Shares in Hong Kong closed out an otherwise lackluster week on a high note Friday, despite ongoing concerns about the fate of the Mainland economy.
Sentiment was bolstered by gains for big-cap Chinese tech. Revenue beats from Alibaba and Baidu were already in the price in the US. ADRs jumped sharply Thursday. Friday’s gains in Hong Kong mirrored Thursday’s rally in The Nasdaq Golden Dragon China Index.
Tellingly, Alibaba provided no full-year top line guidance and pledged to “focus even more” on cost control and efficiency. The company’s position isn’t enviable. Alibaba is a bellwether for Chinese consumer sentiment at a time when the country faces a “grave” unemployment situation (as Li Keqiang put it), and its founder is the poster child for Xi’s regulatory crackdown. The simple figure (below) underscores the scope of the malaise.
Still, China can ill afford additional losses for local shares. Beijing is struggling to reconcile competing priorities amid overlapping crises, and authorities have repeatedly pledged to complete “reforms” targeting platform companies as part of a broader effort to rescue investor sentiment.
Chinese tech is the quintessential example of a falling knife, but it feels like this particular sharp object may have finally hit a floor assuming, of course, the Chinese economy doesn’t succumb completely under the cloud of COVID restrictions. “Street estimates for Chinese tech appear to be more pessimistic than reality,” one analyst quoted by Bloomberg Friday said. The sarcastic among you might respond, “Have you seen reality?”
Data out Friday showed Chinese industrial company profits slid nearly 9% in April, the first contraction in two years (figure below).
“Obviously, profits were under short-term pressure in April,” the NBS said. Yes, “obviously.”
China has attempted to keep factories running and preserve jobs with so-called “closed loop” systems designed for the lockdowns, but the success of the schemes is debatable. Separate data out Friday showed total profits at state firms dropped 3.6% YoY in the January through April period.
On Thursday, the US appeared to give up on reconciling with Xi’s China. “China is the only country with both the intent to reshape the international order and, increasingly, the economic, diplomatic, military and technological power to do it,” Antony Blinken said, in a major foreign policy speech, adding that,
Beijing’s vision would move us away from the universal values that have sustained so much of the world’s progress over the past 75 years. We can’t rely on Beijing to change its trajectory. So we will shape the strategic environment around Beijing to advance our vision for an open and inclusive international system.
Blinken warned that Xi’s refusal to decry Russia’s invasion of Ukraine bodes ill for the Indo-Pacific.
A simple, headline-friendly assessment was that the US has adopted a Cold War-style containment strategy towards China.
But, as Rabobank’s Michael Every suggested, there wasn’t much to get excited about, even as China will surely leverage Blinken’s remarks for domestic propaganda purposes. “With the physical and vocal presence of a junior-high school teacher failing to intimidate a class of 10-year-olds, he laid out a new plan the same as the old one, with rebranding of ‘invest, align and compete,'” Every wrote, noting that “there was the usual mixed messaging of China being an authoritarian threat to the international order, but also an essential partner in solving global problems.”
Of course, if the US wanted to deal a crippling economic blow to Xi, now’s the time to do it. And considering Xi’s “no limits” partnership with Vladimir Putin, there’s no shortage of pretext.
The Biden administration won’t go that route, though. Instead, Washington will “play the Taiwan card,” as Beijing derisively puts it.
Early Friday in Asia, Bloomberg cited the ubiquitous people with the matter in reporting that the US and Taiwan are set to unveil new dialogue aimed at cementing economic ties. It won’t be a free-trade agreement, exactly. Rather, discussions will “focus on enhancing economic cooperation and supply-chain resiliency.”
Whatever the focus, it’ll aggravate the Party at the end of a week that began with Joe Biden “accidentally” committing to defend Taiwan militarily in the event Xi decides he wants to seize it by force.
Thank you, H, as always, for keeping China in focus. I’ve had some fairly negative assessments of the closed character of US-China relations, how it seems to be impacting the Chinese economy, Chinese politics, and our competitiveness with them. In parallel we also strive to get our own house in order economically and politically. In China and the US, the politics can impact the economy, and the economy can impact the politics.
We in the US, of course, have our own challenges in sorting out our politics and economics. But because the United States is a republic, not an autocratic system, we stand on a different footing. Things can happen politically in the US that are much less likely to happen in China. The problem in the United States is that we have difficulty finding consensus, or even a common understanding of the meaning and purpose in our government. Whether we like it or not, our republic requires our understanding, participation, and service.
We have collectively lacked clarity of understanding about the unique creation that is the American Republic. Last weekend, this 10-minute speech by Liz Cheney at the Kennedy Center raised my hope for broader understanding of the meaning of our republic and purpose that drives it.
Here is a link to the aforementioned speech at the Kennedy Center… https://www.youtube.com/watch?v=IA1FwiG1Kv0&t=3s.
Always worthwhile to check in in China. But what really caught my attention was the subtle nod to Lindbloom.