CHINA BULLETIN: Six New BRICS

In this week’s issue six new BRICS, a booming summer box office and an EV swansong. On a scale of 1 to 100, we give the week a 45 for offshore-listed China stocks.

Doug Young, Editor in Chief

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MACRO

Six New BRICS

The acronym makers will have some fun on their hands, including lots of new vowels to play with, following last week’s addition of six new countries to the original BRICS nations of Brazil, Russia, India, China and South Africa. The group announced at its annual summit it will more than double with the addition of Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates.

China has been one of the biggest boosters of this expansion, as part of its bid to build major global organizations to counter current Western-dominated ones. Other similar efforts include its Belt and Road Initiative and Asia Infrastructure Investment Bank, both China dominated. This new effort looks far more multi-polar, though that could hamper its ability to reach consensus on many issues.

More Signs of Thawing U.S.-China Ties

After a frosty winter in arguably the world’s most important bilateral relationship, U.S-China ties thawed just a tiny bit more last week with two separate announcements. One will see U.S. Commerce Secretary Gina Raimondo visit Beijing and Shanghai this week, while the other saw the U.S. remove 27 Chinese companies from its Unverified List after checking their activity.

Raimondo’s trip has been talked about for a while, and follows trips to China by Secretary of State Antony Blinken and Treasury Secretary Janet Yellen earlier this year. The removal of companies from the Unverified List also seems in line with a more recent U.S. policy of more precisely targeting smaller numbers of Chinese companies for limited access to U.S. funds and technology.

China Stocks

Offshore-listed China stocks tried to break their three-week losing streak last week, but in the end a brief mid-week rally just ran out of gas. The Hang Seng China Enterprises Index posted a small 0.5% gain for the week, while the broader Hang Seng Index was flat. The iShares MSCI China ETF rose 1%.

The top macro news of the week, the big expansion announced at the annual BRICS summit, really had little or no bearing on corporate China, hence the lack of enthusiasm from investors around that event. Meantime, the week was generally quiet in terms of major corporate news, as well as any fresh signs of major new stimulus plans from Beijing.

Industry

New Solar Sanctions

While U.S.-China ties seem on a broadly positive track, more friction was occurring on the solar front last week as Washington slapped new tariffs on Chinese solar panels it accused of trying to skirt U.S. tariffs. The move was aimed at a growing number of Chinese solar panel makers that have opened shops in Southeast Asia to avoid penalties on their China-made products.

The U.S. determined that these Southeast Asia shops are little more than finishing centers that take nearly completed products made in China and conduct some minor work before sending them on to the U.S. The plugging of this particular loophole could help to drive some of these companies to finally consider setting up real manufacturing centers outside China, perhaps even in the West.

China Banks Turn Deaf Ear to Central Bank’s Stimulus Call

Beijing may want to stimulate the economy with its recent interest rate cuts, but it seems frontline banks that make actual loans behind such stimulus aren’t playing along. A number of banks whose lending rates are used to determine a national benchmark made smaller than expected cuts to their key rates last week, despite Central Bank pressure to be more aggressive.

The unexpected move is the latest signal of a growing divide between China’s Central Bank and commercial banks, mostly state-owned lenders. As their own portfolios come under pressure from growing bad loans, those banks are increasingly reluctant to sacrifice their own finances by following the Central Bank’s calls for aggressive new lending to stimulate the economy.

Summer Box Office Sizzles

While most economic signals have been gloomy these days, one exception is the nation’s box office, which was one of the hardest hit sectors during the pandemic. The country has recorded a record 16.5 billion yuan in movie ticket sales so far during the important summer cinema season that runs from June 1 to Aug. 31.

The boom has been fueled by a number of blockbusters, including foreign films like “Barbie” and the latest “Mission Impossible” movie, which were mostly excluded from China during the pandemic. The readmission of Hollywood blockbusters shows that China is increasingly more interested in stimulating the economy than using actions like movie bans to send political messages.

Company

Country Garden Clashes with Creditors

First it made headlines when it defaulted on an interest payment. Now, the tortured process of renegotiating billions of dollars in additional debt coming due is starting for Country Garden, the latest poster child for the woes afflicting China’s property market. A new report says Country Garden wants to delay repayment by three years for a $540 million onshore bond due Sept. 2.

The only problem, of course, is that bondholders aren’t biting, worried there may not be much “country” left in Country Garden by the end of a three-year extension. Some are even demanding payment on Sept. 2, which seems nearly impossible. We can expect to see lots more negotiations like this coming up, as Country Garden seeks to resolve its debt crisis out of bankruptcy.

UnionPay to Soak Up New Cash

In what may be another distress signal from China’s corporate sector, electronic payment network operator UnionPay has been cleared to triple its registered capital to almost 10 billion yuan, or about $1.4 billion. UnionPay didn’t give much explanation for the big increase, but one analyst said it was probably to ensure the business’ safety and stability.

We’re no experts on this company, which is jointly owned by China’s banks and is similar to Visa and MasterCard in the West, operating a clearing network for financial transactions. But the move certainly looks like an attempt to pump more money into this financial giant, which could indicate its current capital is insufficient, potentially due to increasingly weak finances.

Singulato Swansong

In case anyone was watching, there’s a smaller homegrown Chinese electric vehicle maker named Singulato Motors. But if you’re just waking up to this company, as we are, then you’re too late. The company officially went belly up last week with its entry into liquidation bankruptcy, meaning the world will soon have one less EV brand that most people never knew existed.

We’re probably being too cheeky here, since hundreds of people will lose their jobs with this latest failure from China’s overheated EV sector. Thousands have lost jobs as many of the dozens of smaller companies, often using old technology, have gone bust after losing government subsidies that were keeping them afloat. We’re still waiting for the first bigger name to enter that list.

AND FROM THE PAGES OF BAMBOO WORKS