CHINA BULLETIN: Foreign Investor Flight

  In this week’s issue foreign investor flight, a major mortgage rate cut and a former drug highflyer disbands. 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

Foreign Investor Flight

Leading this week’s macro news is the latest annual data point that shows foreign direct investment (FDI) into China fell to a 30-year low last year, as foreign businesses and investors avoided the market. The news wasn’t completely terrible, as FDI showed signs of recovery in the fourth quarter after posting its first-ever contraction in the third quarter with an 11.8% decline.

For the year, China recorded $33 billion in net FDI, marking the weakest performance since 1993 when inflows totaled just $27.5 billion. The data is a direct result of growing foreign unease with heavy reliance on China as a manufacturing hub, as well as concerns about Chinese financial markets that have been some of the world’s worst performers these last two years.

China, India Look to Tone Down Border Tensions

On the geopolitical front, an interesting and potentially significant news item last week came from the Chinese and Indian defense ministries, which jointly said they have agreed to resolve their border issues “as soon as possible.” The two sides made their remarks after holding talks on the Chinese side of a meeting point at the Moldo-Chushul border.

The dispute on the China-India border goes back decades, and resulted in violent clashes in 2020 and 2022. So, both sides would probably like to prevent such clashes in the future. But so many other issues exist between China and India right now, including a desire by each to become Asia’s next leading power, that settlement of this border dispute won’t change much in their rivalry.

Stocks Keep Roaring to Start Off Year of the Dragon

Offshore Chinese stocks continued their roaring ways last week to start the Year of the Dragon, though, again, there wasn’t any major news behind the gains. The Hang Seng China Enterprises Index rose 3.6% and is now up about 10% over the last three weeks, while the iShares MSCI China ETF rose 2.9% last week, and the broader Hang Seng Index was up 2.4%.

Last week we took a closer look at the Year of the Dragon historically for Chinese stocks, and discovered it is typically a lucky one for Hong Kong, whose Hang Seng Index has recorded net gains in every Dragon Year since its inception in 1969. Will 2024 be the year that breaks the streak? Things are off to a good start, but the new lunar year is still quite young.

Industry

China Cuts Key Mortgage Rate by Record Amount

Two of last week’s top industry stories came from the embattled property sector, which has the potential to drag China’s entire economy down if it doesn’t stabilize soon. Leading the news was the central bank’s announcement of a 25-basis-point cut in a key mortgage reference rate, marking the largest-ever reduction under the current system launched in 2019. 

This rate-lowering is just the government’s latest step to try and encourage more people to buy homes. Unfortunately, most people are staying on the sidelines over worries that anything they buy now will only go down in value later. Tackling that perception will be key to restoring buyer confidence, though that’s much easier said than done.

Chinese Banks Approve ‘White Listed’ Property Loans

Also from the property sector was word that Chinese banks have approved $17.2 billion in loans for property developers under a new government program that looks quite innovative. “Project Whitelist” was launched last month, and allows local governments to recommend individual development projects to receive priority funding from state-run lenders.

This particular approach seems relatively innovative because it could help to restore confidence to a market where potential buyers often worry that homes still under construction may never actually get completed due to lack of funds. But a closer look at the list shows some new loans are actually just repackaged older ones, hinting that banks are still reluctant to sign onto this plan.

Comac Wins a New Order for Homegrown Jetliner

From real estate, we’ll jet down to Singapore, where global aviation giants were strutting their wares at one of the region’s biggest air shows last week in search of new customers. China’s own Comac scored a minor success at the show when the nation’s Tibet Airlines signed a deal to purchase 40 of Comac’s self-developed C919 jets, which it hopes can compete with Boeing’s 737.

Comac delivered its first C919 last year to China Eastern Airlines, and Chinese airlines have been quite supportive of the model, since most are state-owned and try to show their support for projects like the C919. Still, another year or two of solid performance for the model with no mishaps will probably be needed before any major foreign airlines might consider a purchase.

Company

EU Launches Anti-Dumping Probe Into China’s Top Train Maker

Leading our company news is word that the EU has launched an investigation to determine if a bid for business in Bulgaria by a unit of leading Chinese train maker CRRC included unfair state subsidies. The deal is a bit unusual as it involves a 610 million euro bid placed by Qingdao Sifang Locomotive, rather than any actual final deal.

The move follows a far higher-profile ongoing EU investigation that could ultimately result in anti-dumping penalties against Chinese EVs. All this seems to signal the EU intends to become more aggressive about imposing penalties for products from China that are often made with help from generous state subsidies for industries that Beijing wants to promote.

JD.com Eyes Europe

From homemade jetliners, we’ll move to something China is far better at: E-commerce. Despite that however, Chinese e-commerce giant JD.com has been notably disappointing outside its home China market, even as others like PDD’s Temu and Shein perform much better. JD may be hoping to change that as it reportedly has entered talks to buy British electronics retailer Currys plc.

JD disclosed the talks in a regulatory filing, though it cautioned they are at a very early stage. It made the comment after Currys said it rejected an offer from another suitor. Some are saying such a purchase could provide JD.com an entry to Europe, though Currys’ focus as a brick-and-mortar electronics retailer makes it seem like a less-than-ideal fit.

BoCom Takes $3 Billion Bite Out of HSBC

And finally, we’ll move to the banking realm, where British giant HSBC has said it will take a whopping $3 billion charge related to its investment in China’s Bank of Communications, known locally as BoCom. The charge was related to HSBC’s 19% stake in BoCom, whose Hong Kong-listed stock is down about 20% from a peak five years ago.

HSBC has historically been one of the most bullish foreign banks on China, and has used its relationship with BoCom to try to advance its own business in the country. But China is quickly turning into an albatross for HSBC, which took a similar-sized provision last year related to expected losses on its exposure to China’s sagging property market.

AND FROM THE PAGES OF BAMBOO WORKS