CHINA BULLETIN: Property Keeps Slumping

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 local governments suffer from Covid payment burnout, China callers turn off 5G and Tencent dumps Meituan. On a scale of 1 to 10, we give the week a 6 for offshore-listed China stocks.

Doug Young, Editor in Chief

MACRO

Property Keeps Slumping

Most of last week’s China headlines were of the political variety as President Xi Jinping attended his first two major global events since the pandemic began, one in Indonesia and the other in Thailand. But locally, the nation’s ailing property market continued to slump, with property sales down 28.4% in October from a year earlier. Another headline saw China’s financial regulators calling yet again on banks to support the sector.

If neither of these headlines sounds particularly new, it’s because they are really just rehashes of a chorus that has grown louder with each passing month. Beijing wants to prop up the property market due to its importance to the national economy. But banks are pushing back against calls to do their part, fearful of being stuck with huge volumes of bad mortgages.

Lots of Covid Tests, But Who’s Paying for Them?

China’s big banks may be in position to help the slumping property market, but the same can’t be said of local governments that have spent themselves into oblivion trying to keep Covid out of their backyards. A new headline reflects their deteriorating finances, noting a testing lab in central Henan province stopped providing services after local governments stopped paying their bills.

This headline may sound mundane, but it actually has huge implications. It shows just how bad local finances have become, to the point where governments are saying they can no longer pay for Covid containment that has become the nation’s top priority. At the same time, there’s potential for huge protests if local citizens are asked to foot the bill for frequent testing.

Bargain Hunters Feast on China Stocks

Things may look grim for property and local governments, but stock buyers seemed to be focused on other things last week. All of the major indexes posted a third consecutive week of strong gains, with the Hang Seng China Enterprises Index up 5.1%, the iShares MSCI China ETF up 2.8%, and the broader Hang Seng Index rising 3.9%.

Last week’s gains weren’t as big as the previous two weeks, and we should also note the Hang Seng Index was trading at a 14-year low before this recent rally. Still, the gains appear to show the China stock naysayers have had their day in the sun, and the bargain hunters have moved in. A pause in the gains seems likely this week, but sentiment could keep improving if China eases its Covid restrictions and its relations with the west show signs of improving.

INDUSTRY

Black Friday China Edition Flops

China’s ‘Double 11’ shopping extravaganza was technically not last week, but we’re including it here since the results were in headlines during that time. The week began with Alibaba, which invented the festival, failing to disclose sales results for the first time in the event’s 14-year history. Later in the week Alibaba also reported its own sales rose just 3% year-on-year for the three months through September, in its latest quarterly results announcement.

Neither of these developments comes as a huge surprise, as some were predicting that Double 11 sales could fall this year, and even the most optimistic were saying it would only grow marginally. And while Alibaba’s own quarterly sales growth looked anemic, the small gain actually marked a return to growth after it reported its first-ever year-on-year sales decline in the previous quarter.

Forget About 5G

Beijing may be all excited about 5G, but Chinese consumers are less so. That’s the message being telegraphed by a top executive from global telecoms equipment giant Ericsson, who said a company survey found more than a third of the country’s 5G subscribers chose cheaper calling plans based on older 4G service – higher than the number who opted for such downgrades in 2020.

China has gone from a telecoms laggard to one of the global industry’s biggest boosters over the last two decades, and was in a neck-and-neck horse race with the U.S., South Korea and others to be the first to launch 5G services in 2019. Since then, however, the technology – which is quite expensive and isn’t that different from 4G for ordinary consumers – has almost disappeared from local headlines.

China Chip Buyers Not Wanted, Says UK

In a headline that looks remarkably similar to one last week, the UK has vetoed the earlier sale of its largest microchip factory to a Chinese-led group. The move essentially “undid” a deal that had seen a subsidiary of China’s Wingtech Technology pay about 63 million pounds for the Newport Wafer Fab in Wales, a year after the deal wrapped.

The veto comes just a week after Germany nixed two similar purchases of chip-related assets by Chinese buyers on national security grounds, which was also the reason for the UK veto. The U.S. has cited national security in vetoing a growing number of chip and other high-tech acquisitions by Chinese firms over the last five years. Now Europe may be following suit.

COMPANY

Return of the Ant?

A couple of headlines last week hinted the aborted IPO for Ant Group, the financial arm of Alibaba, could be quietly getting back on track. One said the fintech arm of Alibaba rival JD.com is aiming to get Beijing’s approval for a Hong Kong IPO and list as early as year-end. The other said Ant’s consumer finance unit has just raised a fresh 10.5 billion yuan from a group of Chinese investors.

Privately owned fintechs, especially lenders, have become pariahs in the corridors of Chinese power these days, leaving them mostly sidelined in the IPO market. The spectacular 11th hour collapse of Ant’s IPO, which was set to raise $34 billion in late 2020, became the poster child for the sector’s fall from grace. But after two years in the doghouse, perhaps that’s about to change.

Meituan Shares for All

Tencent, now China’s most valuable internet company, is saying “goodbye” to its longtime takeout dining partner Meituan. The former, in conjunction with its latest quarterly results announcement last week, said it will dispose of most of its share in the latter through a special dividend distribution worth around $20 billion.

This particular divorce comes just months after Tencent did something similar with its longtime holdings in JD.com, another Chinese internet major. The disposals are almost certainly being made as China’s top internet companies get pressured by Beijing to end their monopolistic ways. So far, however, Tencent has been the only company to offload its stakes in other companies.

Something Major for Minor Miner?

It may be known for its gold mines, but ratings agency Fitch is saying it sees nothing but junk in Zijin Mining Group. More precisely, Fitch lowered its rating on Zijin to “junk” status from investment grade over concerns the company may have taken on more debt than it can handle in a 33 billion yuan acquisition spree this year.

Zijin is hardly alone in its recent buying spree, which is why we decided to include this in our weekly roundup. Chinese companies have been quite active overseas this past year, buying up strategic resources like lithium, nickel and other metals worldwide. But many believe prices of those metals have risen too quickly, meaning new mines that are expensive to develop could become uneconomical if the bubble bursts.

AND FROM THE PAGES OF BAMBOO WORKS

Fosun, BioNTech Headed for Divorce?

It was launched with fanfare in the first year of the pandemic, but things have hardly been smooth since then in the rocky partnership between BioNTech, maker of a popular mRNA Covid vaccine, and Fosun Pharma, which was going to bring the vaccine to China. Now it seems that Fosun Pharma has sold off much of the stake in BioNTech it purchased when they first announced their tie-up.

While the dumping of shares has all the signs of divorce, it may really signal something else. Fosun Pharma is making a huge profit on the sale thanks to a big jump in BioNTech shares over the period. So it’s likely to pass that profit on to its parent, which is currently struggling under a massive debt load that looks unsustainable.
TuSimple Saga Rolls On

Recent chaos in the upper echelons of autonomous truck technology firm TuSimple accelerated to new highs last week as the company’s co-founders, one of whom was fired as chairman just a week earlier for undisclosed insider dealings, fired the company’s entire board. This tale is something that could only happen China, and is a textbook case of the dangers of investing in Chinese firms whose co-founders can use their controlling stakes to run roughshod over everyone else.

There are quite a few names to this saga, both Chinese and western, and giving them here would only confuse any reader. But we highly recommend that anyone thinking of buying Chinese stocks, or investing in any Chinese company for that matter, take a closer look at this story to get a better sense of potential troubles that could lie ahead.

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