Tanking Renminbi

In this week’s issue the incredible shrinking yuan, payment companies welcome back foreign visitors, and local governments play debt hide-and-seek. 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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The Incredible Sinking Yuan

The sputtering yuan was last week’s top economic story, with China’s currency, also known as the renminbi, sinking to a seven-month low of 7.24 to the dollar. The weakness prompted China’s monetary authorities to take a number of actions to prop up the currency, including the sale of dollars by major state-run banks.

China has lobbied hard to internationalize the yuan as an alternative to the dollar for global trade and as a reserve currency. But this kind of manipulative action shows why governments and traders may think twice before relying on the currency. The yuan’s weakness is also the latest in a growing number of signals showing China’s economy may be headed into a downturn.

Local Governments Play Debt Hide-and-Seek

Much has been written about the heavy debt burden weighing down local governments, but a recent audit uncovered billions of dollars worth of tricks those governments are using to try to hide their problems. Among other things, the National Audit Office found local governments inflated their revenue by 86 billion yuan by selling assets to themselves in fake deals.

Such figures may look relatively minor considering that local governments are believed to have trillions of dollars in “hidden debt” that isn’t on their public balance sheets. But these kinds of accounting games do hint at how desperate the governments are to hide their problems, which will make sorting out the mess that much more difficult when things finally reach a critical stage.

Markets in Holding Pattern

Offshore-listed Chinese stocks were largely in a holding pattern last week, taking a break after a big selloff the previous week as investors waited for clearer signals on potential steps Beijing might take to reinvigorate the economy. The Hang Seng China Enterprises Index and iShares MSCI China ETF rose 0.4% and 1.3% during the week, while the broader Hang Seng Index rose 0.1%.

An interesting and slightly related report showed that a logjam has developed for Chinese companies wishing to float shares overseas, since all companies must now get government approval for such listings since earlier this year. Not surprisingly, not a single company has been approved yet, which could reflect a broader state of paralysis and indecision in Beijing.

Alipay and WeChat pay used in China


Payment Companies Roll Out Welcome Mat for Return of Foreigners

After years of waiting, foreigners making brief visits to China for tourism or work may finally be able to pay for things using WeChat and Alipay, the two services that have become the main way people pay for things. Both services said last week that they will allow foreigners to link their international credit cards to accounts, which was previously forbidden.

Access to the two payment services was previously nearly impossible for most short-term visitors to China, making it increasingly difficult to function since many places no longer accept cash or credit cards. Plans to address the situation got shelved during the pandemic, but this new development reflects the country’s desire to reopen and bring back foreigners and their spending.

Dragon Boat Spending Sputters

After a brief burst of tourism spending during the Lunar New Year holiday in January and Labor Day holiday in May, the urge to get out and travel seems to be fading for many Chinese. Domestic tourism revenue reached 37.3 billion yuan during this year’s three-day Dragon Boat Festival holiday, which was well above last year’s level but still 5% below pre-pandemic spending in 2019.

The spending slowdown has been a growing theme over the last month, as widespread “revenge spending” at the start of the year after China reopened starts to fade. We’re now seeing nearly daily signs that consumers are reining in their purchases over concerns of a slowing economy, which is quickly sapping any spirit for more revenge spending.

Gaming Approvals Pick Up

Anyone worried that Beijing was losing its taste for gaming can relax. Regulators approved 89 new video games in June, marking the largest monthly batch this year. That brings the total number of games approved in the first half of 2023 to 521, which is higher than the total for all of last year.

Things weren’t always so bright for China’s gaming industry. Beijing previously cracked down on games through a number of steps, aiming to cut back on a behavior it saw as frivolous and even harmful. The change of heart probably owes at least partly to Beijing’s shift from reining in big tech to trying to be more supportive in the face of a sputtering economy.

A Shein Store in Tokyo


Shein Extends Supply Chain Beyond China

E-commerce sensation Shein is expanding the manufacturing network for its cheap, fast fashion products beyond its home China market. A media report last week said the company, which is reportedly planning an IPO, is trying to strengthen its presence in Europe and Mexico, including plans to buy more of its products locally in those markets.

Shein rose to fame by bringing new meaning to the “fast” in “fast fashion,” using real-time technologies and its vast network of Chinese manufacturers to pump out new products in record fast times. But it has also faced criticism for poor conditions at some of its manufacturing partners, showing it’s not just big tech names like Apple that are subject to such scrutiny.

Another Real Estate Default

Another week, another real estate default. This time it was regional developer Central China Real Estate that defaulted on an offshore bond, adding its name to a growing list of developers conserving their cash for other uses. In this case, the developers have prioritized using the cash to finish their works in progress, and are choosing to ignore their dollar-denominated debt.

This growing movement has all the trappings of an under-the-table directive from Beijing, which is eager to avoid any potential unrest or other actions by unhappy home buyers who have already made payments on such unfinished properties. Beijing may also be telling such developers they will be able to access government credit to offset their loss of access to foreign credit markets.

Byton Units Roll Towards Liquidation

In another sign of malaise, this one in the new energy vehicle (NEV) industry, a Chinese court has accepted a bankruptcy application from creditors of two subsidiaries of struggling startup Byton. That kind of move sounds like the beginning of the end for this company, which still has yet to deliver its first NEVs despite aiming to do so back in 2019.

It’s not really clear what Byton has been up to these last three years, since it officially suspended operations in 2020 due to financing issues. The company is just the latest in a vibrant field of NEV startups that sprouted up in China over the last decade, feasting on government largess aimed at promoting the sector. But now companies are being forced to stand on their own.


J&T Global Express: Game Changer or Just a Rabble Rouser?

Last week we turned our spotlight on J&T Global Express, a latecomer that is quickly making up for lost time in China’s massive but highly competitive parcel delivery industry. The company has filed for a Hong Kong IPO that could raise $1 billion or more, giving it new fuel to take on a more established field of rivals with names like SF Express, YTO and ZTO.

Founded just eight years ago, J&T initially set its sights on the Southeast Asian market and rapidly built up a presence there. But it quickly turned its sights to China, and has built a new presence there as well through two acquisitions starting in 2020. From there it touched off a bloody price war that only ended last year when China’s market regulator stepped in to cool things down.
What Foreign Boycott?

Boycotts are a constant danger for foreign companies in China, especially consumer brands. A number of foreign clothing brands got caught in such a boycott two years ago after some refused to use cotton from China’s Xinjiang region in their clothing due to labor issues. The boycott ended up affecting brands that weren’t even involved in the cotton issue.

But the latest financial update from Topsports, the main representative for Nike and Adidas in China, appears to show that effects of that prolonged boycott are finally starting to fade. The company noted its revenue rose by more than 20% in its fiscal first quarter, which was far faster than gains for domestic brands that were major beneficiaries of the boycott.

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