In this week’s issue the Middle Kingdom in the Middle East, Bill Gates goes to Beijing and Hong Kong welcomes yuan-based stock trading. 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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MACRO

Economic Distress Signals Keep Coming

The steady stream of weak economic signals for much of this year seemed to reach a crescendo last week, as the latest data showed weakening credit demand, and industrial output and retail sales in May that were weaker than expected. In fact, industrial output and retail sales were both up firmly, but analysts said that was because year-ago figures were extremely weak during the pandemic.

The central bank was clearly worried by all the negativity, making downward adjustments to a number of lending rates to stimulate demand. Commercial banks passed on those lowered rates to consumers with the same goal in mind, as well as to raise their profits. And last but not least, a number of major foreign banks lowered their 2023 economic growth forecasts for China.

Middle Kingdom Gets Chummy with Middle East

It wasn’t all gloom for China last week. Several thousand miles from the Middle Kingdom in the Middle East, top officials from China and various Arab nations were hobnobbing at the 10th Arab-China Business conference in Saudi Arabia. Chinese companies came away with $10 billion in new investment deals with various regional companies and bodies.

In a related wrinkle back in Beijing, Chinese President Xi Jinping met with Mahmud Abbas and told the Palestinian president China wants to play a positive role in bringing peace between Israel and the Palestinians. All this shows China wants to play an increasingly active role in the region, which is one of its top energy suppliers and also a major destination for Belt and Road projects.

China Stock Rally Continues, Though We’re Not Sure Why

While last week was mostly gloomy for China’s economy, you would never know it from looking at offshore-listed Chinese stocks, which picked up the pace in a rally now in its third week. The Hang Seng China Enterprises Index rose by a strong 3.7% during the week, while the iShares MSCI China ETF was up 4.7%. The broader Hang Seng Index was the relative laggard, up “just” 3.3%.

Several factors may have helped to power the rally, including the central bank interest rate cuts that we previously mentioned. A highly anticipated visit to Beijing by U.S. Secretary of State Antony Blinken over the weekend may have also boosted hopes for better U.S.-China ties.

Industry

Developers Pick Up the Pace of New Share Issues

Following a pause of a few weeks without any major new efforts to stimulate its ailing property sector, Beijing is back at work trying to prop up this hugely important economic pillar. This time it has begun accelerating approvals for cash-strapped property developers to raise more funds by issuing new shares. At least six companies have been approved for such issues since May.

Such share issues should come as a godsend for developers, since many have been forced to halt work on their projects due to lack of cash. Of course, whether anyone will want to buy the shares is a completely different issue. And as we’ve said many times before, this kind of band-aid really won’t address the core issues of too much supply and a sore need for more downward price adjustments.

Aviation Companies Blacklisted

U.S. government blacklist makers were hard at work last week, this time placing 31 new Chinese companies and entities onto the Commerce Department’s “entity list” that restricts their access to U.S. technology. Aviation seemed to be the main target this time, reflecting Washington’s use of the list to keep cutting-edge technologies away from China’s military.

Chinese companies weren’t the only ones on the list, with another 19 entities from Kenya, the United Arab Emirates, Pakistan and South Africa also targeted for helping to train Chinese military personnel. The U.S. certainly seems to be quite systematic in targeting specific industries, having previously placed other companies from the telecoms, AI and surveillance sectors on the list.

Bill Gates Meets with Xi Jinping

Another week, another major U.S. tech leader goes to China. Last week it was Microsoft founder and philanthropist Bill Gates who made the pilgrimage to Beijing to meet with local partners related to his foundation. Unlike the others before him, Gates was also set to meet with Xi Jinping, becoming the first meeting between China’s president and a foreign entrepreneur in recent years.

Gates’ visit follows similar trips to China by the likes of Tesla founder Elon Musk, Apple CEO Tim Cook and JPMorgan CEO Jamie Dimon. Some observers say the warm welcome reflects China’s desire to maintain good relations with western business leaders, especially as its own economy slows and its political ties with the west are strained.

Company

Nio Joins EV Price Wars

Last week, electric vehicle maker Nio became one of the last companies to join a bloody price war taking place in its sector. The company was one of the last holdouts, but suddenly capitulated by slashing the prices on all of its EVs by 30,000 yuan, or about $4,200 each. Previously CEO William Li had insisted as recently as April that his company wouldn’t join the price war.

The war is actually gripping China’s entire auto sector. But it’s wreaking special havoc on an EV sector that was previously enjoying bumper sales thanks to government subsidies that ended at the end of last year. Since many of the EV makers are standalone public companies, we can probably expect to see an ugly second quarter when many release their next financial reports.

BeiGene Lands in AbbVie’s Crosshairs

China’s bumper crop of young drug makers have plenty of problems to deal with, but patent lawsuits wasn’t traditionally one of those. But BeiGene, which is one of the older companies and a leader in the group, has broken new ground by being sued by global giant AbbVie.

The lawsuit is the latest twist in an ongoing rivalry between the two companies for their similar drugs to treat blood cancer. One could argue this is a sort of coming-of-age for China’s young drug sector, since it shows that BeiGene has developed a drug that’s considered a threat by a global major like AbbVie. Unfortunately, investors and accountants won’t see it that way.

EV Industry Cruises into Southeast Asia

Back on EV topic, two stories last week showed how Chinese makers of the technology are spreading their wings beyond their home market. One saw CATL announce a new plan to make its batteries in Thailand with local automaker Arun Plus, while the other saw electric scooter maker Yadea announce plans to build a $1 billion e-motorcycle plant in the Philippines.

CATL has actually been quite active outside China already, particularly in Europe. The moves reflect a growing desire by China’s bustling field of new energy vehicle companies and their component makers to be closer to their end customers in the markets where they operate.

AND FROM THE PAGES OF BAMBOO WORKS

Hong Kong Prepares for New Era of Yuan-Based Stock Trading

Last week we took a deep dive into an upcoming new program in Hong Kong that will see the local stock exchange allow trading using the Chinese yuan for a limited number of stocks, mostly based in the mainland. The move is the latest step for China in trying to internationalize its currency to someday make it a serious alternative to the current dominance of the U.S. dollar.

The “dual counter” system sounds good in theory, and has attracted the likes of Tencent for its launch this week. But as with many of these pilot programs in Hong Kong, trading could be limited due to the relatively limited volume of yuan in Hong Kong. The program could do better if it is open to mainland investors through the two sides’ Stock Connect program.
Drug Maker Junshi Seeks Swiss Cure for Cash Woes

We also looked at the latest Chinese company to try its luck on European stock markets, in this case the drug maker Junshi. This particular program is part of Beijing’s plan to make Chinese companies more international by listing their global depositary receipts (GDRs) overseas. So far more than a dozen companies have made such listings in Switzerland and Britain.

But trading volume has been quite thin for all of the stocks due to lack of familiarity among local investors and also limited liquidity. Junshi has lofty goals for its listing, aiming to raise nearly $500 million. But we have serious doubts about whether the company will find much appetite among European investors due to its growing losses and limited revenue.

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