Illustration of an American business man fleeing China

In this week’s issue China NEVs hit U.S. speed bump, a beverage legend passes on and coffee is king among China investors. 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

Foreign Firms Put New Investments on Hold

In the latest sign of China “de-risking,” a new survey by AmCham’s South China chapter found 40% of foreign firms surveyed said they weren’t planning to make additional investments in China over the next three years – the highest number on record. This particular data point comes after China reported that its foreign direct investment (FDI) reached a 30-year low in 2023.

A couple of factors are feeding this trend, led by the fear many companies felt after being barred from accessing their China operations for most of the pandemic due to the country’s strict Covid controls. Now, companies may also be having second thoughts about investing in China as the domestic market rapidly cools after three decades of breakneck growth.

Factory Activity Contracts – Again

Foreigners aren’t the only ones skittish about new China investment. The latest official manufacturing purchasing managers’ index (PMI) remained in contraction territory in February for a fifth straight month, dropping slightly to 49.1 in February from 49.2 in January. That’s on a scale where anything below 50 indicates contraction.

At least some of the weakness may have owed to seasonal factors, since many factories were closed for weeks in February for the Lunar New Year, which fell in January last year. The economy – and how to perk it up – is almost certain to be a major topic when the annual Two Sessions, which includes a meeting of China’s top legislature, opens later this week in Beijng.

China Stocks Take a Breather

Offshore-listed China stocks took a pause after starting the Year of the Dragon with a three-week roar that lifted the major indexes we follow around 10%. The Hang Seng China Enterprises Index lost 0.6% for the week, while the iShares MSCI China ETF fell 0.7%, and the broader Hang Seng Index was down 1%.

The early-year rally seems based mostly on hopes rather than anything substantial. It’s possible Beijing could announce some major new stimulus measures at the annual meeting of China’s legislature that kicks off this week. A major cue will come in the government’s GDP growth target for 2024, which will indicate how aggressively it might move to support the economy.

Hundreds of vehicles ready to export in a port in Shandong, China

Industry

U.S. Turns Up Heat on Chinese NEVs

They haven’t even entered the U.S. in a serious way just yet, and already Chinese new energy vehicles (NEVs) are coming under assault. President Joe Biden disclosed last week that the U.S. has opened an investigation into whether imported Chinese NEVs could pose a national security risk due to their collection of large amounts of sensitive user data.

Many will say this is just an excuse by the U.S. to keep Chinese NEVs out of the market, protecting its domestic industry and avoiding a fate like what is happening in Europe right now. This particular campaign looks quite similar to the U.S. ban on Chinese telecoms equipment from Huawei and ZTE nearly a decade ago, which was also done in the name of national security.

E-Bikes Behind Deadly Nanjing Fire?

Speaking of NEVs, electric bikes were in the hot seat after a fire that began in a parking lot for electric bikes spread to a nearby building in Nanjing, killing 15 and injuring 44. While the cause hasn’t been announced just yet, e-bikes in China are famous for their low-quality lithium batteries that are often prone to catching fire, unlike electric car batteries that are far safer.

We spotlighted this incident last week in our own earnings story on NEV maker Li Auto because it’s the latest in a string of recent negative reports involving NEVs that could turn off local consumers. Other reports over the Lunar New Year holiday said some NEV owners became stranded on Hainan island due to strict limits to the number of NEVs that could board ferries due to fire hazards.

Alibaba Heats Up China Cloud

First it scrapped its plans to be spun off from Alibaba, and now the cloud unit of China’s largest e-commerce company has announced it will slash prices for some of its new products by up to 55% to garner more customers. These latest cuts come less than a year after the company made similar cuts, and are almost certain to pressure China’s large field of cloud service providers to follow suit.

Alibaba Cloud surprised many last year when it canceled its plans to be spun off as part of a breakup of the bigger Alibaba. The unit’s inability to import cutting-edge AI chips from the U.S. due to sanctions was given as a possible reason for the move. But this latest round of price cuts also seems to show Alibaba Cloud may not be ready to stand on its own just yet.

Wahaha bottled water

Company

Beverage Tycoon Passes On

We begin our company news with a tribute to beverage tycoon Zong Qinghou, who died last week at the age of 79. Zong was one of the first super-rich people in China’s Reform Era thanks to his Wahaha empire that became a household name for its drinks in the 1990s. The company also made major headlines when it joined with France’s Danone to form a joint venture.

But like Danone’s yogurt, that joint venture quickly soured after the French company discovered Zong had used its know-how to set up a parallel rival company. That kind of freewheeling still occurs in China’s business world today. But foreign companies have more options now, including the right to open wholly-owned ventures far more easily rather than working with local partners.

HiPhi Shifts Into Low Gear

Human Horizons Group, maker of the HiPhi brand of luxury new energy vehicles (NEV), has been in steady headlines these last two weeks, starting with word that it suspended production for six months on Feb. 18. Later reports said company founder Ding Lei was out pounding the pavement in search of a white knight to rescue his sinking company.

If it goes under, which seems quite possible, Human Horizons and HiPhi would become just the latest victims in a bloody consolidation in China’s NEV market, which also looks set to claim former highflyer WM Motor. Most have predicted that just four or five of China’s many NEV startups will remain standing when the dust settles, and it appears HiPhi won’t be one of those.

Country Garden Next to Liquidate?

Lest we go an entire week without any news from the embattled property sector, we’ll close our company section with news that a creditor of struggling Country Garden has petitioned a Hong Kong court to liquidate the company. In this case a unit of Kingboard Holdings made the request after Country Garden failed to repay a $205 million loan.

Equally embattled Evergrande fell victim to the same type of bankruptcy petitions from its creditors, and finally succumbed when a Hong Kong judge ordered it to liquidate in January. It’s quite possible that Country Garden could follow down the same path, though the process would take a while. And in the meantime, it’s also possible China could step in to try to help the company.

AND FROM THE PAGES OF BAMBOO WORKS

Investors Chug Down Chinese Coffee in 2023

Last week we brought you our annual special report on the most popular Bamboo Works articles from 2023, as well as the hottest sectors and keywords sought out by investors who follow China stocks. Many won’t be surprised to learn that new energy was a hot topic for the year, as China shored up its position in both the new energy power and car markets.

Last year’s top keyword by far was “coffee,” which reflects the intense competition in this traditional tea-drinking market that has more recently embraced the West’s favorite breakfast drink. There’s lots more on the what’s hot – and what’s not – in corporate China these days, so we strongly encourage you to have a look at the full report.
China Mints Cannabis Vaping King

We also brought you a made-in-China story that has taken up residence in Los Angeles with a vaping company called Ispire. The company has its roots in Shenzhen, where it became a leading global supplier of vaping hardware in its earliest iteration as a firm called Shenzhen Yi Jia. But its global sales arm later relocated to L.A., and made a Nasdaq IPO last year.

CEO Michael Wang was talking up the company after the release of its latest earnings report, saying its revenue could explode over the next three years on huge growth potential for the U.S. cannabis vaping market. While that remains to be seen, the stock has done pretty well since its listing, up around 40%, in sharp contrast to other China-linked stocks that have sunk over that time.

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