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 Chinese exports post a shock decline, Guangzhou becomes the latest city to feel the Covid heat, and a new North Star rises over China. On a scale of 1 to 10, we give the week a 6.5 for offshore-listed China stocks.

Doug Young, Editor in Chief


Sounds of Negativity

Ever wonder what negativity sounds like? There was plenty to hear last week, at least among China’s latest economic indicators. Headlining the noise was a shock 0.3% decline in exports in October, slapping down third-party forecasts for 4.3% growth. Imports also fell 0.7%, and China’s producer prices posted their first deflation since the start of the pandemic in 2020.

The latest negative figures add to declines announced the previous week in the Caixin purchasing manager indexes (PMI) for manufacturers and service companies. The chorus of negativity differs from earlier months when signals were more mixed. It almost feels like a coordinated effort, as if to wake up Beijing to the fact that China’s economy is in trouble.

Guangzhou Feels the Heat

Speaking of economic malaise, one of the prime causes of the current problems, China’s strict Covid-control policies, was wreaking havoc on another major city last week. This time it was the southern metropolis of Guangzhou that was feeling the heat, prompting the city to halt most in-school instruction and roll out mandatory mass testing as daily new cases reached the thousands.

Does that mean a lockdown could soon be coming for this megacity of 14 million? Perhaps not, if you believe another headline citing China’s top health authority scolding individual cities for using “one size fits all” measures to control local outbreaks. In another positive signal, Beijing announced several small tweaks in its Covid controls for people entering the country late Friday, including the end of a “circuit breaker” system that was the source of frequent international flight cancelations.

Dead Cat Standing?

It seems the dead cat bounce we described last week for U.S.- and Hong Kong-listed China stocks has more legs than we thought. Following a strong rally two weeks ago, the Hang Seng China Enterprises Index rose another 7% last week, while the iShares MSCI China ETF was up 5.4%, and the broader Hang Seng Index gained 7.2%. Most of the gains were part of a global rally at the end of the week after the U.S. reported lower-than-expected inflation, raising hopes the Fed will slow its recent aggressive rate hikes.

Does this mean beaten-down China stocks could finally be set for a long-awaited rebound? Perhaps, but not until the country eases its strict “zero Covid” policy that is wreaking havoc on the economy, says Goldman Sachs. The major investment bank said China’s stocks could be set for as much as 20% upside if and when Beijing eases its current Covid control regime.


Chinese Chip Buyers Need Not Apply, Says Germany

In what comes as no huge surprise, Germany has officially vetoed the sale of investments in two semiconductor chip makers by Chinese companies. One deal was set to see a car chip factory owned by Elmos taken over by a unit of China’s Sai Microelectronics, until Germany said “nein.”

This story shows the recent U.S. campaign to keep chip-making technologies out of Chinese hands is spreading to Europe, almost certainly under guidance from Washington. Dutch chip equipment maker ASML has been feeling some of the biggest heat in that campaign, and we can probably expect to see most other major EU governments gradually falling into line behind Washington.

North Star Over China

A new star is popping up across China as the country revs up its BeiDou constellation of satellites meant to someday rival the U.S.-operated Global Positioning System (GPS). A new report last week said nearly all smartphones sold in China, or 98% to be precise, are now outfitted to use the GPS alternative, whose Chinese name means North Star.

Anyhow who thinks this embrace of BeiDou by local smartphone makers is voluntary might want to think again. We’re fairly certain Beijing is ordering this switch as a matter of national security, lest China become reliant on U.S. technology for something as important as location-based apps. Other countries are unlikely to want BeiDou on their phones, though it’s quite possible Beijing could push domestic brands like Xiaomi and Oppo to install the system on models sold in other markets as well.

Morningstar Sets Over China

Financial market research and ratings company Morningstar is slashing its China operation, resulting in $26.3 million in severance payments in the third quarter, the company revealed in its latest quarterly report. The layoffs were first announced in July, affecting hundreds of jobs at the company’s hub in the southern boomtown of Shenzhen.

Morningstar is just one of a growing number of financial services companies that once held out big hopes for the China market, but have scaled back after discovering the going wasn’t as smooth as planned. Many reasons are to blame, most notably the difficulty of competing with big, mostly state-backed rivals that have far better resources and government connections.


Gap Falls Out of China

Leading last week’s corporate headlines was the latest withdrawal from China by a major western retailer, this time fashion giant Gap, which announced it was selling its Chinese operations to e-commerce software maker Baozun. What was particularly striking about this deal was the price, which saw Gap hand Baozun the keys to its China locker for a piddly $40 million to $50 million.

While the price looks like a bargain, the Shanghai-based entity that Baozun acquired was bleeding red ink to the tune of a 256 million yuan ($35 million) loss in 2021. Western fashion brands like H&M and Nike have been subject to boycotts by Chinese consumers in the last two years relating to controversy in the western Xinajiang region, though it’s unclear if Gap got caught up in that as well.

Chip Train Keeps Rolling in Shanghai

The U.S. may be out to stifle China’s homegrown chipmakers, but that hasn’t stopped one of its oldest names from moving forward with a plan for a major new listing. This particular plan is coming from Hua Hong Semiconductor, which is already listed in Hong Kong and now wants to raise up to 18 billion yuan by concurrently listing on Shanghai’s Nasdaq-style STAR Market.

We’re not aware of any individual U.S. sanctions against Hua Hong in the past, which sets it apart from other chip makers like Huawei and SMIC that were specifically targeted. Still, the company won’t be able to buy any advanced foreign chip-making technology under newer rules rolled out by the U.S. Such restrictions may put a damper on demand for this latest listing.

Country Garden Weeds Out S&P Ratings

What do you do when you don’t like your credit rating? If your name is Country Garden, one of China’s top property developers, you fire your ratings agency. That’s exactly what happened last week after S&P lowered its long-term issuer credit rating on Country Garden.

It’s no secret that most companies pay agencies like S&P to rate their bonds, and thus they can easily stop payments when they don’t like their ratings. But such actions come at a price, since investors may shun such bonds if they lack the resources to evaluate them. Most Chinese property bonds are rated so low these days that only the most risk-happy investors would want to buy them anyhow.


China-U.S. IPO Train Heading for the Station?

In the latest sign that the train of Chinese IPOs in New York may soon be back on track, hotel operator Atour made a new filing last week containing updated information for its delayed listing plan. The company first filed to raise up to $350 million in June last year, but that got derailed after both Beijing and Washington expressed different concerns over such cross-border listings.

Most of the issues appear to be resolved by now, which means the IPO train could soon resume, perhaps starting with Atour, whose underwriters include big hitters Citigroup and BofA Securities. Unfortunately, markets aren’t so hot right now, which has led Atour to slash the size of its listing to a more modest fundraising target of about $62 million.
There’s Gold in Noodles

They may not be sexy, but instant noodles have become a type of comfort food for investors in these troubled times for global stock markets. That’s been good news for Nissin Food, one of China’s top instant noodle makers, which last week reported a return to profit growth in the third quarter as it brought its spiraling material costs under control.

Truth be told, Nissin’s results looked good, but they weren’t anything spectacular. Still, the company looks like a relatively safe bet compared with some of its sexier high-tech peers that have fallen on hard times lately. That may explain its current mouth-watering price-to-earnings (P/E) ratio of 23 after a 30% rally for its stock since May.

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