Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why China Tech ETFs Are Diverging From the Yuan
Transcript
- Lucas: So we've got a weird divergence happening in China markets right now. The yuan is strengthening — it's at 6.79 per dollar as of this week, down from 6.80 — but the big China-focused ETFs are all in the red. FXI is down 2.6 percent over five days, KWEB down nearly 4 percent, MCHI down 2.3 percent. That's not the pattern you'd expect. Luna: Right — usually a stronger yuan is a tailwind for Chinese equities, especially for tech and consumer names. Lucas: Exactly. And the divergence is even starker when you look at individual stocks. PDD is down almost 13 percent in five days. JD is off 8 percent. Alibaba down 5. So the question is: why is the currency telling one story and the equity market telling another? Luna: And is this just a short-term blip, or does it signal something deeper about the direction of China's economy? Lucas: I think it's the latter, and it comes down to two different forces. The yuan is responding to China's trade surplus — exports of goods and services hit $3.52 trillion in January, up from $3.35 trillion. That surplus creates demand for yuan. Meanwhile, the equity sell-off is driven by a different set of factors: regulatory overhang, concerns about tech earnings, and a global rotation away from risk assets. Luna: So the currency is being propped up by trade flows, but the stock market is reacting to something else entirely. Lucas: Exactly. And look at the numbers — the trade-weighted dollar index is actually down a tick to 119.3, so the dollar is weakening broadly. That helps the yuan too. But the tech-heavy ETFs are getting hit by a wave of negative sentiment. KWEB in particular is sensitive to regulatory headlines, and there's been a lot of chatter about new data security rules for AI companies. Luna: And PDD's 13 percent drop stands out — that's a massive move for a single week. Is that company-specific or part of the broader trend? Lucas: It's mostly company-specific. PDD reported earnings last week that missed on revenue, and they cited slower growth in their international expansion — Temu is facing more regulatory scrutiny in Europe and the US. But the broader tech weakness amplifies it. When sentiment turns, names with high growth expectations get hit hardest. Luna: NIO is the outlier — up 3 percent in five days. Why would an EV maker buck the trend? Lucas: That's interesting. NIO actually announced a partnership with a state-owned battery recycler that investors liked. And NIO had already been beaten down so much — it's at $5.76 — that any positive news triggers a bigger percentage move. But it's not a sign of broad strength in Chinese equities. Luna: So if someone looks at the yuan and thinks 'China is strong, I should buy Chinese stocks,' they'd be caught off guard. Lucas: Exactly. And that's the real takeaway here. The yuan is being driven by trade surplus and capital controls — Beijing still manages the currency closely. But the equity market is pricing in a different set of risks: regulatory uncertainty, slower consumer spending, and global trade tensions. The two markets are disconnected. Luna: And this disconnect has happened before — I remember in 2015 when the yuan devalued but stocks initially rallied because investors thought it would boost exports. Lucas: Great parallel. But that was the opposite — a weaker yuan and stocks going up. Now we have a stronger yuan and stocks going down. The common thread is that currency and equities don't always move together in China because the drivers are different. The yuan is more policy-driven, equities are more sentiment-driven. Luna: And that's something that's worth paying attention to right now. By the way, if you're finding this kind of breakdown useful — we keep this show ad-free and that's only possible because a handful of listeners chip in monthly. You can find us at buy me a coffee dot com slash fexingo. It's a simple way to support independent economics coverage. Lucas: Yeah, and it genuinely makes a difference. So — back to the divergence. Another factor is that the yuan's strength might actually be hurting export-oriented tech companies. A stronger currency makes their goods more expensive abroad. So the same force that's lifting the yuan is also a headwind for earnings. Luna: That's a double-edged sword. The trade surplus creates demand for yuan, but it also creates a stronger currency that eventually eats into that surplus. Lucas: Right. And we're already seeing the trade surplus shrink — it went from $57.8 billion to $60.3 billion, but that's actually a decline relative to GDP growth. The surplus is still large, but the trend is plateauing. So the yuan's support from trade might be peaking. Luna: Meanwhile, the equity market is looking ahead. The sell-off in tech ETFs suggests investors are anticipating more headwinds — whether from regulation, slower growth, or geopolitical tensions. Lucas: And the valuations are not particularly cheap. KWEB's price to earnings ratio is still above 20, even after the drop. So there's room for further downside if sentiment continues to sour. The question is whether the yuan's strength is a leading indicator that the economy is stabilizing, or a lagging indicator that just reflects past trade flows. Luna: What would break the divergence? What would bring the yuan and equities back into alignment? Lucas: Two things could do it. One is a clear policy signal from Beijing — something like a new stimulus package or a regulatory reset that boosts investor confidence. The other is a change in the global risk environment — if the Fed signals a pause in rate hikes, that could weaken the dollar further and lift all emerging markets, including China. Luna: But those are both 'if' scenarios. For now, we're in a period where you have to look at the currency and the equity market as separate indicators. Lucas: Exactly. And that's a useful lens for anyone tracking China. The yuan tells you about trade and capital flows. The equity market tells you about sentiment and risk appetite. When they diverge, it's a signal that the market is struggling to find a single narrative. Luna: And maybe that's the real story of China in 2026: multiple narratives competing, and no clear direction. Lucas: Right. A stronger yuan, but weaker stocks. Record exports, but a shrinking surplus. It's a market that's searching for its footing. And until something breaks the deadlock, this divergence could persist. Luna: Lucas, thanks for unpacking that. For our listeners, we'll keep watching these numbers. And if you want to support the show, you know where to find us. Lucas: Yeah. Next time, we'll look at whether this divergence is starting to affect other Asian currencies. The yen is at 159 per dollar, and the Korean won has been under pressure too. Could the yuan's strength be an outlier in a region of weakness? We'll dig into that.