the U.S.-based company plans to split off the China unit into an independent company whose new name will be HongShan.

The split is part of a larger breakup of the U.S.-based Sequoia, with both the company’s China and India pieces being split into separate standalone units. The move really does make a lot of sense, as it will free up Sequoia China to pursue its own projects around the world without worry of stepping on its parent’s toes. It also should buffer the company from turbulence in U.S.-China ties.

Syngenta Back on the IPO Path

Its name isn’t too familiar to anyone outside the agricultural sector. But Syngenta has also been a bit of a no-show in financial circles these past few years, as its plans to list in Shanghai keep hitting obstacles. Now, new activity on Shanghai’s Nasdaq-style STAR Market shows the company’s long-awaited $9.4 billion IPO may finally be back on track.

The current Syngenta was created through the blockbuster purchase of Switzerland’s Syngenta by China’s ChemChina in 2017. Ever since, ChemChina has been looking for ways to pay down some of the massive debt it took on to finance the $43 billion deal. The IPO was meant to be part of that, but kept getting delayed due to regulator concerns in China about the offering’s large size.

Subway to Take New China Bite

4,000 subway stops in China? The number may sound large, unless you’re talking about the Subway sandwich chain, which last week announced it has inked a deal with a new master franchisee to open that many stores in China over the next 20 years. The new agreement with local partner Shanghai Fu-Rui-Shi Corporate Development is the largest in Subway’s history.

In fact, Subway has been in China for a while, but seems to be fading lately. Such flame-outs for big western chains in China are quite common, with Dunkin Donuts and Popeyes two notable names that announced big plans, only to later stumble. Subway is being smart this time by giving the 20-year timeframe, since no one will probably remember the prediction 20 years from now.

AND FROM THE PAGES OF BAMBOO WORKS