CHINA BULLETIN: Reopening at Lightning Speed

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’s reopening accelerates, trade tanks, and Alibaba founder Jack Ma abandons entrepreneurs in his home province of Zhejiang. On a scale of 1 to 10, we give the week an 8.5 for offshore-listed China stocks.

Doug Young, Editor in Chief

MACRO

Reopening at Lightning Speed

The top story in China last week, and probably the top story worldwide, was China’s sudden reopening that gained new momentum with each passing day after nearly three years of “zero Covid.” The headlines are too many to recount here, but most involve the scrapping or relaxation of the many testing requirements designed to keep Covid at bay. In another major development, people with mild or asymptomatic Covid are now being allowed to isolate at home.

One of the few things that has yet to be broached is international reopening, since flights into and out of China are still quite scarce and only foreigners with residence visas are currently allowed in. We would bet there may be some major movement on both fronts in the next week to help perk up foreign investment activity that has taken a major hit under the previous closed system.

Tanking Trade

Recent civil unrest was probably the final straw that broke the camel’s back in China’s decision to start reopening. But equally, if not more, important was the country’s sputtering economy. Foreign trade was the latest economic indicator showing such major malaise, with exports down 8.7% in November – their sharpest decline in 2.5 years – while imports fell by an even larger 10.6%.

Certain Chinese leaders have been worriedly watching the country’s deteriorating economy since this spring when the latest round of Covid controls kicked into high gear and led to widespread lockdowns. But their concerns fell on deaf ears until last week, showing the prospect of a severely ailing economy and potential for civil unrest were just too potent a combination to ignore.

Market Rally Marches On

Optimism that China’s leaders are finally starting to think about the economy again, rather than Covid control, kept the recent rally for offshore-listed China stocks alive another week. The Hang Seng China Enterprises Index rose 7% on the week, extending its gains to around 27% over the last month. The iShares MSCI China ETF was up by a more modest 2.1%, while the benchmark Hang Seng Index rose 6.6%.

The number of China skeptics seems to be shrinking with each passing week, and at this point it seems everyone is trying to jump on the China stocks train before it pulls too far out of the station. Some stocks have seen extremely high trading volume in that process, which may reflect big investors taking major new positions.

Property Stocks, Anyone?

We just can’t get enough of China’s ailing property market, which seems to make our top headlines just about every week. This time one new headline says China has lifted a ban on letting property developers sell new shares to raise cash, while another says China is taking new steps to give those developers access to foreign loans to service their dollar-denominated debt.

We can’t imagine too many investors would want to buy new shares issued by any of these companies, though the very big exception would be state-owned enterprises that are ordered to do so by their local governments. That kind of order would mark Beijing’s latest effort to spread China’s huge and growing volume of questionable and outright bad debt throughout its entire corporate and financial system.

Solar Indigestion on the Horizon?

Chinese companies have been the huge beneficiaries of a recent global boom in solar power plant construction, as countries race to reduce their carbon footprints and wean themselves from Russian oil and gas. But a new report from Shanghai Metals Market says China’s penchant for overdoing things in hot new industries is happening now in the solar space, and is predicting 2023 will be the “Year of the Glut” for polysilicon, the main ingredient used to make solar cells.

We wrote about the looming glut this week in a story about Daqo New Energy, one of the world’s leading polysilicon makers, which is building a massive new complex that will triple its capacity in the next year. The buildup will ultimately benefit solar panel makers and solar farm builders, since polysilicon prices are almost certain to plunge soon when all the new supply comes onstream.

China Chipmakers Catch a Break

After staying out of the headlines for a few weeks, semiconductor chips are back again, with news that some U.S. senators have scaled back a proposed law that would ban the use of China-made microchips in government-led projects. They made their concession after people who would have been affected complained the ban would drive up their prices.

While some might see this as a small victory for China’s microchip ambitions, it really looks quite small compared with the much larger effort Washington is making to stifle companies like SMIC and YMTC by banning them from buying the most sophisticated chip-making equipment and software. After all, the Chinese companies’ chips won’t be worth buying by anyone – U.S. or otherwise – if they’re substandard.

Covid Outfoxes Foxconn

In what will come as little surprise to China watchers, Foxconn, which manufactures iPhones for Apple and electronics for many other major brands, said its sales plunged 30% in November from the previous month. The huge drop was a direct result of ongoing turmoil at the company’s mega complex in the central city of Zhengzhou, which has made global headlines and also caused headaches for Apple.

That turmoil saw tens of thousands of workers flee the complex over worries of catching Covid, or of being locked down with people infected with the disease. Signs were emerging last week that the situation at the complex was already starting to settle down as China relaxed some Covid restrictions. But it’s probably safe to say December sales will also be quite weak.

Jack Ma Abandons Zhejiang Entrepreneurs

In one of last week’s lesser observed business headlines, Alibaba founder Jack Ma quietly stepped down as president of the General Association of Zhejiang Entrepreneurs. For those unfamiliar with Chinese geography, Ma is a native of coastal Zhejiang province, and until recently was considered a favorite son of both Zhejiang and also its capital Hangzhou, which is where Alibaba is based.

Ma had been the association’s president since its founding in 2015, and his departure is mostly symbolic in representing his latest fall from grace. Ma left Alibaba several years ago and has been keeping an extremely low profile since late 2020, when some of his outspoken remarks may have contributed to the collapse of the planned mega IPO for Alibaba’s Ant Group financial affiliate.

First C919 Glides Into China Eastern

Fasten your seatbelts for a new era of travel. That’s what the flight attendants at China Eastern may soon be telling passengers, after the company – one of China’s big-three state-run airlines – took delivery of the first made-in-China narrow-body commercial jets. The C919, which is meant to rival Boeing’s 737 and Airbus’ A320, will make its actual first commercial flight next spring.

We’ll have to wait and see how both China Eastern and also its passengers react to flying on this first made-in-China airliner, though we’re guessing the reception could be bumpy. The big majority of the plane’s buyers so far are from China, meaning they have been ordered by the government to make their purchases. That doesn’t necessarily mean the planes will be problematic, but it also means any problems will be borne by the Chinese carriers and their passengers.

AND FROM THE PAGES OF BAMBOO WORKS

Pinduoduo Flies on China’s New Love of Bargains This week we took a deep dive into the latest results from Pinduoduo, one of the few e-commerce newcomers in recent years to successfully challenge the more entrenched duopoly of Alibaba and JD.com. But while the two older companies are struggling a bit these days, Pinduoduo is doing quite well, thank you, due to its focus on super-duper bargains. The company’s profits surged 65% in the third quarter, representing the kind of growth that used to be common for many Chinese e-commerce companies, but has become quite rare these days. The company also reported its sixth straight quarterly profit, showing it’s still possible to make money even after offering the kind of extreme bargains Pinduoduo has become famous for.

Hello Group Flies Despite Ho-Hum Results Another company that appeared to impress investors with its latest quarterly results was Hello Group, whose core Momo dating app is often called the “Tinder of China.” But our closer look at the company’s results revealed they were really quite ho-hum, leaving us wondering what could have fueled the 30% rise in the company’s stock the day after the announcement. We decided the recent rally for offshore China stocks was the main driver behind Hello Group’s surge, as trading volume for its stock was 10 times its daily average and roughly 10% of its shares changed hands. The company already counts A-list institutions like Blackrock and Invesco among its investors, and the latest surge appears to show that others are also betting on the company as Chinese stocks finally awaken from their long winter.