Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why China Yuan Trade Disconnect Is Growing Again
Transcript
- Lucas: The yuan is basically flat this week at 6.77 per dollar. But Chinese stocks trading in New York have taken a pretty clear hit — Alibaba down more than six percent in five days, Baidu down almost five. Luna: That's a real divergence. The currency barely moved, and yet the market is selling off. What's driving that gap? Lucas: It's a story of two Chinas, I think. On one side you have the export-driven manufacturing engine, which is still humming along. Exports hit an annualized rate of about three point five trillion dollars in January — that's up from the previous quarter. Luna: Right. Factories are busy, ports are full. That tends to support the yuan. Lucas: Exactly. The trade surplus — while still negative overall — did narrow slightly in April. But the current account deficit shrank meaningfully from late last year. So the macro picture isn't terrible. And yet you look at consumer-facing stocks and they're getting crushed. Luna: So the currency is reflecting the factory side of the economy, while stocks are pricing in the consumer side. Lucas: That's the thesis. And the numbers bear it out pretty clearly. The FXI ETF, which is a broad China play, is actually up half a percent over the last five days. But that's because it's heavy on state-owned enterprises and banks. The KWEB, which holds tech and consumer internet names, is only up about 0.7 percent. Meanwhile individual ADRs are getting hammered. Luna: It suggests foreign investors are differentiating. They're not just selling China across the board. Lucas: Right. They're rotating out of the names that depend on Chinese consumer spending and into the ones that benefit from global trade and government support. JD.com down almost three percent in five days, Pinduoduo down over four percent. Those are consumer stories. Luna: And yet the macro data we have — exports up, trade balance improving — points to an economy that's still growing. Lucas: Yes, but it's a specific kind of growth. It's high-end manufacturing, green energy equipment, electric vehicles. Those sectors are booming. But the domestic consumer is still cautious. You can see it in the stock performance of companies that rely on household spending. Luna: So the yuan is basically saying 'the export machine is fine,' while the stock market is saying 'the consumer is not fine.' Lucas: That's exactly it. And historically, the yuan and Chinese equities have moved together quite closely. When the currency weakened, stocks usually followed. That correlation has broken down in recent months, and this week it's particularly stark. Luna: What does that mean for investors who are looking at China right now? Should they trust the currency signal or the stock signal? Lucas: I think it depends on your time horizon. If you're a macro trader looking at trade flows, the yuan stability is reassuring. But if you're a stock picker looking at earnings, the consumer weakness is real. Alibaba and Baidu are both facing slowing domestic revenue growth, and the market is pricing that in. Luna: And there's also the political risk factor. Trade tensions haven't gone away, even if they're not in the headlines every day. Lucas: Right. The US dollar index is actually up a bit this week — 120.1 — which puts additional pressure on emerging market assets. And the yuan is being managed, let's not forget. The People's Bank is actively setting the daily fix to maintain stability. So the currency isn't freely floating. Luna: So the yuan's steadiness is partly a policy choice, not just a market signal. Lucas: Exactly. The PBOC has been leaning against depreciation since last year. They want to keep the yuan strong to support confidence and to make imports cheaper — especially energy and raw materials. But that also means the currency is less responsive to shifts in investor sentiment. Luna: Which brings us back to the disconnect. The currency says one thing, the stock market says another, and both might be right about their own slice of the economy. Lucas: Yeah. And it's worth noting that this isn't just a China phenomenon. You see similar divergence in other export-heavy economies. But the scale of China's manufacturing sector makes it more pronounced. Luna: Let's talk about that manufacturing sector for a second. Exports are up, but imports are also up — four point four trillion annualized. So domestic demand for raw materials and equipment is still there. Lucas: Right. Imports rose because factories are buying machinery and components to produce goods for export. It's a circular story. The trade balance is still negative overall — about 56 billion in April — but that deficit has been shrinking. Luna: So the factory economy is still running hot, but the consumer economy is cold. That's the two-speed China we keep hearing about. Lucas: And the financial markets are reflecting that split more clearly than they have in years. If you look at the performance of the MCHI ETF — which is more balanced between sectors — it's actually down slightly this week. So even the broad market is struggling. Luna: Which suggests that export strength alone isn't enough to lift the whole market. Lucas: Not when consumer and tech names drag it down. And there's another layer here: the IPO of SpaceX is dominating headlines, and a lot of global capital is flowing toward that story. That pulls attention — and money — away from Chinese equities. Luna: So we have a rotation out of China tech and into US growth stories. Lucas: Exactly. And the yuan can't do anything about that. It's a capital flow issue, not a trade issue. Which brings us back to the core point: the yuan and the stock market are telling different stories because they're responding to different forces. Luna: Yeah. And for listeners trying to make sense of China right now, it's important to not just look at the currency or the index. You have to dig into the sectors. Lucas: Completely agree. And that kind of analysis takes time. It's why we do these deep dives every week — to help people see past the headline numbers. And it's also why we keep the show ad-free. We want to give you the clearest picture we can, without any commercial interruption. Luna: Yeah. If you find value in walking through the economy with us, and you want to support that, the link is buy me a coffee dot com slash fexingo. No pressure, just an option. Lucas: Exactly. It keeps us independent. So back to the disconnect — let's look ahead. If the consumer doesn't recover, will the stock market keep falling even if the yuan holds? Luna: I think that's the key question. The PBOC can manage the currency, but they can't force people to spend. Lucas: Right. And that's why I'm watching consumer confidence data more than the yuan fix right now. If we see a pickup in domestic spending, the stock market could re-correlate with the currency. Until then, the divergence is the story. Luna: So for now, it's two Chinas: one that exports and one that shops. And the markets are pricing them very differently. Lucas: Yeah. And if you're investing, you need to know which China you're betting on.