CHINA BULLETIN: Central Bank Scramble

In this week’s issue surprise interest rate cuts, vanishing youth unemployment and Tyson scurries out of China. 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

Central Bank Scramble

China’s normally low-key Central Bank became a beehive of activity last week, in one of the loudest signals this year that all is not well in the nation’s economy. Things began with its surprise lowering of several key interest rates, catching many off guard. That move sent the yield gap between U.S. and Chinese treasuries to its highest level since 2007.

The Central Bank went on to issue an unusually assertive statement saying it would keep its policy “precise and forceful” to aid the struggling economy. It also cautioned that banks should keep a “proper level” of profit margins, signaling that banks might be overextending themselves in their rush to help support the economy. Quite a busy week for this normally stodgy institution!

What Youth Unemployment?

The Central Bank wasn’t the only government agency hard at work last week. The Bureau of Statistics also caught many off guard when it announced it would stop reporting the youth unemployment rate, which reached a record high of 21.3% in June. That’s an extremely high number for China, which uses methodology that many believe severely undercounts unemployment.

China has been making repeated calls for employers to soak up the millions of graduates being churned out by the nation’s universities. But such calls are having little effect. That’s not too surprising, since layoffs have become the likelier norm in the current economic climate of weak demand for Chinese goods and services both at home and from abroad.

China Stock Selloff Accelerates

Offshore-listed China stocks fell for a third consecutive week last week, defying the Central Bank’s rate cuts that would normally hearten investors in other markets. The Hang Seng China Enterprises Index tumbled 6% during the week, while the iShares MSCI China ETF fell 5.5%. The broader Hang Seng Index fell 5.9%, and is now down 11% for the year.

Before this three-week selloff, the markets had been in a see-saw holding pattern of up one week, down the next, as investors tried to decide which way China’s economy was heading. This new downward streak, which has seen stocks lose more than 10% of their value in three weeks, seems to show the mood is turning increasingly negative.

Industry

No Trust in Trusts

The latest distress signal from China’s economy came from the financial sector last week, as Zhongrong International Trust Co. missed payments on several of its maturing products. The company is backed by financial conglomerate Zhongzhi Enterprise Group, which traditionally had big exposure to China’s real estate sector.

The missed payments sparked a scramble of queries by people quizzing asset managers about their potential exposure to Zhongrong’s products. China’s trust industry was notorious several years ago for its freewheeling investments, often using funds to buy high-risk assets. Real estate wasn’t traditionally considered high-risk, but that is obviously changing these days.

China Kills Chip Deal

The chip sector that has come to symbolize recent tensions between the U.S. and China was back in the spotlight last week, as China killed a deal for U.S. chip giant Intel to buy Israel’s Tower Semiconductor for more than $5 billion. In classic fashion, China’s anti-trust regulator didn’t actually veto the deal, but instead simply failed to approve it.

As both a major buyer and manufacturer of semiconductor microchips, China must approve any major global M&A in the sector, even if it doesn’t involve Chinese companies. Beijing has used this kind of passive-aggressive approach before to kill another deal involving Qualcomm’s purchase of NXP. We can probably expect to see more such vetoes ahead.

U.S.-China Flights Double

Amid all the latest conflict and turmoil last week, one small bright spot was word that the U.S. and China agreed to double the number of flights between the two countries. Under the latest agreement, the number of weekly flights will rise to 48 from the previous 24.

Travelers have been waiting quite a while for this development, since 24 weekly flights is obviously far lower than demand and has kept the cost of tickets for direct flights between the two countries at sky-high levels. Even after the latest increase, flights still remain at a fraction of pre-pandemic levels, reflecting China’s broader slowness to resume its international flights.

Company

Tyson Chickens Out of China

Global chicken giant Tyson became the latest major multinational to lose its taste for China, as Reuters reported the company was looking for a buyer of its business in the country. The report cited several unnamed sources saying that Tyson has hired Goldman Sachs as an advisor to find a buyer for its China business, with private equity firms as possible bidders.

Tyson’s move follows several similar recent divestitures by foreign multinationals from the food sector, including Cargill’s deal in May to sell its China poultry business to private equity firm DCP Capital. While some companies are selling their businesses, others are simply hiving off their China units to operate independently to reduce their exposure to the fickle market.

Evergrande, Country Garden in New Retrenchment Moves

Developers Evergrande and Country Garden took new steps last week to try to stave off collapse, reflecting the sorry state of China’s property market. Evergrande led the headlines when it filed for bankruptcy protection in the U.S. as part of its broader restructuring. Meantime, Country Garden was talking with investors about extending an onshore bond coming due in September.

Evergrande’s move was seen as the latest step in its months-long reorganization as it tries to restructure its massive debt. Country Garden began battling similar forces more recently after failing to make an interest payment on some bonds earlier this month. While either company could still fail, it does seem like both the companies and their creditors want to work things out if possible.

Alibaba Produces New Spinoff Baby in DingTalk

Alibaba could soon become the proud parent of yet another spinoff baby, as China’s leading e-commerce company prepares to break itself up into more than a half-dozen separately run pieces. The latest piece being separately spun off is DingTalk, Alibaba’s workplace collaboration tool that has many similarities with services like Slack and Zoom.

According to a Caixin report, citing an unnamed source, DingTalk will split from Alibaba’s cloud unit and pursue its own IPO. The cloud unit is already one of six main pieces set to emerge from Alibaba’s breakup that is moving forward since it was first announced in March. The breakup is aimed at making Alibaba’s various pieces financially independent.

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