CHINA BULLETIN: Yuan on the Comeback Trail

In this week’s issue the yuan bounces back, a lifeline for developers and a livestreamer confirms its CEO’s arrest. On a scale of 1 to 100, we give the week a 50 for offshore-listed China stocks.

Doug Young, Editor in Chief

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MACRO

Yuan on the Comeback Trail

Many U.S. investors had a short week for Thanksgiving last week, but China’s yuan was hard at work clawing back some of the ground it has lost over the past year. The currency scored a milestone of sorts early in the week when it strengthened above the daily reference rate set for it by the country’s central bank for the first time since July.

That may sound a bit technical, but the bottom line is that currency traders may finally think the yuan has reached bottom following a steady decline for the currency that has been one of Asia’s worst performers this year. The currency’s weakness owes partly to China’s weakening economy, but also to the country’s low interest rate environment compared with the U.S.

Japanese Bearish on China

While the yuan was bouncing back, the same can’t be said for sentiment among foreigners for investing in China. The latest sign of gloom came from Japan, where just 27.7% of executives in a new survey said they plan to expand their operations in China in the next year or two.

This was the first time since the survey began that the number of respondents planning new near-term investments fell below the 30% mark. The number was down from 33.4% last year and 40.9% in 2021, showing just how rapidly foreign sentiment has deteriorated due to the slowing economy and increasingly tough operating environment.

China Stocks Linger in Glow of Xi-Biden Summit

In the absence of any major catalysts, offshore-listed Chinese stocks managed to notch some small gains the holiday-shortened week in the U.S. The Hang Seng China Enterprises Index rose 1.1% during the week, while the iShares MSCI China ETF rose 0.9%, and the broader Hang Seng Index rose 0.6%.

Investors may still be basking in the lingering glow of the relatively positive summit between Xi Jinping and Joe Biden in San Francisco a week earlier. Some signs emerged last week that the meeting is already having some positive effect on business for foreigners in China, including Beijing’s approval of a major U.S. M&A deal that we’ll discuss shortly.

Industry

Too-Big-to-Fail Developers

In the latest step to prop up the property sector, reports emerged last week saying Beijing was compiling a list of 50 developers eligible for a wide range of government support. Not long after the initial reports came out, another report emerged saying one of the 50 would be none other than Country Garden, which, along with Evergrande, are the two most troubled companies.

This marks a relatively big development for the sector, since up until now Beijing had largely left these struggling property developers to sort out their massive debt problems by themselves. Thus, the establishment of this “list of 50” seems to indicate the central government considers these companies too important to fail, and could help to rescue them.

Warming U.S.-China Ties Grease the Wheels for Major M&A

Next we look at a major development last week on the M&A front, where Beijing finally approved the $69 billion merger between U.S. microchip giant Broadcom and cloud computing firm VMWare more than a year after the deal was first announced. The move made China the final major market to sign off on the deal, which quickly closed afterwards.

While Beijing probably was taking its time considering this complex deal, observers also noted the approval came just days after the relatively friendly meeting between Joe Biden and Xi Jinping in San Francisco. If that’s true, the approval could signal a more cooperative attitude by Beijing going forward in its strained relationship with western businesses.

More U.S.-China Flights Ahead

M&A wasn’t the only area feeling the glow of the Xi-Biden summit last week. Back in China, the head of the country’s aviation regulator met with U.S. Ambassador Nicholas Burns, with the two discussing boosting the number of flights between the two countries. In a speech, Song Zhiyong said the two countries should continue the vision laid out by Xi and Biden in San Francisco.

The two sides have gradually been increasing direct flights between them, but they are still a fraction of where they were in the pre-Covid era. China has been slow to add back international flights in general, but the U.S. flights seem to be coming back more slowly than most. Perhaps things will finally change as China-U.S. ties finally start to improve.

Company

Is Wanda Next?

First it was Evergrande, then Country Garden and Sino-Ocean. Now, everyone is wondering who will be next in the growing list of Chinese developers getting mired in debt crises. The latest signal came from the property management arm of Wanda Group, with reports that it wants to push back the maturity dates on a $600 million dollar-denominated bond by 11 months.

The debt owed by Wanda Commercial Management comes due on Jan. 29 next year, but the company fears it may not have the cash to pay up. Wanda Commercial has already repaid 18 billion yuan worth of onshore and offshore bonds since the start of this year, and is apparently running low on resources to keep paying out more funds.

Zhongzhi Says It’s ‘Severely Insolvent’

It’s one thing when someone else says you have cash problems, and quite another when a company publicly admits that it’s “severely insolvent.” But that’s exactly what happened in the case of investment conglomerate Zhongzhi Enterprise Group, which used the characterization in disclosing a financial shortfall of up to 260 billion yuan, or around $36.5 billion.

Zhongzhi rose to prominence as a major wealth manager, but has been in more negative headlines since it began failing to repay some of its investors starting around June. The company said a recent audit of its balance sheet shows its debts were more than twice its assets. So far, we have yet to see any signs that Beijing will step in to bail out the company and its investors.

DouYu Confirms CEO’s Arrest

It’s been rumored for a few weeks now, but livestream gaming operator DouYu finally fessed up this week that its CEO Chen Shaojie was arrested, though it didn’t say why. But media noticed an announcement from the Chengdu police around the same time saying someone of the same age surnamed Chen was arrested on suspicion of operating a casino, and put two-and-two together.

Chen is the latest in a recent string of corporate chiefs to go missing, though it’s often unclear whether the missing executives are suspected of a crime or assisting in an investigation of someone else. DouYu’s stock fell 6% after the confirmation. But truth be told, the company’s business was already suffering as the result of a string of government crackdowns even before Chen’s arrest.

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