CHINA BULLETIN: Progress First, Stability Second, Says Politburo

In this week’s issue Beijing says progress over stability, a lifeline for local banks, and TikTok’s $1.5 billion Indonesia bet. 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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MACRO

Progress First, Stability Second, Says Politburo

The big macro news last week came from the annual Central Economic Work Conference, where central leaders led by President Xi Jinping vowed to “pursue progress while ensuring stability.” While that may sound rather bland, China watchers pointed out that the pursuit of progress is not usually emphasized so much, so it’s significant that it is suddenly being prioritized over stability.

The meeting also sets the widely watched GDP growth forecast for next year, and one policy insider said the figure was likely to be around 5% – the same as this year’s target. The focus on progress seems to indicate we’ll see more stimulus and other measures to prop up the economy next year, which means Beijing will probably continue to wrack up more debt.

UK Businesses Join China Pessimism Bandwagon

U.S. and EU businesses are quite pessimistic on their future China investment plans, and now the UK is adding its voice to that chorus. According to a new poll by the British Chamber of Commerce in China, British businesses are delaying their new investments in China and downgrading the country’s importance in their global operations.

What’s worse, 60% of companies polled said China’s current economic slowdown is presenting a bigger challenge for them than the country’s three years of crippling Covid controls. Foreign direct investment (FDI) in China passed a major milestone when it went negative for the first time ever in the third quarter, and we expect that trend will continue into 2024.

China Stocks Rise on Late-Week Rally

Offshore-listed Chinese stocks broke their recent losing streak and posted slight gains last week thanks to a Friday rally. The Hang Seng China Enterprises Index rose 1.8% for the week, lifted into positive territory by a 2.3% rise on the last trading day of the week. The iShares MSCI China ETF rose 1.9%, while the broader Hang Seng Index rose 2.8%.

The relative divergence between the Hang Seng China Enterprise Index and the broader Hang Seng Index looks significant, potentially showing investors are slightly more bullish these days on Hong Kong than on Mainland China. That’s not too surprising, since Hong Kong is much smaller and also much better integrated with the more robust global financial system than the rest of China.

Industry

France, Turkey Take Fresh Steps Against China EVs

A couple of headlines from Europe last week show how individual countries are starting to challenge China’s attempts to dominate the emerging market for new energy vehicles (NEVs). One saw France revamp its list of NEVs that are eligible for government subsidies, and, not surprisingly, that list is notably devoid of Chinese models that are flooding the global market.

The other headline had Turkey placing an onerous new restriction on all EVs sold in the country, saying each brand must have at least 140 authorized service centers spread across the country. These moves come as the EU investigates Chinese NEVs for receiving unfair government support, as everyone races to cut off China’s aggressive drive to dominate the global NEV market.

China Tackles Small Private Equity

The latest proposed amendments to China’s rules governing venture capital and private equity look squarely aimed at squashing the many smaller companies that are a vital source of cash for startups, but are also relatively unsophisticated. The change would require qualified PE and VC funds to put up 3 million yuan, triple the current threshold.

Truth be told, 3 million yuan is not a huge sun, and seems quite affordable for any serious investor. This kind of small investor has become a fixture of China’s funding landscape, and was probably fine when the economy was booming. But now that it’s slowing, these micro funds are probably being exposed as less sophisticated players with high probability of losing their investments.

Provinces on Bond-Issuing Binge to Prop Up Local Banks

Much is written about China’s largest banks that are “too big to fail” and would almost certainly get government bailouts if they ran into trouble. But China’s many smaller banks are more problematic, often playing critical roles in their local economies but not justifying such rescues. Still, these smaller lenders are probably suffering far worse right now than big banks due to their limited resources.

Now, local governments are using special purpose bonds permitted by Beijing since 2020 to assist such local banks. Local governments have issued 208 billion yuan worth of such bonds through Dec. 11, more than triple the amount for 2022. While that number looks big, it’s probably relatively small compared with the magnitude of this less-visible problem in China’s financial system.

Company

Country Garden Repays Yuan Notes, Confident of Viability

Struggling developer Country Garden was in a couple of headlines last week, led by its announcement that it had remitted adequate funds to repay some yuan-denominated notes coming due. In a separate report, the company’s Chairman Yang Huiyan was quoted as saying she was “very confident” the company could clean up its messy finances.

The first development shows that China’s embattled developers will do everything they can to repay their domestic debt, as Beijing tries to protect domestic investors. More sophisticated foreign debt holders, on the other hand, are on their own, though that could change if such foreign creditors ultimately cause Country Garden or one of its peers to collapse.

TikTok Pumps $1.5 Billion Into Southeast Asia

Short video sensation TikTok made headlines last week with word that it was investing a total of $1.5 billion into Tokopedia, Indonesia’s largest e-commerce company. It made the move after being forced to shutter its own relatively new local e-commerce service, TikTok Shop, after Indonesia banned e-commerce on social media sites in an effort to protect youth.

The move reflects TikTok’s recent aggressive move into e-commerce, aiming to replicate its huge success in short videos that has made it a global sensation. The new Tokopedia tie-up will take it into direct competition with other China-backed local players, including Alibaba’s Southeast Asian Lazada unit and Singapore based Shopee, whose backers include Tencent.

Alibaba Pumps $630 Million Into Lazada

TikTok wasn’t the only one funneling hundreds of millions in new funds to the hotly contested Southeast Asian e-commerce market last week. In a separate development, Alibaba also pumped an additional $634 million into its Southeast Asian Lazada operation, according to a local filing.

Lazada is part of Alibaba International, one of the company’s main business units that is being spun off to operate independently. It previously said it could do some fund raising, though it wasn’t clear if this capital injection is part of that. What is clear, however, is that Southeast Asia is rapidly shaping up as a major battleground for Chinese e-commerce companies.

AND FROM THE PAGES OF BAMBOO WORKS