Xi’s Pivots, Broken Trust and Wolf Warriors

(Bloomberg) — From Beijing’s accelerating pivot away from Covid Zero to the deep distrust of President Xi Jinping among American investors, here’s my roundup of this week’s key developments in China markets.

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To many observers, Chinese assets have become the world’s “easiest” macro trade … at least in the short term. There’s the new cadre of Xi loyalists reopening borders, wrapping up the rectification of the country’s tech giants and easing the deleveraging drive that’s strained the property industry. And geopolitical tensions are cooling as the regime’s wolf warrior diplomats try to project a friendlier image to the world.

So, much of the buzz this week was about how to get into the Xi-pivots trade.

But not everyone jumped on the bandwagon. US-based asset owners and allocators remain distrustful of Xi and his hot-and-cold relationship with markets. The coming weeks and months will be a test of whether China’s frayed ties with global capital can be fully repaired.

I wrote about scars left by the traumas of the past two years here, and spoke about it in the clip below.

Crackdown ending

Sell-side analysts double down on Chinese tech shares, recommending buys across the board. Guo Shuqing, an influential voice at China’s central bank, is cited by Caixin as saying the regulatory squeeze on internet firms is basically complete. It’s unclear what the future may hold for the sector.

Alibaba Leads Tech Gains After China Signals Crackdown Ending
China Wraps Up Two-Year Tech Crackdown, Top Official Says

The state advances

Government entities are taking “golden shares” in local units of Chinese tech giants like Alibaba and Tencent. Such ownership structures in theory provide Beijing with special voting rights. Separately, Jack Ma is giving up control of Ant, which will again delay its IPO.

What Jack Ma Ceding Control Means for Ant IPO Reboot: QuickTake
China’s Government to Take Golden Shares in Alibaba, Tencent

Wolf warrior out

China transfers Zhao Lijian, a senior diplomat closely associated with Beijing’s more confrontational tone during the pandemic, to a markedly less prominent role. Zhao is now a deputy director at the Department of Boundary and Ocean Affairs.

Taking on India

Chinese carmaker BYD wants a big slice of India’s electric car market, seeking to capture a 40% share by 2030. India is scrutinizing business ties with China as relations between the two nations become increasingly strained.

Cheap vaccines

US makers of Covid drugs appear to be rebuffing China’s efforts to negotiate steep price cuts. Merck’s pricing for molnupiravir isn’t as low as requested, local media say, while there appears to be a deadlock over Pfizer’s Paxlovid.

China’s Push for Cheap Covid Drugs Rebuffed by Merck, Pfizer
China, Pfizer Hit Paxlovid Price Deadlock Amid Covid Surge

Economy update

China’s consumer prices rose just 1.8% in December and factories remain in deflation mode. The data confirm that the spread of Covid damaged industrial demand that month. Exports fell almost 10% in December. While better than feared, this shows slowing global demand for Chinese goods.

Budget deficit

China may target a budget deficit of around 3% of GDP for 2023, wider than that of last year. Some are expecting more stimulus: in a meeting with the market regulator, Premier Li Keqiang said that officials must stabilize growth, employment and consumer prices.

… and three things to watch for next week

Liquidity. China’s central bank is expected to inject more cash into the banking system on Monday to meet increasing demand for funds ahead of the Lunar New Year holiday. Southbound trading into Hong Kong’s stock market will be shut from Jan. 19.
Data dump. Fourth-quarter GDP comes due, as well as December industrial production, retail sales and property investment. Expectations are low.
Tied stocks. Believe it or not, holding US stocks would have delivered the same price returns as owning Chinese stocks over the past 12 months. The S&P 500 and the Hang Seng China Enterprises Index are virtually neck-and-neck.