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 China reopens to foreigners, industrial profits slump and a former beauty salon chairman gets a haircut in prison. On a scale of 1 to 10, we give the week a 6 for offshore-listed China stocks.
Doug Young, Editor in Chief
China Rolls Out the Welcome Mat for Foreigners
The biggest macro story this week was China’s decision to scrap quarantines for foreign visitors starting Jan. 8. Such quarantines were as long as 21 days at their peak, and have pretty much killed all travel into China by foreigners since the pandemic began.
Now the next big step in this rapidly dismantling of China’s Covid restrictions will be the resumption of more international flights and visas for foreign visitors. We’ve heard that foreigners who need to come to China for business are already being issued visas. But it could be several more months before Beijing feels confident enough to open the doors for foreign tourists.
Profit Gloom Seeps Into State-Run Sector
The profit gloom that has overtaken much of China’s private sector this year is finding its way into the country’s mammoth state-run sector as well. The latest government data shows that profits at China’s industrial firms, which tend to be state-run, fell 3.6% in the first 11 months of 2022, accelerating from a 3.0% drop in the first 10 months.
The acceleration represents another brick in the crumbling wall that is China Inc. Private companies that tend to dominate the new economy and services sector have felt the pain of China’s drastic Covid curbs the most acutely this year. This concurrent pain in the state sector was likely a factor in Beijing’s recent decision to abruptly end most of those restrictions.
China Stocks End 2022 Quietly
Offshore-listed Chinese stocks extended their recent breather last week as not much happened in the traditionally slow period between Christmas and New Year. The Hang Seng China Enterprises Index eked out a small 0.9% for the week, while the iShares MSCI China ETF rose 1.6%. Those compared with a 1.0% rise for the broader Hang Seng Index.
The Hang Seng China Enterprises Index ended down 18% for the year. It was actually much worse at one point, down nearly 40% in late October. But a strong rally on a string of positive regulatory developments pared the losses. That rally looks set to continue for the first few months of 2023 as China reopens for business after nearly three years of strict pandemic control.
My Kingdom for a Home Sale
China’s property woes continued as a regular headline fixture last week, and are likely to remain so in 2023. One item said over 20 developers are planning to raise cash through share sales following an end to a ban on such sales. Another said the southern city of Dongguan has abolished home buying limits, and a third said the property slump is hitting steel companies.
This trio of headlines nicely illustrates how problems in China’s property market are permeating much of society, showing up in other places like stock markets and the building materials industry. It’s still quite possible 2023 could finally bring China’s “Lehman moment,” touched off by the crash of a major developer. But Beijing’s deep pockets make a softer landing seem more likely.
The Games Are On
After a parsimonious 2022 when it stopped approving new video games for much of the year, China’s regulator suddenly discovered the Christmas spirit at the end of the year. The regulator’s latest list of approved games issued last week included 44 foreign titles for domestic release, as well as 84 domestic titles.
Observers said the foreign titles were the first to gain entry to China in a year and a half. Industry titan Tencent also got several new licenses, after being denied new approvals for a similar period. The resumptions add further fuel to the growing thesis that China is shifting its focus from a wave of economy-choking regulation to a more business-friendly approach.
China’s Carbon Footprint Gets Bigger
China consistently declares its unwavering commitment to carbon reduction, but its actions are telling a different story. The nation approved 65 million kilowatts of coal-fired power plants in the first 11 months of 2022, more than three times what it approved for all of 2021, according to a new study by the prestigious Peking University.
China has previously committed to reaching peak carbon emissions by 2030 and going carbon-neutral by 2060. This sudden wave of approvals appears to show that jumpstarting the economy through such infrastructure investment, regardless of its poor green credentials, will trump any carbon reduction efforts for at least the immediate future.
BYD, Tesla Running Out of Fuel?
Two separate reports are showing that leading new energy vehicle (NEV) makers BYD and Tesla are rapidly slowing down in China. One report says BYD has slashed its output by 2,000 vehicles per day, while another says Tesla plans to run a reduced production schedule at its Shanghai plant during the month of January.
Different reasons are being cited, including Covid infections in BYD’s case and an extended Lunar New Year holiday in January in Tesla’s. But the reality is that China’s NEV market is rapidly running out of juice, especially with the year-end expiration of some of the many government incentives that helped to fuel the sector’s recent boom.
Steady Goes Huawei
After a couple of difficult years as it struggled under the weight of U.S. sanctions, homegrown tech giant Huawei finally appeared to stabilize in 2022. Previously one of China’s biggest high-tech success stories, the company said it expects to generate 636.9 billion yuan ($92 billion) in sales this year, roughly the same as the level in 2021.
The flat performance follows a 30% revenue decline the previous year, and the latest figure is well below Huawei’s high of $122 billion 2019. Huawei has survived by shifting its focus from smartphones to products like smart cars to wean itself from dependence on U.S. technology. The company is also jettisoning units that have no immediate prospects of profitability.
Beauty Salon Chairman Gets Prison Haircut
It’s been a while since our last corruption story, so we’ll round out our corporate headlines with a report saying the chairman of a beauty salon chain called Fuyuan has been sentenced to 16 years in prison for illegal fundraising. A court in the Jiangsu city of Nantong found the chain illegally raised 1 billion yuan by promoting high-return investments between 2013 and 2019.
Longtime China watchers will know that time period could well be described as a golden age for asset management companies, many of which rose to prominence by selling investment products backed by highly risky assets. Most of that sector has disappeared since 2019, and this sentencing looks like a postscript to that bygone era.
AND FROM THE PAGES OF BAMBOO WORKS
|Fanhua, Full Truck Alliance Decide to Stay on Wall Street|
This week we spotlighted the cases of insurance broker Fanhua and trucking app operator Full Truck Alliance, which made separate moves that reflect growing confidence they won’t get kicked off Wall Street. Fanhua withdrew a bid to privatize the company, while Full Truck Alliance reportedly shelved a plan to seek a second listing in Hong Kong.
Chinese companies were wringing their hands for most of 2022, worried they could be forced off Wall Street by a U.S. securities regulator irate at its inability to audit those companies. Beijing and Washington signed a landmark deal in August to resolve the issue, and in December the U.S. gave a thumbs up to some trial audits under the new framework.
|Air Taxi Maker Fuels Up on New Funds|
In a more futuristic vein, we also shone our spotlight on some new fundraising by EHang, the maker of driverless air taxis that can be used for tourism or to deliver goods. The company raised $10 million by issuing new shares to a government entity in the coastal city of Qingdao, with a promise for another $10 million injection if necessary.
We are personally rooting for EHang, as its products seem quite cutting-edge and could pave the way for a new generation of smaller flying vehicles for short distances. But this story really does illustrate the huge costs and long development periods for creating such new products, especially in a highly regulated and very safety conscious area like aviation.