In this week’s issue a Premier premieres in Davos, more property pain and the U.S. talks tough on export controls. On a scale of 1 to 100, we give the week a 35 for offshore-listed China stocks.

Doug Young, Editor in Chief

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MACRO

Premier Li Qiang premieres in Davos

Last week all eyes were on Davos, Switzerland, where Li Qiang made the first address by a top Chinese official at the World Economic Forum since the pandemic. It was Li’s first time at the event since becoming premier last year. Headlining his remarks were his disclosure that China’s economy grew 5.2% last year, which was broadly in line with Beijing’s target and market expectations.

Li also hobnobed with a number of banking big-wigs, including JPMorgan chief Jamie Dimon and the CEOs of Bank of America and Blackstone. Chinese central bank governor Pan Gongsheng also attended, suggesting that China may soon be looking to some of the world’s top financial leaders and institutions for advice on how to bolster its stumbling economy.

China’s Incredible Shrinking Population

In what comes as little surprise, the other big macro news last week was new government data showing China’s population shrank for a second consecutive year in 2023. The decline was still relatively small, with the population dropping by 2.08 million to bring the total to 1.41 billion. China lost its crown as the world’s most populous country to India last year.

China’s birth rate also fell to 6.39 births per 1,000 people, a new record low since the founding of the PRC in 1949. The falling birth rates are a combination of too much success from China’s earlier “one child policy” that has now been scrapped, and public concerns about the high costs of raising children. Beijing has tried to encourage people to have more children, but with little success.

China Stock Freefall Accelerates

The freefall for offshore-listed China stocks in the New Year accelerated last week on growing concerns over the Chinese economy, sending our indexes to levels not seen since the global financial crisis of 2008. The Hang Seng China Enterprises Index lost 6.5% for the week, while the iShares MSCI China ETF fell 4.5% and the broader Hang Seng Index shed 5.8%.

Year to date, the Hang Seng China Enterprises Index is down about 12%, marking an ominous start to 2024. Much of the selloff is being fueled by foreign fund managers spooked by all the negative headlines coming out of China. The Hang Seng Index now trades at a paltry price-to-earnings (P/E) ratio of just 7, its lowest in at least a decade and a third of the 22 for the S&P 500.

Industry

Property Pain All Around

The latest data is showing just how bad China’s property market became last year after years of breakneck growth. New home prices in December fell by their steepest rate in eight years, while sales based on floor area fell 23%. New investment in property development for December fell at the sharpest rate since 2020, with overall property investment down 9.6% for the year.

Real estate accounts for about a quarter of China’s economy, and many other individuals and companies are exposed through property-related investments. Many observers believe the government downplays the magnitude of the slump and doesn’t allow publication of figures that show how bad it is. Our sources say prices are down anywhere from 20% to 50% from their peaks.

U.S. Talks Tough on Export Control Cheaters

U.S. attempts to stifle China’s chip sector have faded from the headlines these past few weeks, as Washington focuses on implementing and refining the many restrictions it has rolled out to block the most cutting-edge technology from entering China. Now, U.S. officials are starting to talk tough, saying they will crack down on anyone who tries to skirt the restrictions.

“There are going to have to be some penalties that get everyone’s attention,” said Matthew Axelrod, a secretary of export control at the U.S. Commerce Department, speaking at an event in New York. That probably means we can expect to see some eye-catching fines starting later in the year ahead, perhaps in the tens or even hundreds of millions of dollars, to discourage cheating.

China Embraces More Genetically Modified Crops

Beijing is slowly learning to embrace genetically modified crops, which typically have higher yields and are more disease resistant, despite questions about their safety due to their newness. In the latest embrace of such crops, China last week approved the importation of some additional forms of genetically modified soybeans and corn.

It also expanded the areas where such crops can be planted within China. This doesn’t come as a huge surprise, as stories are repeatedly popping up about farmers growing such GMO crops already illegally. What’s more, the GMO industry now has a strong lobbying voice in Beijing, following the landmark 2017 purchase of global seed giant Syngenta by a Chinese buyer.

A Shein showroom in Tokyo.

Company

Shein Discovers It’s Still Chinese

China could soon throw a major wrench into what was shaping up to become one of the world’s biggest IPOs of 2024, with a report that the nation’s cybersecurity regulator has opened a probe into online fast fashion sensation Shein. The Wall Street Journal reported the Cyberspace Administration of China is looking into Shein’s practices for handling and sharing data.

Media reports late last year said that Shein has already made confidential filings for a U.S. IPO that would value the company at up to $90 billion. The company previously relocated its headquarters from China to Singapore to lower its exposure to Chinese regulation. But its huge base of operations in China means Beijing can still exercise significant control over the company.

Huawei EV Faces Delivery Delays

Huawei’s drive into EVs has hit one of its first speed bumps, as buyers of one of its first models co-developed with car maker Chery are learning they won’t get their deliveries on time. The news is coming from disgruntled buyers of the Luxeed S7, which is the first model under Huawei’s Smart Selection business model.

In fact, Huawei is working with a number of other car makers, and some are speculating the Luxeed delay may owe to Huawei’s decision to focus more on another tie-up for an SUV it is helping to produce with another company that has gotten more positive publicity. We wouldn’t read too much into the delay, as such hiccups are quite common for new products.

Country Garden Pledges Big Home Deliveries, Nears Australia Exit

The latest headlines from embattled property developer Country Garden show the company is desperately trying to complete its many domestic projects in progress, and may be selling down its overseas operations to raise cash to do that. The company announced at its annual meeting that it aims to deliver 480,000 homes this year, down from the 600,000 last year.

While the number of homes being delivered is down year-on-year, we have to commend the company for being able to keep delivering any homes at all as it struggles with a debt crisis. In a bid to raise cash to fund its core China operations, another report says the company has been selling its interest in a number of Australian projects, as it winds down its operations down under.

AND FROM THE PAGES OF BAMBOO WORKS

Anta in Foot Race to Separately List Its Overseas Amer Unit

Last week we brought you the latest wrinkle in the story of Anta, China’s answer to Nike, which is racing to make a U.S. listing for its Amer sports unit whose properties include the Salomon, Arc’teryx and Wilson brands. The deal comes about five years after an Anta-led group purchased the Finnish-based company, which is losing money.

This kind of strategy is relatively common for Chinese companies, which often separately list their big foreign acquisitions overseas a few years after the deals. Such moves are largely practical, as they allow acquirers like Anta to pay down debt they used to finance the deals, and also allow private equity that helped to finance the purchases to cash out.
IFlytek Hives Off Health Unit for Hong Kong Listing

We also brought you the latest from iFlytek, one of China’s many bustling young AI companies that are catching the public’s attention for their big potential. The company has announced it will spin off and separately list its healthcare business, Xunfei Healthcare Technology, in Hong Kong.

The move looks like a way for iFlytek to offload a business that is potentially promising, but also losing big money. This comes as AI companies in general are facing the growing prospect of limited ability to raise fresh money to fund their operations that are often losing money. iFlytek itself is profitable, but Xunfei lost 204 million yuan last year.

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