CHINA BULLETIN: Janet Yellen’s Awkward Beijing Visit

In this week’s issue Janet Yellen’s awkward trip to Beijing, China’s new export restrictions, and Tesla’s China layoffs. On a scale of 1 to 100, we give the week a 35 for offshore-listed China stocks.

Doug Young, Editor in Chief

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MACRO

Janet Yellen’s Awkward Beijing Visit

A highly anticipated trip to Beijing by U.S. Treasury Secretary Janet Yellen wasn’t very well timed, coming the same week that China announced one of its harshest moves to date in retaliation for U.S. curbs on its chip sector. But Yellin tried to strike a more positive note during the meeting with former economic czar Liu He, saying the U.S. wanted a healthy competition with China.

Yellen’s trip comes just two weeks after U.S. Secretary of State Antony Blinkin traveled to China for the highest level talks between the two sides since the global pandemic. The U.S. is trying hard to show it wants to repair ties with China, even as it tries to stifle China’s growth in several key areas. China seems to be playing along, but only very grudgingly.

PMI Weakens in Both Manufacturing and Services

A major reason for China’s continuing engagement with the west, despite its displeasure over U.S. actions to stifle its development in certain high-tech areas, may be the country’s slowing economy. The latest signals on that front came from the Caixin PMI, which slowed to 50.5 for manufacturing and 53.9 for services in June.

Both readings are still above the 50 threshold that indicates expansion, whereas anything below 50 represents contraction. But the slowing continues a trend seen throughout this year, following a bump at the start of the year shortly after China lifted its “zero Covid” policy. In the face of such a slowdown, China has repeatedly said it continues to welcome foreign investment.

China Stocks Slump on Signs of Growing Tensions

After taking a brief break from their recent slump, offshore-listed Chinese stocks returned to their slumping ways last week on the latest signs of more economic weakness and continued tensions with the west. The Hang Seng China Enterprises Index fell 3.5% during the week, while the iShares MSCI China ETF rose 0.2%, and the broader Hang Seng Index fell 2.9%.

Offshore-listed Chinese stocks seem to be largely tracking the economy these days, which means they are mostly moving downward, with the exception of a few times when relations with the west seemed to be improving. That means the market is likely to keep moving down on a broader basis in the second half of the year if current trends continue, perhaps punctuated by some brief rallies.

Industry

China Restricts Export of Key Minerals for Tech Products

In its latest sign of displeasure over U.S. restrictions aimed at stifling China’s development of its high-tech chip sector, Beijing announced new restrictions on the export of two key minerals used in the manufacture of high-tech chips. The ban on exports of gallium and germanium is highly symbolic, even if China’s exports of the two minerals are relatively small on a dollar basis.

China’s Commerce Ministry said the restrictions on the export of more than three dozen minerals will take effect Aug. 1. China could also take more steps as retaliation for U.S. restrictions. All eyes will now probably move to rare earths, whose global supply largely comes from China and is also an important component of many sophisticated high-tech electronics.

Property Market Woes ‘Worse Than Expected’

In a major admission that all may not be well in China’s ailing property sector, the chairman of No. 2 developer Vanke has changed his assessment of the home market to “worse than expected” from a previous stance of neutral. In another distress signal, smaller developer Jinke said it may get a restructuring lifeline from one of China’s bad asset managers.

Of these two signals, the Vanke admission is probably the most significant. Anyone on the ground knows that China’s property market is going through difficult times, even if nobody talks about it publicly. But this admission by Vanke seems to show that officials are finally speaking up and acknowledging the sector is in for some tough times ahead.

More ‘Revenge Travel’?

In one of the few positive economic signals we’ve seen lately, official government and state-owned bodies are forecasting the summer travel season this year will surpass pre-Covid levels from 2019. China State Railway Group forecast travelers will make 760 million passenger trips from July 1 to Aug. 31, up from 735 million in 2019.

China’s aviation regulator also forecast air travel will rise by 7% during the period. These organizations are obviously well positioned to make such forecasts, even though the period they are talking about has just begun. Still, it’s quite possible they’ve been pressured to issue this kind of rosy prediction to send a positive signal to show that sluggish consumer demand is picking up.

Company

Ant Restructuring to Wrap Up?

With all the larger macro-economic noise in the background, the overhaul of homegrown financial services giant Ant Group has largely fallen off most people’s radar screens. But Ant was back in the news last week with a media report saying China’s financial regulators are close to wrapping up a restructuring of the company and levying a fine of at least 8 billion yuan, or more than $1 billion.

Ant made major headlines in late 2020 when it famously abandoned its blockbuster IPO at the 11^th hour after Beijing became concerned the company was too big. It has been in restructuring mode since then, and the wrap-up of this phase could pave the way for Ant to finally get a financial holding company license and restart its IPO.

Tesla Tunes Down China Gigafactory

In the latest sign of slowing in China’s overheated electric vehicle (EV) market, U.S. giant Tesla has started laying off workers at its Shanghai Gigafactory, according to a western media report. The layoffs are relatively small but not insignificant, affecting less than 1,000 workers, or less than 5%, of the huge facility’s 20,000 workers.

Such layoffs don’t come as a huge surprise since China’s EV industry became quite overheated last year as buyers raced to take advantage of government subsidies that ended in December. The industry is still growing, but at much slower rates this year than 2022. What’s more, producers have gotten caught up in a recent bloody price war that was started by Tesla.

Trip.com Rewards Family-Oriented Workers

We wrap our company news review with a sign of the times from leading global travel agent Trip.com, which is offering cash subsidies for its workers with children. Specifically, anyone who has worked at the company for at least three years is eligible for an annual 10,000 yuan bonus starting on the first birthday of each of their children.

Trip.com’s founder and Chairman James Liang is renowned in China for his attention to demographic issues, most notably the nation’s looming population shortage due to the big success of its earlier “one child policy.” It’s quite possible we could see other major employers follow with similar programs, especially big state-owned enterprises, to encourage more childbearing.

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