1 Bad omens emerge for China’s new energy vehicle industry
May 2
Berkshire Hathaway sold 1.961 million shares of BYD, according to a Hong Kong Stock Exchange regulatory filing, reducing its stake in the Chinese electric vehicle company from 10.05 percent to 9.87 percent (108 million shares).
Berkshire has cut its holdings of BYD H shares by about 117 million shares since beginning reductions in August 2022, or more than half of what it originally held, cashing out more than HK$25 billion.
May 9
Mainland media and social media called attention to recent rumors which have led to speculation that BYD is “shutting down.”
For instance, mainland media reported that an employee at BYD’s Wangcheng factory in Changsha City received the reply “the resignation quota for this month has been filled” when attempting to submit a resignation. The employee said that quite a number of people had resigned from the factory recently, including “two whole dormitories a few days ago.” On May 8, the phrase “BYD’s resignation quota for the month has been filled” (“比亞迪本月離職名額已滿”) trended on Weibo. BYD responded to media queries by claiming that rumors such as “filled resignation quotas” and “resignation in batches” did not “match with the facts,” and added that recruitment at its Changsha campus was “proceeding normally.”
Another mainland media report featured a BYD dealer who claimed that it was hard to get a BYD vehicle in the past two years and customers must make an advanced booking and pay a deposit to get a vehicle. The dealer added that BYD cars are not selling well this year as compared to the previous two because the company had built a lot of factories over the past two years, which increased its production capacity too quickly and led to inventory accumulating beyond market expectations.
Reuters earlier reported on March 21 that BYD had adjusted shifts at its Xi’an and Shenzhen auto assembly plants in China. The Xi’an plant, its biggest manufacturing hub, saw workers work for just four days in a week in a factory running two eight-hour shifts per day, while the Shenzhen plant moved from three shifts per day to two per day.
More on BYD
1. According to data from the China Association of Automobile Manufacturers (CAAM), BYD sold 1.86 million units in 2022, a year-on-year increase of 152 percent. BYD also sold more units than FAW-Volkswagen in 2022 and became the first private Chinese auto company to make the most sales in the domestic auto market.
From January to April 2023, BYD sold 151,300 units of new energy vehicles, 193,700 units, 207,100 units, and 209,500 units respectively, according to the company’s production and sales announcements.
2. According to insurance data released by the China Passenger Car Association (CPCA), BYD saw 1.583 million insurance registrations in 2022, or 217,000 fewer insurance registrations than cars sold (1.86 million units).
From January to March 2023, BYD NEV’s insurance registrations were 118,000, 146,000, and 183,000 respectively, or 33,400, 47,600, and 23,800 fewer insurance registrations than vehicles sold. This meant that BYD and its dealers would have an additional 104,800 vehicles in their collective inventories in the first quarter of the year.
3. Chinese netizens uploaded videos on social media platforms that appeared to show that BYD was suffering from inventory pressures. Mainland media also reported in early April about a situation in Wenzhou City in Zhejiang Province where more than 100 new BYD cars were spotted in a local car cemetery. The car manufacturing stickers on some of the cars indicated that at least some of them had left the factory floor in January 2023.
China NEV stats
1. According to data from the CPCA, there were about 6 million NEVs produced in China in 2022 (excluding NEVs marked for export) and 5.25 million NEV insurance registrations, which leaves about 750,000 additional vehicles in inventories. And in the first quarter of 2023, there were 1.48 million NEVs sold and just 1.22 million NEV insurance registrations, which leaves about 260,000 additional vehicles in inventories. This data suggests that the supply capacity of new energy vehicles far exceeded demand in China.
2. According to PRC customs data, China exported 679,000 NEVs in 2022, a year-on-year increase of 1.2 times and about 63 percent of total global sales of NEVs (ranked first in the world). And per CAAM data, China exported 248,000 NEVs in the first quarter of 2023, a year-on-year increase of 1.1 times.
Backdrop
1. China’s consumer price index (CPI) rose by 0.1 percent in April year-on-year and decreased by 0.1 percent month-on-month.
2. China’s producer price index (PPI) fell by 3.6 percent in April year-on-year and was down 0.5 percent month-on-month.
3. Chinese banks added 718.8 billion yuan ($103.99 billion) in new loans in April according to People’s Bank of China data, or less than a fifth of new loans in March and about half of the 1.4 billion yuan that analysts expected. Household loans, mainly mortgages, contracted by 241.1 billion yuan in April from 1.24 trillion yuan in March. Meanwhile, corporate loans fell to 683.9 billion yuan in April from 2.7 trillion yuan in March.
Our take
1. The negative information about BYD and the broader NEV oversupply problem spell trouble for China’s NEV industry. The current problems plaguing China’s NEV industry also bode ill for the Politburo’s plan to “develop the advantages of new energy vehicles” and “accelerate the construction of charging piles, energy storage, and other such infrastructure and supporting power grids,” per work requirements laid out during an April 28 meeting.
2. China’s NEV industry woes are problematic for the economy at large because NEVs are taking up an increasing proportion of China’s auto industry, which is in turn a pillar of the national economy. According to CPCA data, the NEV penetration rate in China increased year-on-year by 12.6 percent in 2022 to reach 27.6 percent. CPCA also anticipates the penetration rate to reach 36 percent in 2023. And of the domestic NEV manufacturers, BYD ranks first in sales.
BYD, however, currently appears to be facing an oversupply problem. This could be partly due to weakening demand in China despite the lifting of “zero-COVID” (see point 3). The official CPI, PPI, and household loans data in April also hint at deflation and suggest that the Chinese economy is already in recession territory.
Another possible reason for BYD’s inventory issues could be that the company, like many other NEV makers, produced cars in excess of actual demand to claim more subsidies from the government when generous state subsidies were being issued over the past decade (since 2012). It cannot be ruled out that BYD also used underhand methods to boost its sales figures, which would explain the gap between the number of NEVs sold and insurance registrations, as well as the appearance of brand-new BYD vehicles in car cemeteries. BYD would want to inflate its sales figures to help with its marketing and benefit its stock price.
Regardless, the current troubles of BYD and China’s NEV industry more broadly could be a reason why Warren Buffett’s Berkshire Hathaway has been steadily selling off BYD stock over the past several months. Buffett may not be optimistic about BYD’s development prospects and the NEV industry in general. Buffett is also likely concerned about geopolitical risks impacting the long-term prospects of mainland and Taiwan companies, as he indicated in early April when asked about his sale of TSMC shares.
3. BYD’s inventory problems and labor underutilization appear to be consistent with the CCP’s assessment of “insufficient demand” during high-level meetings on financial and economic work. We see several possible reasons for the PRC’s continued demand woes even after the lifting of “zero-COVID”:
- China could have substantially more COVID deaths over the past three years than officially reported, and many people could be suffering from lockdown-related health issues. Moreover, China has been in demographic decline for years, with official figures recently admitting negative growth. While the CCP is trying its best to cover up the situation, the curious lack of consumption in China and lackluster economic recovery after “zero-COVID” restrictions ended suggest that a shrinking population could be the more fundamental problem for the Chinese economy’s current malaise.
- Weak global demand, slowing exports, insufficient factory orders, and relocating supply chains are affecting the economy and employment in China. The deteriorating economic situation is affecting the Chinese people’s willingness to spend.
- The real estate sector crisis in China has resulted in falling home prices and is affecting the wealth of the Chinese people. Also, many homebuyers are making early payments on their home loans in response to the PBoC cutting interest rates amid the crisis. Those early payments and other property sector crisis-related issues have reduced the spending power of home buyers and are driving down their ability to consume. This in turn affects auto sales because home buyers are a group that have the means to afford a car.
- The CCP authorities are continuing to expand China’s debt and invest in infrastructure to stimulate the economy, but are seeing diminishing returns on invested capital (ROIC). Li Xunlei, the chief economist of Zhongtai Securities, wrote in a recent article that the median ROIC of municipal investment platforms has dropped from 3.1 percent in 2011 to 1.3 percent in 2020. The authorities will struggle to stimulate private investments with inefficient investments, let alone spur consumption. Should current trends continue, the PBoC could be compelled to carry out credit contraction and passive balance sheet reduction, which would further aggravate deflationary conditions in China.
2 US, EU seek engagement with China as tensions simmer
Last week, Western media outlets reported that the Biden administration has been pressing for engagement with China while the European Union does not want to “isolate” China even as it calls on member countries to “de-risking” from the PRC.
Meanwhile, Beijing continues to draw the line on some high-level meetings even as senior officials of the U.S. and the PRC resume meetings since the spy balloon incident in February.
Warming Sino-US relations?
May 8
PRC foreign minister Qin Gang and U.S. ambassador to China Nicholas Burns met in Beijing.
Qin said that the “top priority is to stabilize China-U.S. relations, avoid a downward spiral, and prevent accidents between China and the United States. This should be the most basic consensus and a bottom line for countries to keep, especially two major countries.”
Qin added that a series of “erroneous rhetoric and actions” from the U.S. had undermined the “important consensus reached between PRC leader Xi Jinping and President Joe Biden on the sidelines of the G20 meeting in Bali in 2022.
Qin further warned the U.S. not to cross the PRC’s “red line” on Taiwan and “correctly handle” the issue. He also said that Washington “cannot talk about communication on the one hand, and keep suppressing and containing China on the other.”
Burns tweeted that he and Qin Gang “discussed challenges in the U.S.-China relationship and the necessity of stabilizing ties and expanding high-level communication.”
May 9
Bloomberg News reported that U.S. Trade Representative Katherine Tai plans to meet PRC commerce minister Wang Wentao on the sidelines of the Asia-Pacific Economic Cooperation meeting in Detroit from May 25 to May 26. Wang is expected to be at the APEC meeting, but neither the PRC commerce ministry nor state media have announced his attendance.
May 11
1. White House National Security Advisor Jake Sullivan met with Wang Yi, the director of the Office of the Central Foreign Affairs Commission, in Vienna from May 10 to May 11.
According to a White House statement on the meeting, Sullivan and Wang had “candid, substantive, and constructive discussions” on several issues, including the Sino-U.S. relationship, the Russia-Ukraine conflict, cross-Strait matters, and global and regional security issues. The meeting was billed as part of “ongoing efforts to maintain open lines of communication and responsibly manage competition.”
The PRC readout of the meeting mostly echoed the White House version, and added that Wang Yi “comprehensively expounded on China’s solemn position on the Taiwan issue.”
2. Bloomberg reported that the Biden administration is “trying to make it hard for China to say no to engagement by seeking a flurry of meetings and phone calls,” a strategy that is “aimed at easing tensions and painting President Xi Jinping as recalcitrant if he refuses.”
The administration’s effort to engage with the PRC is also intended to “appease allied nations in Asia and Europe that are anxious the U.S. isn’t doing enough to ease tension that some fear could lead to open conflict,” according to people familiar with the matter. The people also recognize that the strategy could “paint the U.S. as a supplicant seeking the favor of a powerful adversary.”
Bloomberg said that the PRC has “responded tepidly to the U.S. requests” thus far.
3. Reuters reported that the Biden administration has been holding back “human rights-related sanctions, export controls, and other sensitive actions to try to limit damage to the U.S.-China relationship” after the spy balloon incident, citing four sources with direct knowledge of U.S. policy and internal emails.
The sources added that the Biden administration’s decision to “postpone export licensing rules for telecom equipment maker Huawei and sanctions against Chinese officials for abuses of Uyghurs, has damaged morale at China House,” or the State Department’s reorganized China desk.
Reuters reported that former diplomats and members of Congress from both parties have argued that the U.S. needs to keep open channels of communication with Beijing to “avoid misunderstandings and navigate crises.” However, the sources claim that the “current policy hews too closely to an earlier strategy of engagement that enabled China to extract concessions in exchange for high-level dialogues that often yielded few tangible results.”
The sources also indicated that Deputy Secretary of State Wendy Sherman, who Secretary of State Antony Blinken has largely delegated China policy duties and was eager to reschedule the latter’s trip to Beijing, was behind guidance to the State Department to “move on” from the PRC balloon incident.
May 13
The South China Morning Post reported that Secretary Blinken is hoping to visit China “in the near future.” State Department counselor Derek Chollet told the Post that Jake Sullivan and Wang Yi had discussed the broad contours of a visit when they met in Vienna, and “talked about what we’re hoping to get out of such a visit and the structure of dialogue we’d like to have with the PRC [People’s Republic of China], particularly in the service of figuring out ways we could depressurize the situation.”
EU keeps China door open
May 10
1. Reuters reported that German companies are increasing investments in China even as the German government, the EU, and the G7 are looking to “de-risk” their relationships with Beijing. The German Economic Institute IW provided preliminary data to Reuters showing that Germany’s direct investment flows to China are estimated to have increased by 11 percent in 2022, which is similar to the 2021 increase but much stronger than in the years between 2016 to 2020.
Preliminary data provided to Reuters by the German Economic Institute IW show German direct investment in China is still rising.
2. The German government said it would proceed with a plan to sell parts of the Hamburg Tollerort port terminal (24.99 percent of shares) to PRC state-owned company Cosco despite concerns being raised in the country about China controlling critical infrastructure in Germany.
May 11
1. EU foreign policy chief Josep Borrell said at the European Defence and Security Summit in Brussels that the EU is not in a “systematic rivalry” with China even though the PRC is a partner, a competitor, and rival for the bloc in many areas.
“If it uses this power in accordance with international law, if it doesn’t put in danger our interests and values, we have to live with China on the world stage,” Borrell said.
2. Politico and Bloomberg published some details about a draft report by the European External Action Service for a meeting of EU foreign ministers on May 12.
According to Bloomberg, the draft report said that “coordination with the United States will remain essential” for “clear-eyed engagement with China and management of the risk the country poses.” However, the EU “should not subscribe to an idea of a zero-sum game whereby there can only be one winner, in a binary contest between the U.S. and China.” Bloomberg noted that the paper’s position “tacitly echoes recent comments by French President Emmanuel Macron that the bloc shouldn’t become a ‘vassal’ in a U.S.-China clash.”
Bloomberg said that the draft report reaffirmed the EU’s strategy of dealing with the PRC as a partner, a competitor, and a systemic rival, but noted that the balance of the approaches will depend on how China responds to Europe’s engagement. For instance, the EU’s relationship with China will be “critically affected” if Beijing does not get Russia to pull out from Ukraine, and “setting the conditions for a just peace” should define how the EU engages the PRC on the Russia-Ukraine war.
Bloomberg also said that the draft report warned that the EU must be prepared to counter any effects of the PRC’s actions in its societies. “Our openness cannot be allowed to become a vulnerability, but nor should it be dismantled,” the paper said.
According to Politico, the draft report urged the 27 EU member countries to seize a “window of opportunity” to reduce the risk of China’s growing influence over economic and security matters. At the same time, “China and Europe cannot become more foreign to each other. Otherwise there is a risk that misunderstandings will grow and spread to other areas,” the report said.
The paper also urged member countries to accelerate plans for “de-risking” and reducing overdependence on China, according to Politico. On Taiwan, “The EU needs to be prepared for scenarios in which tensions increase significantly. The risk of escalation in the Taiwan Strait clearly shows the necessity to work with partners to deter the erosion of the status quo in the interest of all.”
The draft report further noted that China “is likely to face unprecedented economic and political challenges internally” due to the deceleration of economic growth and demographic change, according to Politico.
May 12
1. The Financial Times reported that Josep Borrell urged EU member states to find a “coherent strategy” to deal with China that addresses Beijing’s rising nationalism and a “hardening of U.S.-China competition” in a private letter to EU foreign ministers.
Borrell also wrote that “the China issue is much more complex than the Russia issue. China’s ambition is clearly to build a new world order with China in its center … A Russian defeat in Ukraine will not derail China’s trajectory. China will manage to take geopolitical advantage of it.”
2. Lithuanian foreign minister Gabrielius Landsbergis said that the EU needs to prepare for a potential deterioration of relations with China over, such as over conflict in the Taiwan Strait.
“Somebody has to devise a possibility that a de-coupling might happen — not because we wished it, like with Russia, not because we willed it but because the situation, for example in the Taiwan Strait, has been changed by force,” Landsbergis said. Europe would have to react to such a development, which would “lead to some sort of a decoupling,” he added.
3. Reuters reported that the Group of 7 meeting in Hiroshima from May 19 to May 21 will issue a statement that contains “a section specific to China” with a list of concerns that include “economic coercion and other behavior that we have seen specifically from the [People’s Republic of China],” according to a U.S. official.
Big picture
The U.S. and the EU’s China outreach comes amid talk and signs of a “spring offensive” by Ukraine, a brewing banking crisis and other domestic troubles in America and Europe, as well as a lackluster economic recovery and other internal problems in China.
Our take
1. The Biden administration’s holding off on taking “sensitive actions” against the PRC and renewed effort to seek engagement with Beijing could be part of its ongoing attempt to establish a “floor under the relationship and guardrails” to prevent the Sino-U.S. relationship from spiraling out of control. And as indicated in news reports, the Biden administration could be striving to have engagement with China to assuage allies in Asia and in Europe that Washington does not want tensions with Beijing to spiral out of control. The EU in particular does not seem keen on going along wholeheartedly with the U.S. if the latter presses forward with zero-sum competition with the PRC, while some European countries are interested in Xi Jinping’s Ukraine “peace plan.”
The uncertain state of the Russia-Ukraine war and domestic problems at home could also be factors influencing the Biden administration’s decision to step up efforts to engage with China. Likewise, the conflict in Ukraine and internal troubles could be swaying the EU’s decision to continue engaging with China even as member countries in the bloc are encouraged to speed up plans to “de-risk” and reduce their overdependence on the PRC.
We believe that the U.S. and the EU’s current efforts to engage with the PRC are likely conditional, time-limited, and do not represent a return to the pre-Trump “engagement era.” For one, the international community recognizes that the CCP adheres to Marxist-Leninist ideology and is a threat to the global order with its world domination ambitions. Countries are becoming increasingly wary of the PRC and its actions, and will likely continue “de-risking” and “diversifying” from China to protect their supply chains and mitigate geopolitical risks. Meanwhile, any U.S. and EU “rapprochement” with China will unlikely be long-term given that the ideologically-driven CCP will stick firmly to its guns; it cannot be ruled out that current Western efforts at engaging Beijing are partly aimed at buying time to prepare for future conflict.
The U.S. and the EU are unlikely to keep up with their current engagement efforts for too long given how the PRC could respond to those efforts and Beijing’s stance on key issues and agenda items of Washington and Brussels. The Xi leadership will likely continue its relationship with Russia and not seek a peace plan that aligns with those of the West, stances that will make it increasingly difficult for the U.S. and the EU to not sanction China and escalate tensions. How the war in Ukraine develops and Beijing’s continued unwillingness to distance itself from Moscow could also push Brussels and Washington to swiftly abandon engagement and “last chances” for the PRC in favor of stiff “confrontation,” “competition,” and “rivalry” to compel cooperation from the Xi leadership on a “red line” issue for the West. Further, the U.S. and the EU could be wary of efforts by Beijing to hijack their climate agenda while paying lip service, and could call out the Xi leadership for lacking good faith in dealing with climate change.
2. The CCP seems to be deeply convinced that the West is determined to “contain, encircle, and suppress” the PRC, and is not likely to be significantly swayed by renewed efforts on the part of the U.S. and its allies to engage with China. Beijing will likely keep its distance from Washington and stay the course on various issues of international concern (Ukraine, Taiwan, South China Sea, etc.) even if senior officials from both sides do end up meeting in future weeks and months. Xi and the CCP will likely only make serious efforts to “ease tensions” if the U.S. and its allies first make tangible concessions on the PRC’s “red line” issues. In any case, the CCP will continue with its strategy of “delaying and waiting for change” and wait for the West to “decline” before grasping the chance to seal the East’s “rise” (東升西降).
The Biden administration may be prepared to receive a lukewarm response from Beijing to its outreach and could be positioning itself to depict Xi Jinping as “recalcitrant” for not properly engaging with the United States. Continued efforts by the Xi leadership to stonewall America’s attempts at engagement and build “guardrails” in the relationship could see the Biden administration seize another opportunity like the PRC spy balloon incident to heap pressure on Beijing and convince the CCP that “guardrails” and engagement are needed, and that it is in Beijing’s best interests to go along with Washington’s agenda.
3. Mounting geopolitical pressures and domestic troubles would give Xi Jinping added reason to double down on his political indoctrination campaign and anti-corruption effort in the regime. Aside from strengthening intra-Party “unity” and forcing Party members to be publicly loyal to his leadership, Xi’s political campaigns also pave the way for him to publicly denounce his lingering factional rivals and the “incorrect political line” of Jiang Zemin should the situation call for it (i.e. when Xi needs to absolve himself and blame others for the problems caused in part by his policy failures, etc.).
