Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why China Stocks Are Falling More Than the Yuan
Transcript
- Lucas: So we're halfway through June 2026, and I keep staring at this one number. The KWEB ETF, which tracks Chinese internet stocks, is down over seven percent in the last five trading days. Baidu alone fell nearly thirteen percent in that window. And the yuan? It barely budged — from 6.78 to 6.77 against the dollar. That's a rounding error. Luna: That gap feels meaningful. Markets usually move currencies and stocks together on China news. What's breaking the link? Lucas: Well, traditionally if you saw a China stock rout like this, the yuan would weaken in sympathy — investors selling yuan to get out of China exposure. But that's not happening. The yuan is essentially flat. And the trade-weighted dollar index actually dipped a little, down to 118.9. So it's not a broad dollar strength story either. Luna: So the selling is specific to equities, not the currency. That suggests the move is about company-level earnings fears, not macro capital flight. Lucas: Exactly. And look at what's driving the Baidu drop — twelve and a half percent in a week. That's not a broad tariff shock; that's a stock-specific reassessment. Baidu's AI monetization is taking longer than expected, and ad revenue is still soft. Alibaba is down eight percent, JD down nearly five. These are companies whose earnings are tied to Chinese consumer spending and business investment — two areas that are still sluggish. Luna: Meanwhile, the yuan is being supported by the PBOC's managed float and the fact that China's trade surplus, while shrinking, is still massive. Exports hit a record high earlier this year. Lucas: Right. Exports of goods and services were over three and a half trillion dollars in January. That's up from the prior quarter. So the currency has a real trade flow backing it. Exporters are converting dollars into yuan, which creates a natural floor. The PBOC also doesn't want a weaker yuan right now — it would aggravate trading partners and fuel inflation on imported commodities. Luna: So the stock selloff is a profit warning, not a currency crisis. That's actually less scary for the broader economy, but it's brutal for anyone holding China ADRs. Lucas: Yeah. And it creates an interesting puzzle for allocators. If you're a global fund manager and you see Chinese stocks getting hammered but the yuan stable, do you buy the dip? Or do you read the equity rout as a leading indicator that the PBOC will eventually have to ease policy, which would weaken the yuan and hurt your FX return? Luna: That's the tightrope. And the PBOC is in a tricky spot because if they cut rates to stimulate the stock market, they risk putting pressure on the yuan. They've been keeping one-year loan prime rate steady for months. Lucas: So they're stuck. The equity market is signalling that the domestic economy needs support. But the currency market is saying, don't rock the boat — the trade surplus is still your best card. And the PBOC has made it clear they prioritize currency stability above all else. They've got a bandwidth of maybe 50 basis points either way on the yuan, and they're using it. Luna: Let me push back on that a little. The yuan is pegged to a basket, but it's not completely fixed. Could this period of divergence end with a sudden yuan depreciation that catches everyone off guard? Lucas: It could, but I'd say the probability is low in the near term. The PBOC has been very disciplined. They've allowed gradual depreciation over years, not sharp moves. And the trade surplus gives them cover. What would trigger a sudden devaluation is if the US imposes a big new round of tariffs that specifically targets China's exports — something beyond the current rhetoric. Luna: And that's still on the table. The tariff environment is uncertain. But the market seems to be pricing in a scenario where tariffs hurt corporate profits more than they hurt the currency. Lucas: That's exactly the read-through. The equity market is looking at earnings and saying, even if the yuan holds, these companies are going to make less money because of trade friction and weak domestic demand. Baidu and Alibaba are ad-driven — if businesses are cautious about spending, that hits their top line directly. Luna: Meanwhile, the exporters that underpin the yuan's strength — the manufacturers, the EV companies, the solar panel makers — those stocks are also getting hit. NIO is down nearly nine percent in five days. Lucas: Right. So it's not just consumer tech. EV stocks are getting crushed too. The market is saying that trade headwinds are broad-based and that the earnings outlook for Chinese companies is deteriorating across sectors. The only thing holding the yuan up is the sheer volume of dollar inflows from exports that still exist. Luna: But those inflows could slow if global demand weakens. The latest trade balance data showed the surplus narrowing — from 57.8 billion to 60.3 billion. That's still a surplus, but it's not growing. Lucas: And that's the key risk. If the trade surplus starts to shrink more sharply, the yuan support weakens. Then you could see both stocks and currency fall together. But right now, the divergence tells us that investors are differentiating between a trade flow story and an earnings story. Luna: So what's the one thing a listener should take away from this episode about the China stock selloff? Lucas: That the yuan is not a canary in the coal mine for China equities anymore. The PBOC has insulated the currency through intervention and a still-healthy trade surplus, but the stock market is voting with its feet on the earnings outlook. If you're watching China, watch the companies, not just the exchange rate. Luna: That's a good framework. And it also means that any recovery in Chinese stocks will need to come from either a catalyst in domestic demand or a resolution on tariffs — not just a weaker yuan. Lucas: Exactly. We're recording this on June 8th, 2026. The next few weeks will tell us whether this is a mid-year correction or the start of a deeper repricing. If tariffs escalate, the yuan might finally join the equity market on the downside. But if trade talks stay quiet, the PBOC might let the yuan drift a bit lower to help exporters — which could eventually lift stocks. Luna: One thing I really appreciate about these episodes is that we look at the numbers without the hype. If today's breakdown helped clarify a confusing market move, that's exactly what this show is for. Lucas: Absolutely. And if you find value in that kind of grounded analysis, the best way to keep it going is through listener support. We keep the show ad-free, and it's powered by people who buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small gesture that makes a big difference for us. Thanks for being part of it. Lucas: So back to the divergence we were talking about — another way to frame it is that the yuan is a macro asset, while Chinese equities are a micro asset. The macro picture is stabilizing on trade, but the micro picture is deteriorating on earnings. That's a classic signal to be stock-picking, not index-buying. Luna: And for listeners who want to track this, keep an eye on the PBOC's daily fixing and on Baidu's next earnings report. Those two data points will tell you a lot about where this is headed. Lucas: Good note to end on. We'll be back tomorrow with another angle on China's economy. Thanks for listening.