CHINA BULLETIN: Weak Inflation, Producer Price Data Hint at Flagging Rebound

In this week’s issue a China downgrade, zooming car exports, and more hotels roll out the welcome mat for foreigners. 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

Weak Inflation, Producer Price Data Hint at Flagging Rebound

We’re getting a sense of déjà vu from the latest CPI and PPI data, which show a brief wave of optimism over improving indicators at the start of the year may have been premature. The consumer price index (CPI) rose an anemic 0.1% in March, down from a 0.7% rise in February that was the first gain for the deflation-prone indicator in six months.

Meantime, the producer price index (PPI) fell 2.8% in March, extending a stretch in negative territory dating back a year and a half. Before these two gloomy data points, people were getting excited by PMI data that seemed to show China’s economy was getting back on track. The whole thing looks a bit like last year, when a highly anticipated rebound at the start of the year quickly fizzled.

Fitch Downgrades China Outlook

The people at the Fitch ratings agency weren’t too upbeat on China either last week, officially downgrading their outlook on the country’s sovereign credit rating to “negative,” citing risks to public finances caused by economic uncertainty. Fitch’s move follows a similar downgrade by Moody’s in December. Not surprisingly, China said it “regretted” the decision.

Making this kind of sovereign downgrade is always hugely sensitive, and the bigger the country, the bigger the consequences for the ratings agency that takes such action. That means we can be almost certain that first Moody’s, and now Fitch, probably felt incredible pressure from Beijing not to take their action, and only did so to protect their credibility.

Markets Shrug Off Bad News

The weak indicators and Fitch downgrade didn’t faze investors too much, with offshore China stocks ending last week relatively unchanged. The Hang Seng China Enterprises Index ended up 0.3% for the week, while the iShares MSCI China ETF fell 1.7%. The broader Hang Seng Index was essentially unchanged.

The three indexes have been posting this kind of small movement for most of the last month, which feels a bit like a holding pattern. Some may still be hoping for a major stimulus like the one China did during the Global Financial Crisis of 2008. But in a piece we published last week, analysts at CCB International, an affiliate of one of China’s top banks, said such a “bazooka-style” plan is unlikely.

Industry

Cheap Hotels Roll Out Red Carpet for Foreigners

China’s recent attempts to bring back foreign tourists took a new step forward last week with reports that hotels rated three stars or higher have been ordered to accept payments using foreign credit cards. Major tourist attractions have also been ordered to accept such cards, and to accept cash as well, according to a joint statement from the central bank and culture ministry.

These latest orders come as China is also making huge efforts to help foreigners link their credit cards to accounts allowing them to make payments in China using WeChat and Alipay, which are used by the vast majority of Chinese to buy everything these days. Part of this drive is obviously economic, but China is also making growing efforts to stem its recent isolation on the world stage.

China Car Exports Soar, But Don’t Blame Overcapacity

The headlines kept flowing last week showing how China has suddenly become an EV powerhouse and is trying to export its wares as its home market slows, even as it denies foreign accusations that its industry receives unfair government support. Leading the headlines was news that China set another record for monthly vehicle exports in March, about a third of them NEVs.

Meantime, new data showed that domestic EV sales in China rose just 10.5% in March year-on-year, well below growth rates last year. And lest anyone think China has too much NEV capacity built on the back of strong state support that Western countries are labeling as unfair, its commerce minister denied that’s the case on a trip to Europe to fend off potential anti-dumping tariffs.

Guangzhou Plugs Residential Development Loophole

As development of new residential housing slows sharply due to big oversupply and lack of financing, the southern mega-city of Guangzhou is taking steps to close a loophole in the market. That latest move targets developers who previously used land earmarked for commercial development to build residential housing instead.

Frankly speaking, this particular move doesn’t seem all that necessary, since there’s probably plenty of land these days for anyone brave enough to develop anything in today’s anemic property market. Perhaps Guangzhou is simply taking the step to plug the loophole while resistance is likely to be minimal, as the city looks forward to better times whenever the market recovers.

Company

Ping An Subsidiary Delays Repayment

The growing volume of stories about investors losing their life savings due to dodgy investments promising big returns has been mostly limited to no-name and second-tier asset managers so far. But last week a unit of financial giant Ping An entered those ranks when its Ping An Trust failed to make scheduled payments on products backed by developer Zhenro Properties.

Ping An Trust said it’s suing Zhenro to recover money it’s owed, after it failed to repay a $100 million trust product on time. Normally speaking, this kind of company would probably ask its wealthy parent to bail it out in this type of situation. But Ping An is one of China’s more market-oriented companies, so perhaps it’s forcing the trust to handle its own finances.

Asset Manager Declares Severe Insolvency

A case of such no-name asset managers getting into trouble was in the headlines last week, as Shanghai HHSC Capital Management ceased operations after becoming “severely insolvent.” The company and its affiliates have failed to pay a whopping 30 billion yuan, or more than $4 billion, owed to buyers of their wealth management products since last August.

This kind of fraud has become increasingly common in China’s vibrant and freewheeling asset management industry, though the magnitude of this case looks larger than most. Reports on the matter say that many of the products were sold illegally, and that the company’s chairman mysteriously disappeared during a recent trip to Hong Kong.

SAIC Brings in Local Investors to India Venture

Leading Chinese automaker SAIC announced last week it is selling 51% of its India business to a local investor group led by JSW Group for $624 million. After the deal, SAIC’s stake in its MG Motor India venture will drop to 49%, while JSW will hold 35%. The remaining 16% will be held by other locally based Indian investors.

SAIC is saying the sale will allow it to recoup most of its investment, which sounds like it may be considering exiting the venture completely. It may also be trying to make the venture look more local as it tries to avoid potential conflicts like those plaguing a growing number of Chinese companies in India amid high tensions between the two countries.

AND FROM THE PAGES OF BAMBOO WORKS