CHINA BULLETIN: Mixed Manufacturing Signals

Welcome to the latest Bamboo Works China Bulletin, where we recap the top China macro, industry and company developments from the past week and give you our spin on what it all means. In this week’s issue we see mixed manufacturing signals and an ominous export sign, while Xiaomi feuds with India and Google leaves China – again. On a scale of 1 to 10, we give the week a 6.5 for offshore-listed China stocks.

Doug Young, Editor in Chief

MACRO

Mixed Manufacturing Signals

It was the best of times for state-run manufacturers, but the worst of times for private ones. Perhaps that’s a slight exaggeration, but it roughly sums up the picture for China’s vast manufacturing sector, based on the latest purchasing managers’ index (PMI) data released just before the weeklong National Day holiday.

The official government-compiled PMI for September, which reflects the performance of the state-run sector, came in at 50.1, moving back into growth territory after two months of contraction, defined as levels below 50. But the independently compiled Caixin PMI came in at 48.1, marking its second month of contraction. While the signals vary from month to month, the latest ones do seem to highlight the government’s apparent preference these days for state-run over the private firms.

Sinking Hong Kong Ship

While the September PMI numbers hovered around the 50 line that demarcates expansion from contraction, there was no such subtlety in the latest export figures from Hong Kong. Exports from the city plunged 14.3% in September, marking their worst decline since the pandemic began in early 2020.

While Hong Kong is indeed an island, and a small one at that, it is also a sort of canary in the coal mine for China due to its close ties to the Chinese economy. Accordingly, the huge drop in exports could show up soon in China’s own export data, reflecting the combined effects of a slowing global economy and the country’s own widespread pandemic-control disruptions.

China Stocks Take Breather from Downward Drive

After a rough few weeks, China stocks finally gave investors something to cheer about last week when most of the country was closed for the Oct. 1 National Day holiday. The Hang Seng China Enterprises Index rose 2.7% during the week, while the iShares MSCI China ETF rose by a smaller 1.3%, compared with a 3% rise for the broader Hang Seng Index.

Some might argue this was just a “dead cat bounce” week, since all of the indexes are down sharply year-to-date and have been in a steady state of decline in recent weeks. One minor bright signal came in the IPO of vaccine maker AIM, whose shares shot up 42.3% in their first two trading days – a sharp contrast to most Hong Kong IPOs that have fallen in their debuts so far this year.

Positive Signals in U.S.-China Stock Standoff

The last two weeks have seen a few movements in the U.S.-China stock standoff, led by a Nasdaq official’s comments that Chinese listings on the exchange could “pick up pretty dramatically” in the months ahead. In a similar vein, the U.S. Securities and Exchange Commission (SEC) fined Deloitte’s China affiliate a relatively modest $20 million for various breaches such as asking some of its clients to do their own audit work.

While Nasdaq officials have obvious reason to sound optimistic about a resumption in major Chinese listings, the fact that they’re talking so openly seems to reflect growing sentiment that a landmark U.S.-China information-sharing deal will ultimately get the China-U.S. IPO pipeline restarted. The SEC’s fining of Deloitte’s China affiliate also hints that the regulator wants to put the past behind it and wipe the slate clean for a new era of better cooperation with its Chinese counterpart.

Who Needs Wall Street or London WheNew Energy Gets Charge From Beijing, Toyota and Hyundai

If there’s one thing China never seems to get enough of, it’s anything related to clean energy. In the latest headlines in that regard, Beijing has extended tax credits it was offering for new energy vehicle (NEV) buyers for another year. In a related show of support for the sector, car makers Toyota and Hyundai said they would start selling hydrogen-powered cars in China.

The NEV tax credit extension is a slight surprise, since China has been trying to phase out such subsidies as the technologies mature and become commercially viable. Most likely the move is aimed at boosting the country’s anemic car market. Meantime, the moves by Toyota and Hyundai reflect China’s strong support for hydrogen, which has been far slower to take off than electric and hybrid vehicles.

Property Prop-Ups

China Construction Bank, one of the nation’s “big four” state-run lenders, has set up a $4.2 billion fund to buy properties, in the latest of a series of government moves to prop up the nation’s foundering real estate market. The move comes as construction of many major real estate developments, especially residential, have come to a halt due to overbuilding and lack of funds after years of breakneck growth. 

In a related report, financial media Caixin is saying that some developers in the central city of Zhengzhou are simply trying to satisfy local officials by going through the motions to restart stalled projects, even though they lack the funds to actually resume construction. The bottom line is that there’s lots of talk about making funds available to get projects restarted to support the market. But at least so far, that money has yet to reach its intended targets, or at least in large enough quantities to have a significant impact.

Google Leaves China – Again

Google says it is leaving China again, this time shuttering its translation service that was one of its last remaining internet-based services in the country. Google is blaming low usage for the decision, which may be true since the company has become virtually invisible in China since its high-profile exit from the country’s search market in 2010.

Google certainly isn’t the only major foreign internet company to give up on China, which is now home to only a handful of remaining global players like Amazon and Microsoft’s Bing search engine. None of those is a major force in China, and Google’s latest exit shows that all have pretty much given up on a market that they once believed held up huge potential.

Xiaomi Meets Its Match in India

Smartphone maker Xiaomi’s ongoing joust with Delhi continues, with the company expressing disappointment at an Indian authority’s decision last week to freeze $680 million worth of its assets in the country pending resolution of a tax dispute. The dispute has dragged on for more than a year now, and involves accusations that Xiaomi used fake royalty payments to move money out of India to avoid paying taxes.

The bigger picture is that India has become an increasingly hostile place for Chinese companies these days, in no small part due to geopolitical tensions between the world’s two most populous countries that share a long and slightly contested border. Data security concerns led India to ban many popular Chinese apps a couple of years ago, though Chinese smartphones that now dominate the market have yet to face a similar ban – yet.

Big Sums for Fosun

Fosun, one of the last men standing among a group of Chinese conglomerates that went on a global buying spree over the last decade, is reportedly close to securing a 15 billion yuan ($2.1 billion) loan it desperately needs to pay off some of its massive debt coming due in the next 12 months. Not surprisingly, the syndicate underwriting the loan is an all-China affair, including leading state bank ICBC and the smaller Minsheng Bank.

We say “not surprisingly” because government leaders are probably feeling some pressure to avoid another spectacular collapse like the ones we saw earlier for former highflyer acquirers like HNA Group and Anbang Insurance. In this case Fosun has a very strong backer in the government of its hometown of Shanghai, which undoubtedly is doing its best to make sure the company remains intact.

AND FROM THE PAGES OF BAMBOO WORKS

Based in Singapore, But Made in China This week we spotlighted Asia Innovations, a social networking company that is based in Singapore but quite Chinese in almost every other way. The company made headlines by announcing its plans to make a backdoor listing in New York using a special purpose acquisition company (SPAC), in a deal it said would value it at $2.5 billion. But what caught our attention was the background of the company’s top four executives, who all come from or spent significant portions of their careers working for major tech and media companies in China. This hybrid of “China-made but Singapore based” looks set to become a major trend in the years ahead for globally-minded internet startups looking to avoid the heavy-handed regulation they would face from being based in China.

Fishy Investments Spark Investor Revolt Another made-in-China story popped up on our radar last week when restaurant operator Jiumaojiu International abruptly pulled the plug on a previous plan to invest up to 1 billion yuan ($140 million) in a massive retail-office complex in its hometown of Guangzhou. The company had announced the plan just a week earlier, sparking a selloff that saw its shares tank 20% the next day. This kind of practice, which sees company chiefs use their publicly-traded firms as pawns in their larger business empires, is quite common in China, sometimes to the detriment of minority shareholders. In this case the shareholder revolt cost the company’s chairman $240 million after the stock plunge, though he gained most of that back after announcing he would make the real estate investment using other personal – and not company – assets.