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 GDP growth rebounds, but microchips and China stocks end up losers. On a scale of 1 to 10, we give the week a 2.5 for offshore-listed China stocks.

Doug Young, Editor in Chief

MACRO

GDP Data Magically Reappears

After going AWOL in our last update, China’s quarterly GDP data showed up last week, a week after the previously schedule release date, beating analyst forecasts by growing 3.9% in the third quarter. The growth marked a vast improvement over the 0.4% growth in the previous quarter when draconian Covid-control measures squashed activity in major cities like Shanghai.

Despite the rebound, analysts are becoming increasingly bearish about China’s economic outlook due to growing signs it won’t ease its “zero Covid” policy that has wreaked havoc on the economy. Reflecting that, a new Bloomberg poll found that analysts don’t expect China’s annual GDP growth to top 5% at least through 2024.

Help for Foreigners

While a relaxation of most Covid-control measures appears to be off the table, one area that looks slightly encouraging comes in recent reports that China will try to make life easier for foreigners in a bid to perk up foreign investment. One report said the nation’s state planner has instructed local governments to let foreigners enter the country more easily, as most senior executives have stayed away since the start of the pandemic due to stiff quarantine requirements.

Such a move would come as a new survey from the American Chamber of Commerce in Shanghai found that sentiment among U.S. businesses in China was at a record low. In what should come as no surprise to anyone in China, only 55% of more than 300 companies surveyed were optimistic about the five-year business outlook, a record low in the survey’s 23-year history.

Woe Is Me, Say China Stocks

Just when you thought markets surely had found their bottom, Chinese stocks showed everyone there’s still plenty more room to fall. The Hang Seng China Enterprises Index tumbled 8.8% last week, while the iShares MSCI China ETF fell 9.1%, compared with an 8.3% decline for the broader Hang Seng Index.

The big catalyst driving things lower was the latest signals that China’s economy might become second fiddle to other causes, based on the leadership lineup announced at the end of the Communist Party’s latest congress. Reflecting the pessimism, Morgan Stanley slashed its outlook for Chinese stocks over the next year.

INDUSTRY

Never-Ending Chip Takes

The recent saga of America’s campaign to stifle China’s chip ambitious continues, with the New York Times reporting the Biden administration is cooking up yet more steps to keep advanced microchip technology out of Chinese hands. A Commerce Department undersecretary said the department was likely to take more steps to control China’s access to quantum information, biotech, artificial intelligence and advanced algorithm technology.

In related news, Yangtze Memory Technologies, considered China’s most up-and-coming memory chip maker, has reportedly ordered its American employees in core tech positions to leave due to the new U.S. restrictions. You don’t need to be a genius to see the Biden administration is putting quite a bit of thought into this major campaign, which really does have the potential to cause headaches in many areas China has targeted for development.

Smartphone Slide

After years of explosive growth, China’s smartphone industry continued its slide in the third quarter, with sales dropping 12% in the three-month period from a year earlier. Just about all top players experienced double-digit declines, with the notable exception of Apple, whose sales rose by a modest 2.5%.

China’s smartphone market has been in a state of contraction since 2017, which is well before the country’s recent economic slowdown, making you wonder if perhaps the figures before that year were slightly inflated. One of our analyst sources attributes the recent weakness to the fading of former highflyer Huawei, which has been hamstrung for several years now by lack of access to 5G microchips.

Car Exports Zoom

While most industry indicators have been bleak lately, one exception is China’s car exports, which rose 51% in the first three quarters of this year, according to new customs data. The country shipped 2.26 million vehicles abroad over that period, with exports coming mostly from domestic names like SAIC and Chery, along with U.S. EV maker Tesla.

Notably, new energy vehicle (NEV) exports nearly doubled in the period to 656,000 units, making up about 30% of the total. That should come as no surprise, since China is churning out some of the world’s most promising new NEV makers with names like BYD, Li Auto and Nio.

COMPANY

Lame Lam

Back on the subject of microchips, U.S. companies set to take a big hit from Chinese restrictions are starting to quantify just how much they will suffer. One of the first to do that was chip equipment maker Lam Research, which last week disclosed it expects to lose between $2 billion and $2.5 billion in revenue next year from the restrictions.

To put that in perspective, Lam, the world’s fourth-largest producer of chip-making equipment, was getting about 30% of its revenue from China before the latest U.S. restrictions. We can expect to see similar announcements from throughout the chip food chain, with names like Applied Materials and even Dutch firm ASML likely to announce more hits.

My Kingdom for Some Cash?

In what could potentially become the biggest corporate implosion of the year, financial conglomerate Fosun is reportedly getting ready to sell up to $11 billion in assets in the next year to raise cash as it faces a looming debt crisis. We’ve previously reported the company was selling down stakes in New China Life Insurance and Fosun Tourism, owner of the Club Med resort chain, as it stumbles under a heavy debt load following a nearly decade-long global buying spree.

The latest reports say Fosun will look to sell mostly peripheral assets, though it is determined to keep what it considers its core holdings in the financial and pharmaceutical sectors. Despite the woes and potential of having to sell assets at fire sale prices, we’re relatively confident Fosun has the necessary resources, including strong ties to the Shanghai government, to survive its current cash crunch.

EVs Running Out of Juice?

In the latest signal that China’s new energy vehicle (NEV) boom of the last two years may be nearing a bust, market leader Tesla has cut the price of its cars in the country. The carmaker lowered the price of its cheapest locally built Model 3 sedan by 5%, while it trimmed the starting price for its Model Y SUV by a bigger 8.8%, media reported last week, citing information on Tesla’s website.

China is currently the world’s largest market for NEVs, buying more than half of global output. A big chunk of that was being snapped up by people cashing in on a wide range of government incentives, many of which are now being phased out, even as such cars have yet to become truly competitive with traditional gas-powered models.

AND FROM THE PAGES OF BAMBOO WORKS

Nationalist Wrath: Not Just for Foreigners

It used to be that Chinese companies could benefit by picking up market share when online nationalists turned their flags against foreign companies for perceived slights against the country. But now it seems such nationalist wrath can also be aimed at Chinese companies, even such national prides as Li Ning, the leading sportswear brand founded by one of China’s earliest Olympic gold medalists.

This week we wrote about Li Ning’s latest crisis that began after some netizens noticed one of the hats from its new winter lineup resembled caps worn by Japanese pilots during World War 2. Li Ning issued the pro forma apology, hoping to make things better. But it also criticized netizens for their cultural ignorance, further inflaming the online fury.
Pinduoduo’s U.S. Foray Shows Early Signs of Success

China’s internet companies have found tough going in the west, with the notable exception of TikTok, owned by Chinese giant ByteDance. But now a similar-vintage company, Pinduoduo, is taking a shot at the U.S. e-commerce market and finding some early signs of success.

The company has found riches in China by focusing on the ultra-low end of the market. It cuts costs to the bone by directly linking consumers with manufacturers, and is trying to copy its success abroad with its Temu app, which it launched in the U.S. in September.

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