CHINA BULLETIN: Beijing Gets Serious on Economic Stimulus

In this week’s issue government stimulus heats up, U.S. Commerce Secretary calls on Beijing, and Huawei rejoins the smartphone race. On a scale of 1 to 100, we give the week a 55 for offshore-listed China stocks.

Doug Young, Editor in Chief

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MACRO

Beijing Gets Serious on Economic Stimulus

After months of foot-dragging, Beijing finally began to get serious last week about propping up the sagging Chinese economy with a series of forceful new measures. It began the week with a package to stimulate the moribund stock market. Later it closed out the week with more interest rate cuts, amid talk of upcoming major new steps to shore up the property market.

This certainly isn’t the first time China has taken steps to prop up the property and stock markets and support businesses. But many of last week’s steps seem a bit more specific and forceful than previous ones, which were more like suggestions than actual orders. The rapid-fire sequence of the announcements may also signal a shift that will see Beijing treat matters with more urgency.

U.S. Commerce Secretary Holds No Punches

The other big economic story last week was the visit to China by U.S. Commerce Secretary Gina Raimondo, which was one of the most substantive among a recent string of visits to Beijing by members of President Joe Biden’s cabinet. The week started on the usual tense note, which reached a crescendo when Raimondo bluntly remarked that China was rapidly becoming “uninvestable.”

But things got happier after that, and she sounded more upbeat on her departure after a brief trip to Shanghai. Beijing officials didn’t address the “uninvestible” comments, but, when asked, said that China remained “open for business.” Raimondo’s bluntness should drive home to Beijing that its recent focus on national security is starting to spook the foreign business community.

China Stocks Take Heart from Stimulus

The steady stream of stimulus signals from Beijing was the main driver of offshore-listed Chinese stocks last week, though we should note the gains weren’t as big as one might expect. The Hang Seng China Enterprises Index rose 2.5% during the week, which was shortened by a day due to a typhoon, similar to 2.4% rise for the Hang Seng Index. The iShares MSCI China ETF rose 4.9%.

The rise reverses nearly a month of dismal performance for offshore-listed Chinese stocks, and we’ll have to wait another week to see if this new rally has any legs. Last week actually began with a bang on the announcement of new measures to support the stock market, only to fizzle mid-week, before picking up some steam with the announcement of more measures.

Industry

Factory Indexes Send Mixed Messages

Since our Macro section was quite full last week, we’re moving our top economic indicator for the week to the Industry section, where mixed messages emerged from the two main factory PMIs for August. The official government PMI was in contraction territory for a fifth consecutive month, but the Caixin PMI unexpectedly moved into expansion territory.

The official government PMI’s reading of 49.7 was an improvement from July, but was still in contraction territory of below 50. The Caixin PMI’s reading of 51 was its best showing since February, and suggested the economy may be starting to improve after months of sluggishness. But a month hardly makes a trend, and we’ll have to see if the improvement continues.

Corruption Dragnet Nets Big Fish from Medical, Sports Sectors

There’s nothing like a good corruption story to break up all the dry economic and industry news, and last week brought us two from very different sectors. One saw an ex-provincial chief who once led China’s medical reform caught up in a corruption probe, while the other netted a top official from China’s domestic soccer league that is also rife with corruption.

The first story spotlights a recently announced clampdown on corruption in China’s medical sector, which is flush with cash as the country tries to set up a national safety net for its 1.4 billion people. The soccer clampdown is a bit older news, but also reflects the need for a cleanup in the nation’s larger sports industry that is also plagued by corruption.

Baidu Chatbot Goes Public

The Chinese AI world was chattering last week as search leader Baidu made its chatbot available to the public. ERNIE was big news, and provided a huge lift to Baidu’s stock, when it became the first Chinese chatbot announced early this year following the huge success of OpenAI’s ChatGPT. Most other major Chinese tech companies were quick to also disclose their own similar efforts.

But most of those efforts were still works in progress, and Baidu’s highly managed demonstration of ERNIE was hardly impressive. Beijing also weighed in, saying all such generative AI would need to meet government standards to ensure they didn’t “say” anything unacceptable. All that means that ERNIE and the many Chinese chatbots to follow may not say much of value.

Company

Huawei Rejoins the High-Speed Smartphone Race

Embattled smartphone maker Huawei was in the headlines last week with a low-key debut for its latest flagship model, the Mate 60 Pro. The company didn’t even announce the launch beforehand, and also wasn’t saying if the model would have 5G capability. But its steep price of 6,999 yuan, or nearly $1,000, suggests it is probably a cutting-edge model.

Sources are saying the model is powered by a self-developed central chip, and runs on Huawei’s own Harmony OS. Huawei has been designing its own chips for a while now, but is having trouble finding sophisticated enough manufacturers to actually produce them. We’ll need to wait for some reviews to appear before determining whether Huawei is back in the smartphone game.

Jabil Sells China Operations

In what seems to be a growing trend, another major U.S. company is selling off its China operations to a local buyer. This time it’s component maker Jabil Inc., which is selling its Chinese factories in the cities of Chengdu and Wuxi for 15.8 billion yuan to BYD, which lately has been known for its electric cars but originally started out as an electronic components maker.

This deal is slightly different from the handful we’ve seen so far, since it comes from the manufacturing sector. Previous deals were mostly from the services sector, involving names like private equity giant Sequoia and law firm Dentons. More such sales could dent China’s manufacturing prowess, since their operations often rely on technology from their foreign owners.

Evergrande Tumbles in Trading Resumption

Lest we go an entire week without a major real estate story, we’ll give that honor to Evergrande, the original poster child for the woes of China’s struggling property market. Last week the company’s Hong Kong-listed stock tumbled by 79% when its share resumed trading after a 17 month suspension that began when its troubles first came to light.

Such a big drop isn’t at all surprising, given how much Evergrande’s and China’s property market have deteriorated since the trading suspension began. This particular resumption follows similar returns to trading for Evergrande’s other publicly traded units over the last few weeks, as the company tries to restructure itself to avoid being liquidated.

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