Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why China Stocks Are Rallying Despite a Widening Trade Deficit
Transcript
- Lucas: So China ETFs have had a solid week. FXI up 3.5 percent, KWEB up 3.3 percent, and JD.com especially strong — up over 5 percent in five days. That's against a pretty grim macro backdrop. Luna: Grim is putting it mildly. The trade deficit just hit 77.6 billion dollars in May, and the current account deficit is deepening. Lucas: Right. The trade balance flipped negative earlier this year and it's getting worse. May's deficit was up from 54.6 billion in April. Exports are still growing, but imports are surging faster — partly because of commodity prices, partly because domestic demand is actually holding up. Luna: And yet the market is cheering. What explains the divergence? Lucas: I'd point to three things. First, the yuan has been remarkably stable — at 6.77 per dollar, flat over the past week despite the trade data. The PBOC is clearly managing expectations. Second, there's growing belief that Beijing will roll out more consumer stimulus, maybe even direct handouts. And third, there's a rotation happening — money moving out of defensive sectors into beaten-down tech names. Luna: JD.com specifically — their earnings season is coming up, and the market is betting on a beat. Also, the broader China tech rally is partly spillover from the US tech bounce. Lucas: Exactly. But look at the trade data more closely. The goods and services deficit widened to 77.6 billion in May, and the current account deficit is now over 226 billion. That's a structural shift. China used to run massive surpluses; now it's a net importer. Luna: And historically, a weakening trade balance is bearish for the currency and for stocks. So why isn't that happening? Lucas: Because the market is looking past the trade data to policy. The Politburo meets soon, and expectations are high for fresh stimulus. Also, the dollar index has eased slightly — down to 120.7 — which takes pressure off emerging markets. Luna: But if the stimulus doesn't materialize, or if it's smaller than hoped, this rally could unwind fast. Lucas: That's the risk. In fact, the market is pricing in a lot of good news. The FXI is still well below its highs from earlier this year. So there's room, but also vulnerability. Luna: If walking through the economy with us has made something click, you know what keeps this show ad-free — listener support. Lucas: Yeah, it's a small thing that makes a big difference. If you find this kind of analysis useful, you can help keep it going at buy me a coffee dot com slash fexingo. Luna: Right. And honestly, it's because of listeners that we can dig into these numbers without any sponsor pressure. Lucas: So back to the rally. Another factor: the tech sector specifically is getting a bid because of the DeepSeek hype from earlier this year — AI optimism is still lingering. But also, the hardware and semiconductor names are benefiting from export controls that are actually boosting domestic substitution stories. Luna: So you have a mix of policy anticipation, tech momentum, and yuan stability. But the trade deficit is a real headwind. How long can the rally ignore it? Lucas: Probably until the next piece of hard data — like July trade numbers, due in early August. If the deficit keeps widening, the yuan could come under pressure, and then the whole story changes. Luna: For now, though, the market is saying 'stimulus will save us'. That's a dangerous bet, but it's also the only game in town. Lucas: And that's exactly why we're watching JD and PDD so closely. JD up 5.1 percent this week, PDD up 2.6 percent. Consumer stocks are leading the rally because they're most sensitive to stimulus. Luna: Meanwhile, Baidu is down 2.8 percent — so it's not a blanket tech rally. Selective. Lucas: Right. Baidu's ad revenue is tied to the broader economy, which is still sluggish. So the market is distinguishing between names that benefit directly from a consumption boost versus those that need a macro turnaround first. Luna: That's a healthy sign, actually. It means investors aren't just blindly buying everything. They're doing some homework. Lucas: Agreed. But the overarching theme is that China's trade deficit is a structural shift that isn't going away. The question is whether markets can adapt to a new normal where China runs deficits and still grows. Luna: And that's a question that has implications far beyond stocks. It affects the yuan's reserve currency ambitions, trade policy, and even geopolitical leverage. Lucas: For now, the market is giving Beijing the benefit of the doubt. But the data keeps rolling in, and the margin for error is shrinking. Luna: We'll be watching the trade numbers and the Politburo meeting. Thanks for listening — and if you want to support the show, you know where to find us. Lucas: Buy me a coffee dot com slash fexingo. That's it for today. We'll be back tomorrow with more on the intersection of policy and markets.