Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why JD and PDD Are Surging Despite Chinas Widening Trade Deficit
Transcript
- Lucas: China's trade deficit widened again in May, hitting seventy-seven point six billion dollars. That's a deepening hole—down from about fifty-four and a half billion in the prior reading. Lucas: But if you look at Chinese e-commerce stocks this week, you'd never guess it. JD is up seven percent in five days, PDD up six percent, and the KWEB China internet ETF is up nearly six percent. Luna: So the market is completely ignoring the trade data? That's a pretty big divergence. Lucas: It is. And I think it tells us that investors are rotating toward companies that are more insulated from the trade war and the global slowdown. JD and PDD are domestic consumption plays—their revenue comes from Chinese consumers, not exports. Luna: Right. And the trade deficit is driven largely by imports of oil and chips, not by a collapse in exports. Exports are actually still up year over year. Lucas: Exactly. Imports grew faster than exports, partly because of the Iran situation and higher oil prices. But for e-commerce, the key driver is domestic demand. And there are signs that the stimulus is starting to work. Luna: What kind of stimulus are we seeing? I know there was the consumer goods trade-in program earlier this year. Lucas: That program is still rolling out, but more importantly, the Fed paused rate hikes in July, and that gives the People's Bank more room to ease without worrying about the yuan. The yuan has stayed stable around 6.77 per dollar. Luna: So lower global rates mean higher valuations for growth stocks, and a stable yuan means no panic about capital flight. That's a double tailwind. Lucas: Exactly. And look at the data: PDD reported strong quarterly earnings a few weeks ago, beating on revenue. JD's logistics network is getting more efficient. These are company-specific stories, but they're also riding a broader wave of consumer confidence. Luna: But the trade deficit is still a problem long-term. If China keeps importing more than it exports, the current account deficit will keep widening. That puts pressure on the yuan eventually. Lucas: That's true. The current account deficit hit about two hundred twenty-seven billion in the first quarter. But the market seems to be taking a 'this year, next year' view. Investors are betting that domestic consumption will fill the gap, at least for now. Luna: And the Iran conflict? Oil prices are spiking again. That's an immediate headwind for any company that relies on shipping or energy costs. But JD and PDD have relatively low energy exposure. Lucas: Right. JD's delivery fleet uses fuel, but they've been investing in electric vans. PDD is a marketplace, so the logistics cost falls on the merchants. On balance, the profit margins are less sensitive to oil than, say, airlines or chemical companies. Luna: So the market is essentially saying: the trade deficit is a macro worry, but right now micro beats macro. JD, PDD, and even Alibaba up nearly one percent are seen as safer bets. Lucas: And Baidu is down two percent, interestingly. That's an outlier. But Baidu's business is more tied to advertising and enterprise, which might be slower to recover. The e-commerce names are the clear winners this week. Luna: What about NIO? It's up two and a half percent. EV stocks are also domestic consumption, but they face headwinds from the trade war on batteries and components. Lucas: NIO's move is modest. The EV sector is more global, so it's more vulnerable to tariff escalation. But the trade deficit data doesn't directly affect them. It's more about sentiment. Luna: Let's talk about the bigger picture. If this rotation continues, what does it mean for the broader China ETF, like FXI? It's up four point eight percent in five days. Lucas: FXI includes banks and energy stocks too, not just tech. So it's a broader rally. But the relative outperformance of e-commerce suggests that the market is betting on the consumer. That's a shift from earlier this year when energy and exporters led. Luna: And it's because we have listeners who trust us to dig into that story without ads or spin. Lucas: Yeah, it's part of why we keep going. A handful of listeners chip in monthly at buy me a coffee dot com slash fexingo, and that's what makes this possible. Luna: It keeps us independent. So back to that rotation—do you think it's sustainable, or is this just a short-term bounce on Fed pause euphoria? Lucas: I think it's partly that, but there's a structural argument too. China's middle class is still growing, and the government is directing stimulus toward consumers rather than infrastructure this time. That's a long-term positive for e-commerce. Luna: But the trade deficit is a ticking clock. Eventually, if exports don't pick up, the yuan will weaken, and that would hit consumer buying power. Lucas: Right. And that's the risk. But the market is looking at the next few months, not the next few years. Right now, the data supports a domestic consumption story. July retail sales numbers are due next week, and if they show strength, this rally could continue. Luna: What about the geopolitical risk? The US strikes on Iran and the Strait of Hormuz disruption—that's a huge wild card for China's energy imports. Lucas: It is. China gets a lot of its oil from the Middle East, and if the strait gets blocked, oil prices could spike dramatically. That would hurt the trade deficit even more and could force the PBOC to act. But so far, the market is treating it as a manageable risk. Luna: Manageable until it's not. But I get the optimism on e-commerce. These companies have proven they can grow in a tough macro environment. Lucas: And they have cash. JD and PDD both have strong balance sheets. They're not dependent on external financing, so a credit crunch wouldn't hurt them as much. Luna: So the takeaway: the trade deficit is real, but the market is choosing to focus on the parts of the economy that are decoupled from global trade. For now, that's working. Lucas: Exactly. And if you're investing in China, it pays to understand which sectors have domestic tailwinds and which are exposed to global headwinds. E-commerce is firmly in the first camp. Luna: This week's data suggests that camp is growing. We'll be watching the retail sales and the next trade balance release to see if the divergence holds. Lucas: For now, JD and PDD are telling a story of resilience. Whether that story holds depends on the consumer and on how the Iran situation unfolds. But it's a story worth following.