Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / How China Tech Stocks Rally on Fed Pause and Stimulus
Transcript
- Lucas: So the Fed held rates steady yesterday, but three members voted to hike, and the Dow dropped a thousand points. Meanwhile, Chinese tech stocks are having their best week in months. Luna: Yeah, I saw the KWEB ETF is up more than six percent in five days. Pinduoduo and JD are both up over seven percent. That's a striking divergence. Lucas: Exactly. And it comes as China's trade deficit widened to nearly 78 billion dollars in May, the largest on record. So you have this deteriorating external picture, yet domestic-facing tech names are rallying. Luna: What's driving it? Is it purely the Fed pause, or is there a China-specific catalyst? Lucas: I'd say it's a combination. On the Fed side, the hold signals that rate cuts are still on the table for later this year, which weakens the dollar a bit. The trade-weighted dollar index dipped to 120.7, and the yuan has been rock steady at 6.77 per dollar for weeks. Luna: Right, stability in the yuan is a big deal for foreign investors. If they're worried about currency depreciation, they'd stay out. But the PBOC has been defending that level without burning much reserves. Lucas: Exactly. And domestically, China has been rolling out stimulus measures focused on consumer spending. There was that 50 billion yuan subsidy for electronics and home appliances in July, which directly benefits JD and Pinduoduo. Luna: So you've got a perfect storm: a weaker dollar, a stable yuan, and targeted fiscal stimulus. No wonder money is rotating out of U.S. tech into Chinese tech. Lucas: And it's not just e-commerce. Look at Baidu — it's down slightly this week, but that's because it's more tied to AI and regulatory uncertainty. The broader KWEB index includes gaming, cloud, and electric vehicle stocks like NIO, which is up three percent. Luna: NIO at 4.78 is still cheap relative to its history. But the big headline is that Chinese equities are outperforming U.S. equities this week, despite all the geopolitical noise. Lucas: And that's the key point. Investors are looking past the trade deficit and the Iran oil spike — which, by the way, hit China's import bill hard — and focusing on the fact that China's domestic economy is getting a shot in the arm. Luna: Yeah, the trade deficit is largely due to higher import prices for oil and chips, not a collapse in exports. Exports actually grew one point seven percent in the latest data. So the narrative of a trade collapse is overblown. Lucas: That's a great nuance. The deficit is a terms of trade shock, not a competitiveness problem. And if the Fed eventually cuts rates, that could boost global demand for Chinese exports. Luna: So for now, the market is saying: China's tech sector is a buy on stimulus, yuan stability, and a Fed pivot. But what could break this rally? Lucas: The biggest risk is if the Fed doesn't cut at all — if those three hawkish votes gain more support. That could strengthen the dollar and pressure the yuan again. We've seen that dynamic before. Luna: Or if the trade deficit keeps widening and forces a devaluation. But the PBOC seems committed to a stable yuan for now. Lucas: Yeah, and they have the tools. They can tighten capital controls, they can use state banks to absorb dollar supply. The question is whether they'll let the yuan weaken to boost exports or keep it strong to attract capital. Luna: And so far, they're choosing capital stability over export competitiveness. That's a bet on domestic consumption. Lucas: Which ties back to the stimulus. If the consumer responds, then the trade deficit matters less for corporate earnings. That's the bull case for JD and Pinduoduo right now. Luna: And Alibaba? It's up only one point four percent this week. Lagging behind. Lucas: Alibaba is still digesting the cloud restructuring. Plus it's more exposed to cross-border trade, which is under pressure. So the market is favoring pure domestic plays like JD and Pinduoduo. Luna: So if I'm an investor, I'm looking at which Chinese companies generate most of their revenue inside China. That seems to be the winning formula this quarter. Lucas: Absolutely. And that's exactly the kind of insight that makes following this show worthwhile — understanding the granular drivers behind the market moves. Luna: Yeah, if you're getting value from these breakdowns, it's worth knowing that this podcast stays ad-free because of listener support. You can contribute at buy me a coffee dot com slash fexingo. Lucas: And we really appreciate that. It lets us keep digging into topics like this without any sponsor influence. Luna: Now, coming back to the rally — how sustainable is this rotation? If the Fed does cut later this year, could we see a sustained bull run in Chinese tech? Lucas: It's possible, but we need to watch the upcoming earnings season. JD reports next week, and Pinduoduo in early August. If they show strong margins and growth, that will validate the thesis. Luna: And if they miss? The rally could unwind quickly. But the setup is more favorable now than it's been all year. Lucas: Agreed. So for listeners tracking China: focus on domestic stimulus, watch the yuan, and keep an eye on the Fed's next move. Those three variables are driving the action. Luna: And speaking of the Fed, we haven't even mentioned the Trump Iran headlines. That could spike oil prices again and widen China's deficit further. Lucas: Right — Trump's threat to 'beat' Iran after the surprise attack. Brent crude was up four percent today. China imports a huge portion of its oil from Iran via sanctioned channels, so any disruption raises costs. Luna: That's one risk that could stall the rally. Higher energy costs eat into corporate margins and worsen the trade balance. Lucas: But for now, the market is shrugging it off. The KWEB closed at 27.91 today, near its highest level since early June. Luna: So it's a tug of war between stimulus optimism and external headwinds. And so far, stimulus is winning. Lucas: That's the China story in a nutshell right now. We'll keep tracking it. Next week's JD earnings will be a big tell.