In this week’s issue new China-India tensions, BYD overtakes Tesla, and Boeing emerges from the China doghouse. 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

China-India Tensions Flare with New Arrests

We kick off our first edition of the New Year with what could well become a major theme in 2023, following reports that India has arrested two executives from Chinese smartphone maker Vivo. The action came two months after four other India-based Vivo employees were arrested in connection with a money laundering investigation, leading many to guess the latest detentions are related.

Vivo expressed alarm at the actions, while China warned India not to discriminate against its companies. The China-India rivalry has heated up over the last few years as the pair increasingly vie with each other on the global stage for status as economic powerhouses. Look for this rivalry to continue heating up in the New Year, in both the political and corporate realms.

Anti-Monopoly Crackdown Marches On

Anyone who thought China’s crackdown on anti-competitive behavior was finished might want to think again. As 2023 wrapped up, a Beijing court ruled in favor of e-commerce giant JD.com, which had sued the larger Alibaba for unfair competition. The court awarded JD.com 1 billion yuan, or about $140 million, in compensation.

China’s market regulator socked Alibaba with an even larger fine of $2.75 billion in 2021 at the start of the anti-monopoly crackdown, before leveling smaller but still sizable fines against other big companies including Tencent and Meituan. This latest move signals that both regulators and also competitors will continue to punish companies that engage in uncompetitive behavior in the future.

China Stocks End 2023 with Santa Claus Rally

Christmas may not be an official holiday for most of China, but that doesn’t mean Santa Claus didn’t have some nice year-end presents for offshore-listed Chinese stocks. The indexes we follow all posted nice gains to end the year, led by a 5.1% rise last week for the Hang Seng China Enterprises Index. The iShares MSCI China ETF rose 3.7%, while the Hang Seng Index gained 4.3%.

Those gains provided an upbeat ending to what was otherwise a miserable year for offshore-listed Chinese stocks, summed up by an 18% decline for the Hang Seng China Enterprises Index for the year. Many are probably hoping the year-end rally will signal better things to come in 2024, though we have yet to see any real signals from China’s sputtering economy to justify such hopes.

Warren Buffett and Bill Gates at a launching ceremony of a BYD NEV.

Industry

BYD Overtakes Tesla for Global EV Crown

2024 could well go down as a seminal year for Chinese electric vehicles (EVs), with leading domestic producer BYD poised to overtake Tesla as the world’s largest EV maker in the fourth quarter. Here, we have to commend Warren Buffett, who was one of the few to spot BYD’s big potential more than a decade ago and has profited handsomely by investing in the company.

In separate related news, Chinese EVs were reportedly the subject of new higher tariffs being considered by the U.S., according to a Wall Street Journal report. Europe is also currently conducting an anti-dumping investigation into Chinese EVs, and we expect this kind of growing EV friction to be another major theme in 2024.

Home Price Freefall Hits New Highs

The latest data shows new home prices fell in 59 of the 70 cities tracked by the National Bureau of Statistics in November, marking a new record. Overall new home prices fell by 0.4% during the month from October, while previously owned home prices dropped by a larger 0.8%. Frankly speaking, we’re surprised that there are still 11 cities where new home prices are still rising.

China’s slumping property market was a major theme in 2023, with former powerhouses Evergrande and Country Garden symbolic of the sector’s woes. 2024 is almost certain to be a year of reckoning, as Beijing finally decides how to sort out the mess. We predict it will let the weakest companies fail, while trying to save healthier ones and also trying to keep prices from going into freefall.

Gaming Firms Launch Wave of Share Buybacks

The year ended with a roller coaster ride for the gaming sector, with the government releasing draft new rules to further regulate the group, only to quickly downplay its intentions. At the same time, the gaming companies themselves fought back by announcing share buybacks last week to try to support their stocks that tumbled after the draft rules were first announced.

The latest rules look relatively minor, and their release at such a sensitive time probably reflects a certain tone deafness among Chinese regulators. Gaming companies have been hammered with a wave of new regulations over the last two years designed to curb gaming addiction, though Beijing seems to be easing its stance lately to focus more on the economy.

A Boeing 787 dreamliner of China Southern Airlines.

Company

Boeing Emerges from the China Doghouse

After being in the China doghouse for much of the last four years, aircraft giant Boeing is finally seeing some relief in the market. The company said last week that its 737-MAX planes that were grounded by China in 2019 were all back in service at the end of last year. In a separate development, the company also delivered its first 787 Dreamliner to the market since 2019.

China was commended for grounding its 737-MAX fleet back in 2019 after two crashes caused by faulty plane systems. But it also took its time allowing the planes to resume flying after Boeing made necessary fixes. Many attributed the foot-dragging for both the MAX and also Dreamliner deliveries to growing U.S.-China tensions, which have begun to ease recently.

Failed Sichuan Trust Compensates Investors

More than three years after running into difficulties, Sichuan Trust Co. has finally offered a compensation plan to 8,300 retail customers who bought its now-defaulted financial products. But those investors might not be too happy to learn they will only get between 40 cents and 80 cents for every dollar they invested in the failed products.

The company was one of many Chinese trust companies that played just a tad too fast-and-loose with money from investors who often forked over their life savings in exchange for promised big returns. Sichuan Trust was ultimately seized by the government, which is increasingly having to step in and clean up many similar messes that are likely to keep coming in 2024.

AstraZeneca Pays Big Bucks for Chinese Biotech

The year ended on a high note for a little-known U.S.-listed Chinese drug company called Gracell Biotechnologies, which received a buyout offer from global giant AstraZeneca in a deal valued at $1.2 billion. AstraZeneca’s offer represented a 62% premium to Gracell’s last closing price before the announcement, and will bring it Gracell’s technology in the CAR-T cell therapy space.

While this deal is quite large and noteworthy on its own, it’s also notable because it could mark the start of a wave of similar buyouts for the dozens of Chinese biotech firms that have emerged in the last five years that often have promising products, but are short on cash. This kind of M&A is quite common in the west, but has yet to really take off in China.

AND FROM THE PAGES OF BAMBOO WORKS

KFC Plucks Up Major Milestone with 10,000th China Store Opening

Just before the Christmas holiday, we brought you the story of a major milestone for KFC with the opening of its 10,000th store in China. That further solidifies the chain’s status as the largest foreign fast-food operator in China, well ahead of smaller rival McDonald’s. KFC reached the milestone 36 years after becoming the first major foreign fast food brand to enter China in 1987.

Here, however, we should note that KFC’s milestone comes with an asterisk, since an increasing number of homegrown Chinese chains are growing far faster through their aggressive use of franchising. KFC only recently began using such franchisees in China to expand more quickly, preferring to own and operate its own stores in the past to control quality.
Autohome Looks for New Mileage in Used Cars

We also brought you the story of Autohome, one of China’s oldest car services companies, which is revving up for a major drive into the used car business. In an interview, company executives detailed their plans to start signing up China’s hundreds of thousands of used car dealers for a new category of used car memberships in 2024, aiming to replicate its popular memberships for new car dealers.

As a newly developed country, Chinese consumers once insisted on only new items, from homes, to cars and electronic gadgets. But Autohome is betting a growing number will lower their sights and settle for quality used cars as the market matures and consumers become more cautious with the nation’s slowing economy.

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