CHINA BULLETIN: More Sagging Exports and Deflation, but an Import Surprise

In this week’s issue an import surprise, Nio slims down and Hong Kong investors to feast on Sichuan-spicy hot-and-sour noodles. 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

More Sagging Exports and Deflation, but an Import Surprise

The latest macro data are mostly more of the same, with exports down in October as the latest consumer price index (CPI) also showed China slipping back into deflation. Exports contracted 6.4% in the latest monthly reading, quickening from a 6.2% decline in September. Meantime, the CPI fell 0.2% in October, landing back in contraction territory after posting a slight rise in September.

The one surprise came from imports, which posted an unexpected 3% rise in October, marking their first year-on-year increase since February. Soybeans and oil powered the import rise. Perhaps we’re being slightly cynical, but the surprise increase was announced the same week as China’s big Import Expo was happening in Shanghai, which seems just slightly coincidental.

U.S. Makes Splash at Import Extravaganza

Speaking of that, the China International Import Expo was the toast of the town in Chinese media last week, as it came back to life after three years with very limited foreign participation during the pandemic. The U.S. got special attention this year after sending its largest-ever delegation, including more than 200 American exhibitors, many from the agricultural sector.

Leading the U.S. delegation was none other than Ambassador Nicholas Burns, who has become a very high-profile spokesman for the U.S. in China. Burns sought to assure China that the U.S. has no intention of decoupling, and that trade between the two countries is very important. All this comes as Presidents Xi Jinping and Joe Biden get set to meet next week in San Francisco.

China Stocks Return to Downward Track

After a couple of weekly gains fueled by strong Friday rallies, offshore-listed Chinese stocks returned to their falling ways as a Friday rally failed to materialize to save them last week. The Hang Seng China Enterprises Index fell 2.5% during the week, while the broader Hang Seng Index was down 2.6%. Over in the U.S., the iShares MSCI China ETF fell 1.7%.

More weak economic data probably weighed on market, and most foreigners probably dismissed the big Import Expo in Shanghai as little more than pageantry. The next big news could come from the Xi-Biden summit in San Francisco next week, which could help to lift stocks if the meeting is positive.

Industry

Beijing Summons Top Developers, Calls on Ping An to Rescue Country Garden

Ongoing concerns about China’s slumping property market led Beijing regulators to call a pow-wow last week with the financial chiefs of six leading developers to better understand their situations. Equally interesting was a separate Reuters report saying Ping An was being asked by the government to step in and rescue sinking developer Country Garden.

Not surprisingly, Ping An vehemently denied the Reuters story, which cited four unnamed people familiar with the matter. We wouldn’t be surprised if Ping An was being pressured to assist, as it’s one of China’s relatively healthier financial institutions. Such an assist would fit with the broader pattern of Beijing using healthy companies to rescue sick ones like Country Garden.

China Snaps Up U.S. Soybeans

We’ve already mentioned that soybeans were a major driver behind the unexpected rise in China’s imports last month, and a separate report shows the U.S. may be supplying a big portion of those soybeans. Another Reuters report says China recently booked its largest soybean purchases in at least three months, though the goods won’t be shipped until December or later.

China watchers may recall that Beijing committed to big purchases of U.S. agricultural products back when Donald Trump was president as part of a trade deal, but that many of those commitments were never completed. With the U.S. and China now trying to mend fences, it should come as little surprise that China is once again stepping up its U.S. soybean purchases.

Chinese Solar Panels Illuminate European Warehouses

They were designed to generate power, but it seems a growing volume of solar panels being shipped from China to Europe are sitting in warehouses instead. A new report shows the number of unsold solar panels sitting idle in European warehouses doubled to nearly 80 GW by the end of August from 40 GW in mid-July. An expert said the figure could climb even higher to 100 GW.

This building glut is leading to crashing solar panel prices. In our last newsletter we quoted a top official from leading producer Longi saying that prices were so low right now his company could barely cover its costs. Look for prices to dip even lower, which will probably send most of the Chinese manufacturers that dominate this industry into the red.

Company

Apple Supplier Luxeshare Ups Vietnam Investment

Much has been written about growing investment in India by Foxconn, one of Apple’s key manufacturing partners. But another major Apple partner, China’s Luxeshare, is also diversifying away from its home market. Luxeshare was in the news last week after being licensed to invest an additional $330 million in its facility in Vietnam, raising the investment there to $504 million.

Luxeshare is interesting for its roots in Mainland China, unlike Foxconn, which is based in Taiwan. While many foreign companies have been diversifying their manufacturing from China, it’s unclear if Chinese companies are also doing this. This development shows big names like Luxeshare are indeed also diversifying geographically to hedge their risk.

Nio Tries to Run More Efficiently

While EV makers BYD and Tesla have navigated the tough road to profits, most of China’s other EV startups are still mired deeply in red ink – a situation that looks increasingly unsustainable. Recognizing that, Nio, one of the leading domestic startups, is cutting 10% of its staff this month and also considering spinning off its noncore businesses, according to local reports.

Nio is making the adjustments as it and other smaller Chinese EV makers see their sales growth slow sharply after a bumper year in 2022. The fierce competition resulted in a price war earlier this year, hitting smaller players like Nio that really couldn’t afford to cut prices. We have yet to see any major companies fail, though a few appear to be running on fumes.

Another Day, Another AI Unicorn

We’ve recently detailed quite a few Chinese AI startups on steroids, often reaching “unicorn” status by attaining $1 billion market valuations just a year or two after their founding. The latest in that club is 01.AI, which reached the $1 billion mark in a recent funding whose backers include Alibaba’s cloud unit. The company only began operating in June.

01.AI is drawing more attention than most because of its founder and CEO, AI guru Lee Kai-fu. Lee, who disclosed the $1 billion valuation in a recent interview, is legendary in AI circles, following his earlier stints as a top executive at Microsoft and Google before striking out on his own in his current company, Sinovation Ventures.

AND FROM THE PAGES OF BAMBOO WORKS