CHINA BULLETIN: Bring on the Covid

Welcome to the latest Bamboo Works China Bulletin, where we recap the top China macro, industry and company developments from the past week and give you our spin on what it all means. In this week’s issue Covid cases reach new highs, banks shower property developers with cash and companies go into cutting mode. On a scale of 1 to 10, we give the week a 5 for offshore-listed China stocks.

Doug Young, Editor in Chief

MACRO

Bring on the Covid

It was a short work week in the U.S. for Thanksgiving, but holidays are really irrelevant when it comes to Covid. As Americans were sitting down for their turkey dinners, China was chalking up day after day of record new Covid infections last week. The number of new daily cases topped 30,000 nationwide by the end of the week, the vast majority of those asymptomatic.

But it really makes no difference whether your case does or doesn’t have symptoms as far as Beijing and thousands of local governments around China are concerned, since any case can spread to others. The country is rapidly devolving into another big mess as places like Guangzhou, Beijing and Chongqing turn to mass-scale lockdowns, even as China tries to signal it’s easing its Covid controls.

Rate Cuts, Anyone?

While turkey was in short supply in China due to hugely reduced numbers of foreigners, rate cuts were still high on Beijing’s menu of economic stimulus tools last week. China’s State Council said in a new statement that monetary measures like a cut in bank reserve requirement ratios will be used “in a timely and appropriate manner,” leading observers to guess such a rate cut could come soon. Sure enough, the central bank announced a 0.25 percentage point cut late on Friday.

China is relatively unique compared with other major economies in its use of reserve requirement ratios as a monetary policy tool, and lowers those ratios to encourage banks to lend more. The economy is certainly in need of a jumpstart, though whether a reserve requirement ratio adjustment will have any effect is debatable since there are less and less creditworthy borrowers out there. 

China Stocks Take a Breather

After a three-week rally that sent the battered Hang Seng Index up by 21%, China stocks took a break last week to wait for fresh economic signals before deciding where to go next. The Hang Seng China Enterprises Index slumped 2.5% during the week, while the iShares MSCI China ETF fell 3.4%, and the broader Hang Seng Index fell 2.3%.

The big question now is whether the three-week rally was just a respite after a terrible year for China stocks, or will it continue? Valuations are really quite depressed right now, as the Hang Seng Index was trading at lows not seen since 2008 before the rally. And while Covid is still a big question mark, our bets would be the rally may still have some life left.

Developers Brace for Flood of Cash

The big volume of stories on new steps to rescue the property market shows Beijing may finally realize the potential crisis at hand if this hugely important economic pillar stumbles. The headlines included a $162 billion pledge by China’s top commercial banks to help struggling developers, a report of a new central bank lending tool to help developers, and a report that even the stodgy Postal Savings Bank was getting in on the act by pledging $39 billion to help developers.

It’s interesting that all this assistance is targeting developers, rather than homebuyers whose help is also needed to prop up the market. That might imply the government is worried that some of those developers could soon collapse. The money could also be used to restart stalled housing projects, after many homebuyers stopped paying mortgages for unfinished properties in such projects.

Moody’s in No Mood for China Risk Management

Moody’s became the latest global ratings firm to head for the China exit last week, with word the company shuttered its China-based risk management unit, laying off about 100 people. We should note that the unit being shut is relatively small and engaged in consulting, and that Moody’s will maintain its credit rating agency in the country.

This move comes months after another ratings agency, Morningstar, cut or relocated several hundred jobs from its hub in Shenzhen. It’s no secret that the western consultants are quite pricey compared with their homegrown peers, even if the latter often offer service of far lower quality. But in the current climate where everyone is slashing budgets, such pricey service providers could be staring at a long winter ahead.

Tinseltown Cracks Back Into China

Just in time for the holiday season, China is offering its beleaguered moviegoers an early gift by allowing the screening of the upcoming sequel of “Avatar” in the country. Reports last week said the popular James Cameron movie will not only screen in China, but will debut in the country the same day as its worldwide premier on Dec. 16.

Hollywood has basically given up on China since the pandemic began, partly because theaters have been closed for much of the time and partly because China hasn’t been approving many foreign films. The first “Avatar” was hugely popular here, and we suspect this rare allowance of a foreign movie into China is more a one-off, a sort of morale booster for a Covid-weary populace, rather than signaling a reopening of the market.

Salary Cuts for JD and WM

Last week’s corporate headlines were filled with cuts, led by reports of companies slashing salaries as their business sags. One report said e-commerce giant JD.com was cutting salaries for about 2,000 senior managers by 10% to 20% from next year, while another said electric vehicle startup WM Motor was cutting salaries by half for managers and nearly a third of its staff. 

JD.com reported relatively strong revenue growth in the third quarter and returned to profitability, though it and its peers are probably worried about the potential for a longer-term downturn. Meantime, we suspect that WM Motor, while one of China’s lesser-known EV makers, isn’t the only one in its field cutting salaries as the that formerly red-hot market shows signs of losing steam.  

Volkswagen Cuts Targets

While JD.com and WM Motor were cutting salaries, German car giant Volkswagen was busy making another kind of cut, saying its China car sales this year would be 14% lower than expected. The company said it now expects to sell about 3.3 million cars in China this year, about a half million less than its earlier target.

China’s car market has been quite weak this year as the economy slows and Covid controls keep people out of the auto showroom. The market showed some signs of rebounding in the third quarter after a dismal first half of the year. But a boost to the broader market from surging electric vehicle sales looks set to slow with the looming end of many government incentives.

Xiaomi Sales Get Cut

Our last corporate story isn’t really about active cuts by a company, but rather about a highflyer having its wings clipped due to sagging demand. In this case the victim is smartphone maker Xiaomi, which reported its sales fell 11% in this year’s third quarter. The drop isn’t a huge surprise, since IDC previously reported that Xiaomi’s sales, as measured by number of smartphones sold, fell 8.6% for the quarter.

Xiaomi is the world’s third biggest smartphone maker, and counts China as its largest single market. That’s quite important in this case, since China’s smartphone sales fell 11.9% in the third quarter, outpacing the global decline of 9.7%. As China’s economy continues to run out of steam, companies like Xiaomi – which counts on China for nearly a quarter of its sales – are likely to find the going increasingly difficult.

AND FROM THE PAGES OF BAMBOO WORKS

Ant Creeping Back Into the IPO Queue? Two weeks ago we described recent signals that the aborted blockbuster IPO for Alibaba-affiliate Ant Financial could be getting on track, and last week we saw more such signals. The latest of those comes in a report that the Chinese securities regulator has decided to look afresh at a Hong Kong listing application by JD Technology, the fintech arm of e-commerce giant JD.com. There are certainly lots of parallels here, since Alibaba and JD.com are China’s two largest e-commerce companies, and Ant Group and JD Tech are their two main fintech arms. Chinese fintech IPOs have essentially been frozen since the spectacular 11th hour collapse of Ant’s dual Hong Kong and Shanghai listing in late 2020.

Geely’s Global Roadmap Geely may not be a global name to anyone outside China, but the up-and-coming car maker wants to change all that. The latest signal in Geely’s drive to become China’s first global car brand came earlier this month when smart car technology company Ecarx neared the finish line for its U.S. SPAC listing, in a deal expected to close by year end. Geely could be the biggest car maker most people have never heard of. Despite its own low-key name, the company owns a number of major global brands, led by Volvo, which it purchased in 2010. The company, whose other brands include Britain’s Lotus and Malaysia’s Proton, is hoping to build Ecarx into a major global provider of the tech powering a future generation of smart cars