Weekly Reads - October 24, 2022
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The Hang Seng Index and the Golden Dragon China Index fell more than 6% and 14% respectively after President Xi Jinping tightened his grasp on power at the Communist Party congress this weekend. Xi secured an unprecedented third term in office and promoted political allies to top political positions in the country. This news sent shock waves to the financial markets worrying many investors about growing political and policy risks in the country. Investors are worried that under President Xi the country is likely to continue its zero-COVID policy hobbling the economy. According to China’s Chief economist Ting Lu the 207.7 million people in current lockdown represents 8.5% of China’s total GDP. Additionally, President Xi has a track record of interfering with the operations of the country’s largest internet companies imposing fines and regulations that have severely hampered their business. The share prices of the country’s largest companies have not responded well to recent events with e-commerce player Pinduoduo dropping more than 24%, Alibaba dropping 12.5%, JD.com dropping 13%, and EV makers Li Auto, Nio, and Xpeng plunging by double digits. With investor sentiment at a low the Chinese political regime has major work to do to restore investor confidence in the country’s financial markets.
The world’s largest oilfield services provider, Schlumberger, is getting a facelift with a new name and logo positioning itself for a low-carbon future. The nearly 100-year-old Schlumberger is now known as SLB and is focusing on transforming itself into a digital services provider and partner of clean energies. The company’s CEO has noted that the rebranding is not a shift away from fossil fuels but rather an extension toward using SLB capabilities to support clean energy. One of these capabilities is subsurface analysis which can be used to help carbon capture and sequestration for emerging clean energies. In 2020 SLB launched a New Energies business unit to explore low carbon technologies and last year set a net-zero emission target. SLB’s recent actions show that management is serious in positioning the company to benefit from secular clean energy tailwinds and diversifying away from the slowly declining fossil fuel business. With many oil producers moving toward hydrogen and other renewable fuels, SLB and other oilfield services providers are slowly pivoting away from their core fossil business and extending their product lines to service the future of energy.
Tesla in its latest bold move has decided to lower prices for its vehicles in China by as much as 9.4% for its popular Model Y and Model 3 vehicles. This is a reverse of last year in which Tesla and competitors in China raised prices several times to adjust for rising lithium costs and supply chain disruptions. Elon Musk in an analyst call last week talked about declining commodity costs and of a brutal recession ahead. Tesla faces near term difficulties in China with the country struggling with a weak economy and intensifying competition from domestic EV competitors. The biggest EV car maker in China, BYD, has outsold Tesla over the last six months and is now targeting global expansion setting itself to be a global competitor to Tesla. With the Chinese economy weakening and competition intensifying, Tesla’s price cutting move might be seen as the start of a price war across EV makers in China.