Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why Chinese Stocks Are Rallying While Other Emerging Markets Sink
Transcript
- Lucas: So here's something that jumped out at me from this week's market data. Chinese stocks are having a noticeably good week. The FXI, the big China ETF, is up about three and a half percent over the last five days. But the broad emerging markets ETF, EEM, is down four percent. That's a seven-plus percent gap. Luna: That's a pretty wide divergence. What's driving it? Lucas: Part of it is that other major emerging markets are getting hammered. South Korea's EWY is down more than ten percent in five days. Taiwan's EWT is off nearly eight percent. So the story is really about why China is bucking the trend while Korea and Taiwan are getting sold off. Luna: And this isn't just a one-day blip, right? It's been building over the past month. Lucas: Exactly. Over the past month, China has been rallying while the rest of EM has been flat to down. The key differences I see are exposure to the global semiconductor cycle, currency dynamics, and domestic policy support. Let's start with semiconductors. South Korea and Taiwan are deeply tied to chipmaking. Samsung, SK Hynix, TSMC — these are huge weights in their indices. And the global chip market is going through a rough patch. Demand for memory chips has softened, and the US export controls are creating uncertainty for these companies. Luna: Meanwhile, China's semiconductor industry is more focused on legacy chips and domestic production. They're less exposed to the global demand cycle. Plus, the Chinese government is pouring money into self-sufficiency. Lucas: Right. And that ties into the second factor: policy support. China's central bank has been easing, and there's been a wave of stimulus aimed at tech and manufacturing. That's giving a boost to Chinese internet names. Look at JD.com — up 5.1 percent this week. Pinduoduo is up 2.6 percent. Even Alibaba, which has been under pressure, is only down one percent. That's relative strength. Luna: So the narrative is that China is getting its own domestic engine going, while Korea and Taiwan are more dependent on global demand, which is weakening. Lucas: Precisely. And then there's currency. The yuan has been remarkably stable at around 6.77 per dollar. The dollar index has actually edged down a bit, to 120.7. That stability gives foreign investors confidence to hold Chinese assets. In contrast, the Korean won has weakened, and the Taiwan dollar is under pressure. That adds to the selling pressure in those markets. Luna: Speaking of confidence, if you find this kind of analysis useful, there's a small way to support the show. We keep it ad-free, and listener support is what makes that possible. If today's episode was worth a coffee to you, there's a link at buy me a coffee dot com slash fexingo. No pressure at all. Lucas: Yeah, it genuinely helps. And like Luna said, totally optional. So, back to the divergence — I think there's also a geopolitical angle. The US is tightening export controls on advanced chips, which directly hits Korean and Taiwanese companies. But for China, this has actually spurred more domestic investment. It's a perverse incentive. Luna: Right, the 'decoupling' narrative is playing out differently than many expected. It's not a uniform hit to EM; it's creating winners and losers within the space. Lucas: And that's the key for investors. The old idea of 'buying the EM basket' is becoming less useful. You need to be selective. The EEM includes a lot of Korea and Taiwan, so it's down. But if you'd bought just China, you'd be up. The performance gap between FXI and EEM this week is about seven percentage points. That's huge. Luna: What about the trade deficit numbers? We saw the US trade deficit widened to over 77 billion dollars in May. Does that play into this? Lucas: It does, but in a nuanced way. The US is importing more, but not all EM benefit equally. Chinese exports to the US have held up, especially in industrial goods and consumer electronics. Meanwhile, Korea and Taiwan are seeing more competition from China in some areas, plus their own export slowdowns. The trade data shows US imports overall are up, but the composition is shifting. Luna: So China is capturing a larger share of the import pie, at least for now. Lucas: Exactly. And that's reflected in the stock performance. JD.com and Pinduoduo are essentially proxies for Chinese consumer and e-commerce strength. They're benefiting from domestic demand and also from cross-border trade. Meanwhile, Korean exporters like Samsung are struggling with weakening global demand. Luna: And what about the AI angle? We saw the NASDAQ had a good week, and the headlines are all about AI. Is that helping China too? Lucas: Yes, but in a different way. In the US, AI enthusiasm boosts big tech like NVIDIA. In China, the AI story is more about the local equivalent — companies like Baidu, which is actually down 2.7 percent this week. So it's not a straightforward lift. But the broader sentiment around technology is positive. The KWEB, which tracks Chinese internet, is up 3.2 percent. So there is a tech tailwind, but it's selective. Luna: So where does this leave us? Are we looking at a temporary divergence or a more structural shift? Lucas: That's the million-dollar question. I think part of it is cyclical — the semiconductor downturn will eventually bottom out, and Korea and Taiwan will recover. But some of it is structural. China's push for self-sufficiency in chips, its domestic market size, and its policy flexibility give it an edge in the current environment. The strong dollar also weighs less on China because of capital controls and a managed currency. Luna: So investors should watch for signs of a semiconductor turnaround, or a shift in the dollar's direction, as potential triggers for a reversal. Lucas: Exactly. And keep an eye on the yuan. If the dollar strengthens again, that could hit China too. But for now, the data is telling a clear story: China is the standout in EM, and the gap is widening. Luna: Good food for thought. Thanks, Lucas. Lucas: You bet. That's it for this episode of The Emerging Markets Podcast. We'll be back next time with another angle.