CHINA BULLETIN: Politburo Acknowledges Economic ‘Difficulties and Challenges’

In this week’s issue stronger government support, brisk condom sales and geopolitical tensions tug on India investment. On a scale of 1 to 100, we give the week a 60 for offshore-listed China stocks.

Doug Young, Editor in Chief

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MACRO

Politburo Acknowledges Economic ‘Difficulties and Challenges’

Last week’s big news was the July meeting of the Communist Party’s Politburo, where leaders acknowledged that the economy is facing tough times and issued a number of general steps the government will take to try and improve things. Measures included potential tax breaks, efforts to boost consumption and the possibility for more monetary loosening.

The biggest takeaway may be the party’s admission of widespread problems in the domestic economy, and that it may finally be preparing to take more aggressive action to stabilize the situation. In a possibly related development, Beijing also published plans allowing foreign investment in China’s bad asset managers, whose services may soon be in higher demand.

Industrial Profits in Freefall

Last week’s biggest economic indicator release showed once again how much the economy is hurting. This time it was industrial profits, which tumbled 16.8% in the first six months of the year, easing slightly from an 18.8% decline in the first five months. Industrial earnings for the month of June fell 8.3%, easing from a 12.6% decline in May.

This particular indicator is important because it reflects the health of China’s key manufacturing sector, and also the country’s massive complex of state-run companies. That group has tended to hold up better than the private sector due to stronger government support. Thus, its continued suffering shows the widespread nature of China’s latest economic malaise.

Stocks Rally on Hopes for More Government Support

Offshore-listed Chinese stocks continued their see-saw performance last week, posting strong gains after falling the previous week. The Hang Seng China Enterprises Index did quite well, rising 6.1% for the week, while the iShares MSCI China ETF jumped an even bigger 9%. The broader Hang Seng Index rose by a milder 4.4%, indicating China stocks were carrying the day.

The weekly rally is almost certainly tied to hopes for more aggressive government efforts to reinvigorate the economy following the latest Politburo meeting. Investors may have also been heartened by signs the securities regulator may soon resume allowing new U.S. listings for Chinese companies following the launch of a new application process earlier this year.

Industry

Securities Regulator Receives First New U.S. Listing Application

China’s securities regulator launched a new application process early this year for companies looking to list in the U.S., in a welcome sign that such IPOs would resume following a pause that has now lasted two years. But since then no companies have been formally approved, even though many are believed to have submitted applications.

That logjam may finally be breaking up, as the China Securities Regulatory Commission (CSRC) published a notice last week saying Majestic Ideal Holdings had completed the formal registration process. The notice was the first since the new rules took effect March 31, and seems to indicate the first official approvals for new U.S. listings could finally come in the next few months.

U.S. Lawmakers Pressure Venture Capital on China Tech Investments

In the latest round of U.S.-China political saber-rattling, the House of Representatives has launched an investigation into four U.S. venture capital firms that invested in China’s tech sector, including the investment arm of chip giant Qualcomm. The House committee is zeroing in on investments in the AI, chip and quantum computing sectors, among others.

This kind of investigation looks mostly political, aimed at discouraging this kind of investment by U.S. funding sources, since it’s unlikely that these companies did anything illegal. Still, this kind of pressure tactic and resulting negative publicity is almost certain to make U.S. venture capital and private equity companies think twice about future investments in these sensitive areas.

What Slowdown, Asks Condom Maker

Consumer sentiment may be weak in general, but that has yet to trickle down to the very niche space for condoms. We’re ending our industry wrap on this lighter note to show that life continues in China, despite the many negative economic signals. Anyone wanting more details on this particular industry can check the latest upbeat comments from Reckitt, maker of Durex condoms.

On a more serious note, it’s not surprising that people might be taking birth control more seriously in these economically uncertain times, since studies have repeatedly shown that a major reason for China’s low birth rates is concerns about the high cost of raising children. Condoms are also quite affordable, meaning no one will hesitate about such purchases over cost concerns.

Company

Foxconn Eyes More India Investment

The China-India rivalry for foreign investment was center stage last week with a report that Apple manufacturing partner Foxconn was in talks to build a $200 million component manufacturing complex in the Indian state of Tamil Nadu. The local government published a notice confirming a meeting with Foxconn CEO Brand Cheng, but didn’t elaborate beyond that.

Foxconn is the world’s largest contract manufacturer of electronics for other companies, and is Apple’s biggest iPhone producer. Apple and many of Foxconn’s other customers have been pressuring Foxconn to do more manufacturing outside of China, and those calls increased during the pandemic due to big disruptions created by China’s “zero Covid” policy.

BYD Pulls Plug on India EV Investment Plan

While Foxconn was boosting its India investment, leading Chinese electric vehicle maker BYD was doing just the opposite. Another unsourced story from Reuters last week said BYD was shelving plans for a $1 billion EV manufacturing base with a local joint venture partner, after the proposal began facing scrutiny from the Indian government.

While India is welcoming investment from just about anyone and everyone, especially in cutting-edge high-tech areas, one exception may be new investment from China. That’s partly because the pair of countries are increasingly wary of each other due to growing geopolitical tensions over a border dispute. India is also suspicious of the national security threat posed by such investment.

Volkswagen Throws Electric Lifeline to XPeng

In another major EV story, struggling electric vehicle maker XPeng is set to receive a $700 million cash lifeline from German auto giant Volkswagen. That lifeline is sorely needed by XPeng, which received the money in exchange for 5% of its shares. Under their new tie-up XPeng will develop two new VW-branded models specifically for the China market.

Investors applauded the deal, bidding up XPeng shares by around 50% in the three trading days after the announcement. The investment provides XPeng with a much-needed lifeline, since the company is one of China’s smaller EV makers, and has seen its sales plunge in the past year with the retirement of government incentives at the end of 2022.

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