In this week’s issue we bring you British bears, a chatbot price war and the end of the road for Didi’s president. On a scale of 1 to 100, we give the week a 50 for offshore-listed China stocks.

Doug Young, Editor in Chief

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MACRO

Fiscal Revenue, Land Sales Fall in April

The latest economic signals continue to show a slumping economy whose only saving grace is China’s export machine. The Finance Ministry reported that its fiscal revenue dropped 3.7% in April, accelerating from a 2.4% decline in March and down 2.7% in the first four months of the year. Meantime, revenue from the sale of land use rights tanked 21.2% year-on-year in April.

The fiscal revenue decline is worrisome for the central government, because its fiscal spending is moving in just the opposite direction, up 6.1% in April, as Beijing spends more to try and jumpstart the economy. The diving land sales aren’t unexpected, but also spell bad news for debt-strapped local governments that depend heavily on such sales to raise money.

Brits Bearish on China Business Outlook

Foreign business associations that once could find no wrong with China have done a complete turnaround these past few years, with the latest negative voice coming from the British Chamber of Commerce in China. The chamber’s latest survey found that its members believe the 48 measures China has announced to restore foreign confidence since last August are mostly lip service.

Barely a week goes by when China doesn’t announce its intent to keep opening up and create a more level playing field for foreign companies doing business in the country. Despite that, foreign companies are voting with their wallets, with foreign direct investment that once used to only rise suddenly sagging 8% last year.

Markets Take a Break. But Is This the End of the Rally?

It was only a matter of time before the latest rally for offshore-listed China stocks came to an end, and that’s exactly what happened last week. After four straight weeks of strong gains that sent all the indexes we follow into bull territory, the Hang Seng China Enterprises Index and Hang Seng Index both fell 4.8% last week, while the iShares MSCI China ETF lost 5.2%.

Meantime, another report showed that not all foreigners are necessarily bullish on China stocks these days. It detailed how a similar rally on China’s domestic stock markets is being driven mostly by domestic investors, with foreigners staying on the sidelines. That seems to show the rally in the U.S. and Hong Kong is mostly a valuation play, and not over bullishness on the Chinese economy.

Industry

Solar Association Admits to Overcapacity, Sort Of

Despite repeated accusations by the West that China is artificially spurring huge oversupply in emerging industries like EVs and solar panels through strong government support, Beijing repeatedly denies it is doing any such thing. But its main solar industry association is finally admitting that something isn’t right, even if it’s avoiding using the word “oversupply.”

The China Photovoltaic Industry Association last week called on its members, which produce the vast majority of the world’s solar panels, to halt their price wars that have ravaged the sector due to major oversupply. It added that while markets are often best at solving this kind of problem, the “government’s visible hand” can also play an important role.

Cities Cut Home Downpayment, Mortgage Rates

As often happens in China, the central government makes major policy announcements one week, and then local governments follow with supporting measures. That’s what happened last week when a number of cities across the country lowered downpayment and mortgage rates for home buyers, after Beijing announced a similar plan the previous week.

In a separate but related step, a top financial regulator said last week that Chinese banks had approved 935 billion yuan in new loans under a “whitelist” program to help developers complete select properties that had stalled due to lack of funds. All this shows Beijing is taking the property downturn increasingly seriously, realizing the huge drag it is creating on the economy.

Chatbots Overheat with New Price War

China is the land of the price war, with new battles regularly breaking out due to Beijing’s tendency to encourage investment in emerging areas, often resulting in overcapacity. This time it’s chatbots that are experiencing their first-ever price war, as tech giants Alibaba and Baidu both slashed prices last week for their large language models (LLMs).

Alibaba threw down the gauntlet by announcing cuts of up to 97% for its Tongyi Qwen LLMs. Baidu quickly followed hours later by saying that two LLMs from its Ernie series would be free for all business users. Both Alibaba and Baidu have plenty of cash, so it’s quite possible this price war could go on for some time. That would be bad news for smaller rivals.

Company

Evergrande EV Unit Asked to Repay Government Subsidies

Talk about hitting someone when they’re down. That’s exactly what China is doing to the electric vehicle-making unit of bankrupt developer Evergrande. Media reported last week that Evergrande New Energy Vehicle said it received a letter from local Chinese administrative bodies demanding it repay 1.9 billion yuan, or more than $250 million, in government subsidies it had received.

Such a demand looks quite difficult for a company that has yet to record any meaningful revenue from EV sales, and whose entry to the sector looked mostly like a “me-too” stunt to try to get its hands on generous government subsidies going out to startups. This particular request seems a bit unusual and shows just how far Evergrande has fallen out of government favor.

Chinese Owner Defaults on Inter Milan Loan

It seems quite distant now, but it wasn’t so long ago that Chinese companies were snapping up global sports teams left and right, rushing to heed Beijing’s call to improve the country’s sports prowess. Now, at least one of those owners is coughing up its club, Inter Milan, after defaulting on a 395 million euro loan it used to fund the purchase.

The storied club’s former owner is Suning, once a retailing giant that has been in sorry shape for quite some time. Suning’s majority stake was seized by Oaktree Capital, which said it was committed to the club’s long-term success. We haven’t heard much about the fate of other similar purchases during the buying spree, but we suspect many have also been sold or forfeited by now.

Ride Ends for Didi President

It was the end of the road last week for Jean Liu, who stepped down as president of Didi Global after nearly a decade in the position at a company once called the “Uber of China.” Despite relinquishing the president’s role, Liu will stay on as Didi’s chief people officer and will continue to report to Didi CEO Will Cheng. Her president’s position won’t be filled.

The daughter of Lenovo founder Liu Chuanzhi, Jean Liu was once feted as an entrepreneur supreme in her own right, and also one of China’s most successful female entrepreneurs in a club dominated by men. But following its rapid rise, Didi suffered from several safety scandals and a big regulatory rap on the knuckles after rushing to list in the U.S. without getting a required data security review.

AND FROM THE PAGES OF BAMBOO WORKS

ATRenew Feeds on National Recycling Campaign

Last week we brought you the latest on ATRenew, one of China’s leading recyclers, whose story shows just how important it is to sync with government priorities when doing business in the country. Even as many other companies have stumbled with little or no revenue growth, ATRenew continued to post strong gains, including a 27% revenue rise in the first quarter.

The company was already benefitting from previous government calls for more recycling. But that campaign has kicked into high gear this year, after President Xi Jinping called for more consumer goods recycling at a key Communist Party meeting in February. Local governments quickly followed with their own action plans, showing how such directives trickle down the food chain.
Forget the Pricey Collectibles, Says Maker of Cheap Licensed Toys

We also brought you the story of Bloks Group, a former Lego imitator that’s found bigger money more recently in cheap, assembled toys produced under licensing agreements with franchises like Ultraman and Transformers. The company has filed for what’s likely to become the biggest IPO by a toy company in quite some time, aiming to raise around $300 million.

China has offered up a few toymakers for investors in the past few years, many engaged in the sale of pricey collectibles that require self-developed intellectual property and sell for fat margins. Bloks is taking a far more down-market approach, playing to China’s increasingly cautious consumers with toys that average just 39 yuan, or less than $6, apiece.

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