CHINA BULLETIN: More Trade Contraction

In this week’s issue exports keep falling, another new chip fund and China’s answer to Irish coffee. On a scale of 1 to 100, we give the week a 45 for offshore-listed China stocks.

Doug Young, Editor in Chief

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MACRO

More Trade Contraction

The weak trade data kept flowing last week, with more contraction for both Chinese imports and exports in August. Chinese exports fell 8.8% last month, while imports contracted by 7.3%. Some reports are calling the data encouraging, since both declines were less severe than economists were expecting and represented slower declines than those seen in July.

But a decline is still a decline, and an 8.8% drop for exports is nothing to get too exited about, equating to billions of dollars in lost economic activity. This is the fourth straight month of falling exports, and the trend is likely to continue through the rest of the year. While some may blame a weak global economy, manufacturing migration to other countries is also a major factor.

Improving Australia Ties

While much attention has focused on recent efforts by China and the U.S. to improve their strained relations, a similar process is taking place between China and Australia. Following three years of chilly relations, the two countries last week agreed to restart high-level dialogue, in a process that could see Australian Prime Minister Anthony Albanese visit China by year-end.

This kind of rapprochement is being driven at least partly by practicality from China and Australia. Both countries are quite dependent on each other, since Australia is one of the leading suppliers of resources like iron ore and coal that feed China’s economic machine. Both countries are also probably eager to move past their past recent clashes, mostly related to Covid.

China Stocks in Wishy-Washy Mode

Offshore listed Chinese stocks were in wishy-washy mode last week, following earlier gains on signs that Beijing was getting more serious about economic stimulus. The Hang Seng China Enterprises Index edged down 0.3% during the week, which was shortened by a day due to local flooding, while the broader Hang Seng Index fell 1%. The U.S.-traded iShares MSCI China ETF fell 4.4%.

After unleashing a rapid-fire series of announcements on major new economic stimulus measures two weeks ago, Beijing went largely silent on that front last week, perhaps explaining the market’s lack of direction. That sentiment could quickly worsen and stocks could begin moving downward again unless we start to see more signs of concrete government action.

Industry

Beijing, Shanghai Jump on Property Support Bandwagon

While the central government was largely quiet last week on new economic stimulus, a number of city governments announced relatively high-profile steps to prop up their local property markets. Two of the biggest of those were the mega-cities of Beijing and Shanghai, which both announced the lowering of mortgage requirements for some buyers.

This particular news is relatively significant because Beijing and Shanghai were traditionally China’s two hottest property markets, and had become playgrounds for speculators who believed prices would rise indefinitely. Both cities were reluctant to relax their tough buying restrictions, but this latest move shows that even they are suffering from the current downturn.

Another Day, Another Chip Mega-Fund

China’s microchip sector may be mired in problems, led by corruption as companies soak up billions of dollars in government funds, as well as Western-imposed technology transfer curbs. There’s not much China can do about the technology curbs. But one thing it’s quite capable of doing is making even more funds available to this important but highly inefficient sector.

Those efforts were in the spotlight last week, as Reuters reported that China’s biggest chip cheerleader is preparing to raise a new fund worth about 300 billion yuan, or $41 billion. The fund would be the third from China Integrated Circuit Industry Investment Fund, which Beijing set up to channel billions of dollars from mostly state-run investors into its young microchip sector.

Solar Glut on the Horizon

We also want to draw attention to an in-depth Caixin report that shows how Chinese solar panel makers are sowing the seeds of their own financial destruction by building up huge new capacity. The report says that various expansion projects now under construction will raise the industry’s capacity by a whopping 54% by year-end from levels just last year.

The report says that Chinese companies now produce up to 95% of the world’s solar panels – a figure that surprised even us – showing just how dominant China has become in the sector. This massive buildup of new capacity is almost certain to cause prices to tumble, which will be a huge boon for solar energy but won’t bode so well for actual solar panel makers.

Company

No iPhones for Government Workers

Apple suffered a blow last week when Beijing officially told all government workers not to use the company’s popular iPhones for official business. Apple wasn’t the only one targeted, as the order applied to any foreign-made phone. For all intents and purposes, that means that Apple and Samsung were probably the only companies affected.

The move doesn’t ban government workers from owning iPhones for their personal use, meaning its impact could be limited since many Chinese now carry two phones, one for business and one for personal use. Still, the ban could have a big impact by not only affecting Chinese who work for the government, but probably also workers at big state-owned enterprises.

Luckin and Moutai Brew Up Unlikely Partnership

Move over, Irish coffee. China Starbucks challenger Luckin made global headlines last week with its launch of a gimmicky product adding a dash of Moutai, the country’s most famous distilled spirit, into its otherwise-ordinary cups of premium coffee. Gimmick or not, the tie-up piqued a huge wave of curiosity that saw 5 million cups of the “sauce-flavored latte” sell on the brew’s first day.

The campaign also provided a nice shot of caffeine for Luckin’s stock, which has become the most valuable over-the-counter ticker on Wall Street with a market cap of $10 billion. People might recall that Luckin was kicked off the Nasdaq in 2021 after a major accounting scandal, and has been trying to bounce back ever since after tossing out its earlier management team.

Tesla Passes China Milestone

Electric vehicle giant Tesla crossed a major milestone last week when it rolled out the 2 millionth vehicle from its Gigafactory in Shanghai. Tesla was relatively low-key about the milestone, disclosing it in a post on its WeChat social media account. That low-keyness may owe partly to the company’s recent China sales, which don’t look too pretty.

The company has been one of the biggest beneficiaries of China’s strong incentives to boost EV sales in the world’s largest auto market. But its sales began falling month-on-month earlier this year, as the market ran out of fuel with the retirement of some incentives and consumer fatigue. Tesla did find a bright spot in August, as sales began to grow again month-on-month.

AND FROM THE PAGES OF BAMBOO WORKS