CHINA BULLETIN: U.S. Ratchets Up Strategic Tariffs

In this week’s issue strategic China tariffs from Washington, ‘Big Short’ investor buys China stocks and a diaper maker finds riches in Russia. On a scale of 1 to 100, we give the week a 65 for offshore-listed China stocks.

Doug Young, Editor in Chief

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U.S. Ratchets Up Strategic Tariffs

Any American thinking of going electric with the latest electric vehicle (EV) from BYD or Nio probably got a case of sticker shock last week after President Biden rolled out new tariffs that will hike EV import taxes to 100% from a previous 25%. That hike was part of a broader package of tariff increases on strategic industries including Chinese EV batteries, microchips and medical products.

The action continues Biden’s highly targeted approach of taking on Chinese exports in an effort to develop America’s own industries in these cutting-edge areas. Notably, the action won’t really affect that much trade right now, since just $18 billion worth of targeted goods are imported annually. But without such tariffs, such imports in new areas like EVs would undoubtedly rise very quickly.

Indicators Mixed as Inflation Picks Up, Factory Prices Slump

We got a mixed bag of economic indicators last week, led by inflation that was rising, albeit from a very low base. The CPI rose 0.3% in April, up from a 0.1% rise in March and in solid inflationary mode, unlike the deflation that has shown up a few times in recent months. But factory gate prices were stuck in deflation territory, with the producer price index down 2.5% in April.

In other indicators released last week, industrial output rose 6.7% in April, accelerating from a 4.5% gain in March, while retail sales slowed to a 2.3% gain from a 3.1% rise in March. These mixed signals look like what happened in 2023 when the year got off to a strong start with the end of pandemic restrictions, only to see the momentum quickly undercut by weak consumer sentiment.

‘Big Short’ Investor Buys Into China Stock Rally

The recent rally for offshore-listed Chinese stocks continued last week, extending gains that have lifted shares well into bull territory after more than two years in the doldrums. The Hang Seng China Enterprises Index rose 3.2% for the week and is now up nearly 40% from a low in late January. The iShares MSCI China ETF also rose 5%, while the Hang Seng Index gained 3.1%.

The rally got a vote of confidence when media reported that Michael Burry, famous for his bet against the U.S. housing market during the financial crisis of 2008, chronicled in “The Big Short,” boosted his Chinese stock buying during the first quarter. New regulatory filings showed his firm, Scion Asset Management, raised its positions in Alibaba and JD.com during the period.

Industry

China to Become a Homebuyer?

Media were abuzz last week when Bloomberg reported the government was mulling a plan to start buying up thousands of unsold homes nationwide to support the battered property market. Later, Beijing announced a new slate of measures to prop up the sector, including lowering mortgages and allowing local governments to buy some homes to resell as affordable housing.

Bloomberg didn’t cite any named sources in its report, and it looks like it was referring to the affordable housing purchases in the broader plan. The government home buying looks like a new approach, while we’ve seen variations on all the other steps before. But such buying would be very costly, and the government would probably need to buy millions of homes to make any difference.

U.S. Bill Targeting Chinese Drug Companies Advances

Meantime in the U.S., a piece of legislation aimed at getting U.S. drug makers to lessen their reliance on Chinese providers of outsourced drug-related services advanced with its approval by a committee in the House of Representatives. The bill would bar U.S. companies that work with Chinese firms like WuXi AppTec from doing any work with federally funded projects.

The Biosecure Act must still get approved by the full House and Senate before President Biden could sign it into law. We’ve seen plenty of talk about similar legislation by U.S. politicians in the past, but such talk usually goes nowhere. This bill, however, could stand a real chance of success, and would follow passage of another law aimed at forcing a sale of TikTok’s U.S. operation.

Severe Weather Devastates Chinese Lychee Crop

A report on how severe weather this year has devastated China’s lychee crop is shining a spotlight on a story that hasn’t gotten much ink internationally, namely the huge rains that have been soaking South China this summer. China produced 3.1 million tons of the fruit last year, but this year’s harvest is expected to be just half that, at about 1.7 million tons.

Lychee lovers will probably be dismayed but not surprised to learn that prices are already much higher due to the low harvest. Barely a week has gone by this summer that South China’s Guangdong province hasn’t gotten hit by huge soaking rains, leading not only to crop damage but also all kinds of other disruptions. Rainfall in April alone was three times normal levels.

Company

Group Assembling Bid for TikTok

ByteDance may say the U.S. portion of its TikTok short video service isn’t for sale, but don’t tell that to an investor group that revealed it’s putting together a bid for the company. The group is being led by former Los Angeles Dodgers owner Frank McCourt, whose Project Liberty organization is working on its bid with Guggenheim Securities and law firm Kirkland & Ellis, among others.

This is the first we’ve heard of any potential buyers since President Biden signed a bill late last month requiring ByteDance to sell or risk having the wildly popular platform banned in the U.S. Any sale would probably cost billions of dollars, and it’s not clear where McCourt would get such big money. Other potential buyers could include wealthier names like Oracle and Microsoft.

McDonald’s Grilled Over Food Safety Violations

In a story that looks like something from five or 10 years ago, McDonald’s has formally apologized after local media in the Central Chinese city of Zhengzhou uncovered evidence of food safety violations by the fast-food giant. Those violations included use of expired ingredients to make some products and tampering with food expiration labels.

This kind of story was all the rage a few years back when food safety was front and center and media throughout China were conducting their own investigations. But such reporting has largely subsided by now after most operators reformed. Guilty parties have also learned their lesson when such scandals occur, and, like McDonald’s, almost always immediately issue public apologies.

KFC Fined for Rejecting Cash

McDonald’s wasn’t the only Western fast-food chain in the news last week, as KFC also made headlines for different violations. In this case, KFC was fined 30,000 yuan not for any food safety issues, but rather after one of its outlets in the city of Wuxi refused to accept cash from a customer trying to pay for breakfast. KFC was just one of several companies fined for such practices.

Paying with cash is becoming increasingly difficult in China, as the big majority of people now do most of their purchasing electronically using Alipay and WeChat. That’s been problematic for many older people who still prefer to pay with cash, and also for international tourists who come to China and discover they can’t pay for anything with cash or their credit cards.

AND FROM THE PAGES OF BAMBOO WORKS