Foreign investors spooked by the outcome of the Communist Party’s leadership reshuffle dumped Chinese equities and the yuan despite the release of stronger-than-expected GDP data. They’re worried that Xi’s tightening grip on power will lead to the continuation of Beijing’s existing policies and further dent the economy.
Hong Kong’s benchmark Hang Seng
(HSI) Index plunged 6.4% on Monday, marking its biggest daily drop since November 2008. The index closed at its lowest level since April 2009.
The Chinese yuan weakened sharply, hitting a fresh 14-year low against the US dollar on the onshore market. On the offshore market, where it can trade more freely, the currency tumbled 0.8%, hovering near its weakest level on record, even as the Chinese economy grew 3.9% in the third quarter from a year ago, according to the National Bureau of Statistics. Economists polled by Reuters had expected growth of 3.4%.
The sharp sell-off came one day after the ruling Communist Party unveiled its new leadership for the next five years. In addition to securing an unprecedented third term as party chief, Xi packed his new leadership team with staunch loyalists.
A number of senior officials who have backed market reforms and opening up the economy were missing from the new top team, stirring concerns about the future direction of the country and its relations with the United States. Those pushed aside included Premier Li Keqiang, Vice Premier Liu He, and central bank governor Yi Gang.
“It appears that the leadership reshuffle spooked foreign investors to offload their Chinese investment, sparking heavy sell-offs in Hong Kong-listed Chinese equities,” said Ken Cheung, chief Asian forex strategist at Mizuho bank.
The GDP data marked a pick-up from the 0.4% increase in the second quarter, when China’s economy was battered by widespread Covid lockdowns. Shanghai, the nation’s financial center and a key global trade hub, was shut down for two months in April and May. But the growth rate was still below the annual official target that the government set earlier this year.
GDP data fails to lift mood
“The outlook remains gloomy,” said Julian Evans-Pritchard, senior China economist for Capital Economics, in a research report on Monday.
“There is no prospect of China lifting its zero-Covid policy in the near future, and we don’t expect any meaningful relaxation before 2024,” he added.
Coupled with a further weakening in the global economy and a persistent slump in China’s real estate, all the headwinds will continue to pressure the Chinese economy, he said.
Evans-Pritchard expected China’s official GDP to grow by only 2.5% this year and by 3.5% in 2023.
Monday’s GDP data were initially scheduled for release on October 18 during the Chinese Communist Party’s congress, but were postponed without explanation.
New leadership bodes ill for the outlook?
The possibility that policies such as zero-Covid, which has resulted in sweeping lockdowns to contain the virus, and “Common Prosperity” — Xi’s bid to redistribute wealth — could be escalated was causing concern, Cheung said.
“With the Politburo Standing Committee composed of President Xi’s close allies, market participants read the implications as President Xi’s power consolidation and the policy continuation,” he added.
Mitul Kotecha, head of emerging markets strategy at TD Securities, also pointed out that the disappearance of pro-reform officials from the new leadership bodes ill for the future of China’s private sector.
“The departure of perceived pro-stimulus officials and reformers from the Politburo Standing Committee and replacement with allies of Xi, suggests that ‘Common Prosperity’ will be the overriding push of officials,” Kotecha said.
Under the banner of the “Common Prosperity” campaign, Beijing launched a sweeping crackdown on the country’s private enterprise, which shook almost every industry to its core.
“The [market] reaction in our view is consistent with the reduced prospects of significant stimulus or changes to zero-Covid policy. Overall, prospects of a re-acceleration of growth are limited,” Kotecha said.
On the tightly controlled domestic market in China, the benchmark Shanghai Composite Index dropped 2%. The tech-heavy Shenzhen Component Index lost 2.1%.
The Hang Seng Tech Index, which tracks the 30 largest technology firms listed in Hong Kong, plunged 9.7%.
The sell-off spilled over into the United States as well. Shares of Alibaba and several other leading Chinese stocks trading in New York, such as EV companies Nio
(NIO) and Xpeng, Alibaba rivals JD.com
(JD) and Pinduoduo
(PDD) and search engine Baidu
(BIDU), were all down sharply.
Tesla adds another recall to a ‘Total Recall’ year
Tesla issues a recall on 80,000 cars in China adding another one to a year with a lot of recalls, but most of them are easily fixed with software updates.
Earlier this year, NHTSA issued a series of recalls on Tesla vehicles that were highly reported in the media.
What was less reported, though, is that almost all of those recalls were fairly simple software issues that Tesla has been able to fix through over-the-air software updates.
Whenever there’s a safety-related issue, NHTSA has to issue a “safety recall,” even if the automaker doesn’t have to physically recall any vehicle, which leads to some confusion.
Again last month, a Tesla recall of “1 million vehicles” made many headlines when the recall simply consisted of Tesla changing how its software handled window operations. These instances have led Tesla CEO Elon Musk to complain about the term “recall” and how it is used against Tesla by the media.
Today, Tesla also announced more recalls in China on about 80,000 vehicles.
According to Chinese authorities, the recall includes 67,698 imported Model S and Model X vehicles with a software problem related to the battery pack. Again, the fix is a simple software update.
However, this time there’s also a physical recall due to a seat belt issue on about 13,000 Model 3 vehicles: 2,736 imported and 10,127 made in China.
With now over 20 recalls in 2022, it has been a “Total Recall” year for Tesla – pun intended:
But Tesla is not the only automaker affected by large recalls this year. Ford just confirmed that it is recalling another half a million vehicles due to a fire risk, and many automakers have also recalled millions of vehicles this year.
If anything, the fact that the large majority of Tesla’s recalls are quickly fixed with over-the-air software updates – rather than having to bring the cars back to the dealership like other automakers – shows that Tesla’s level of connectivity in its vehicles is a major advantage in the industry.
It makes for an easier experience for the customers, and it is much cheaper and more efficient for Tesla.
Flair flight from Vancouver overshoots Ontario runway
Vancouver couple Charissa Landicho and Mac Bradley just wanted a quick and cheap getaway, but a turbulent landing was not on their itinerary.
“I was definitely in shock because it was an overnight flight. I woke up, just, ‘What’s going on?'” Landicho said.
“We touched down and we could hear a loud thud. And it lifted up and it (went) down again,” she recalled.
It was a frightening experience for the 134 passengers on the Flair Airlines Boeing 737, which went off the runway just before 6:30 a.m. Friday morning in southern Ontario.
The flight from Vancouver was landing at the Kitchener-Waterloo airport when it overshot the runway and ended up in the grass.
“To me, it felt like we pulled right and then next thing you know, we’re off the tarmac, in the field pretty much, bouncing around, smacking around,” said Bradley.
“We probably went like 50 to 100 metres off the runway,” he continued.
He said their plane tickets cost about $100 each, roundtrip, potentially saving them hundreds by going with the budget airline.
With no announcement or warning, the couple said they were only told to stay put and waited an hour to finally get off the plane.
“It was a little bit questionable because it seemed like nobody really knew what to do on the plane other than just trying to keep calm. So that was a little bit unnerving,” said Bradley.
“And the fact that we just got an automated text after asking us to leave a Google review on our experience was a little satirical,” he added.
In a statement, Flair Airlines said there were no reported injuries and passengers were taken to the terminal by bus.
There is no word on what caused the aircraft to overshoot the runway, but the Transportation Safety Board (TSB) has been deployed to investigate.
Black Friday impacted by changing shopping habits
When Shopify Inc.’s Harley Finkelstein surveys November’s retail landscape, he finds it hard to see where Black Friday stops and Cyber Monday begins.
The annual pre-holiday sales blitzes meant to encourage customers to drop cash on discounted goods have bled together in recent years, with stores extending Black Friday promotions beyond a single day and online retailers offering Cyber Monday deals all week — or all month.
“Black Friday/Cyber Monday used to be a weekend, now it’s more of a season,” said the president of the Ottawa e-commerce giant.
Many in the retail industry feel the divisions will be even more hazy this Cyber Monday as the COVID-19 health crisis continues to reshape shopping habits.
During the pandemic, which saw stores temporarily close and people retreat inside their homes, there was a surge in online shopping.
As measures meant to quell the virus eased, many kept shopping online — but not at the rate some brands anticipated.
“Online shopping grew in popularity, obviously, through the pandemic, but it’s actually fallen off now because people are returning back to the store,” said Lisa Hutcheson, managing partner at J.C. Williams Group, a consulting firm.
“E-commerce spending is actually down year-to-date 11.5 per cent.”
The consumer shift back to brick-and-mortar stores blindsided Shopify, which had banked on online shopping continuing to accelerate at pandemic rates.
“It’s now clear that bet didn’t pay off,” chief executive Tobi Lutke said in a July statement announcing the company was laying off 10 per cent of staff as a result of the misjudgment.
The company’s stock traded for as high as $212 in the past year but has averaged closer to $50 in recent days.
So there’s a lot riding on the Black Friday/Cyber Monday weekend.
“Black Friday/Cyber Monday is sort of our Super Bowl,” said Finkelstein. “The culture and the energy at the company is really high right now.”
A survey his company conducted with 24,000 consumers and 9,000 small and medium businesses around the world found 59 per cent of Canadians planned to spend the same amount as or more than last year on Black Friday and Cyber Monday weekend. That figure rose to 74 per cent for those between the age of 25 and 34.
Finkelstein finds it hard to predict how the weekend will go, though he suspects it will be very different from last year, when the country was consumed with product shortages and the Omicron wave of COVID-19.
“This Black Friday/Cyber Monday seems far less frantic than last year,” he said. “There are less supply chain issues, more physical stores are open, there’s more inventory. There’s better capacity planning at the shipping companies.”
However, there is a new problem: inflation remains stubbornly high.
Michelle Wasylyshen of the Retail Council of Canada says “consumers tightened their belts a little” in recent months but still plan to spend the same as they did last holiday season, roughly $790.
“The difference this year is that they will be looking for more meaningful or practical gifts,” she wrote in an email. “They might also decrease the number of people they buy for or will give fewer gifts per person, but they do plan to shop.”
Finkelstein also foresees a more measured approach.
“They may not buy five things they have mediocre love for. They may buy two things they deeply want,” said Finkelstein.
“And they may also be thoughtful about how they buy … Is there a discount coming? I’ll wait until Thursday night or until Cyber Monday.”
The term Cyber Monday was coined in 2005 by the National Retail Federation, which noticed the Monday after Black Friday had delivered a big spike for online sales and traffic in the prior two years.
“We won’t be seeing quite the same spike that we have in the past,” Hutcheson predicted.
Some of that forecast comes from the stretched shopping window but also because some people are going to stick with their pandemic habits of online shopping.
Moneris is predicting Cyber Monday will be the busiest online shopping day, following a trend set in 2019 and 2020. However, Black Friday is still expected to be the busiest day in terms of total transaction count and dollars spent across all mediums.
Hutcheson said the week will play out as an “omnichannel view.”
Omnichannel is an industry term referring to making shopping seamless across online and mobile platforms as well as brick-and-mortar stores.
Finkelstein likes the term because the retail industry “is no longer online versus offline.”
“Saying omnichannel is a strategy will soon be akin to saying colour TV,” he said. “It is the norm and so consumers are shopping everywhere and everywhere.”
This report by The Canadian Press was first published Nov. 25, 2022.
Companies in this story: (TSX:SHOP)
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