Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why China Tech Stocks Are Falling Despite Earnings Growth
Transcript
- Lucas: So China tech stocks are having a rough week. The KWEB ETF, which tracks Chinese internet companies, is down more than four percent over the last five days. That's not a blip. Luna: And it's not just the ETF. NIO is down eleven percent in the same period. Baidu lost seven percent. Lucas: Right. And this comes despite what, on paper, look like decent earnings from some of these names. Alibaba and PDD both reported solid quarters. So the obvious question is: why is the market selling? Luna: I think the first place to look is the yuan. It's at 6.81 against the dollar, and it's been weakening. A weaker yuan makes Chinese assets less attractive for foreign investors. Lucas: Exactly. And the dollar is strong — the trade-weighted dollar index just hit 119.3, up again this month. When the dollar strengthens, capital tends to flow out of emerging markets, and China is the biggest EM allocation for most global funds. Luna: But there's also a trade story here. China's trade surplus narrowed in March. Imports are growing faster than exports. That tells you domestic demand might be picking up, but it also means the trade surplus that was supporting the economy is shrinking. Lucas: And the tariff backdrop doesn't help. Even though there hasn't been a major escalation this week, the market is pricing in a higher probability of renewed US tariffs. The headlines out of Washington are all about trade friction. That weighs on sentiment for any China-exposed stock. Luna: So investors are looking at Alibaba reporting good earnings and saying, 'Yeah, but what about next quarter if tariffs hit?' Lucas: Exactly. And it's not just Alibaba. JD is down three and a half percent this week. Baidu, which has been trying to pivot to AI, is getting hammered. The market is treating all of them with the same brush right now. Luna: There's also a regulatory angle that's quietly resurfacing. China's crackdown on tech isn't as loud as it was in 2021, but there are still new rules around data security and algorithm transparency. It adds a layer of uncertainty. Lucas: Yeah, it's a slow burn rather than a headline event. But it means the regulatory risk premium stays embedded in these stocks. So you have three things: a strong dollar, trade war fears, and ongoing regulatory oversight. That's a tough combination. Luna: And yet, valuations are lower than they've been in years. The question is whether that's a value trap or a genuine opportunity. Lucas: That's the key debate. On one hand, Alibaba trades at a price to earnings ratio that's roughly half of where it was five years ago. PDD is even cheaper on a forward earnings basis. If you believe the earnings are sustainable, those multiples look compelling. Luna: But if the earnings get crushed by tariffs or a domestic slowdown, then the low P/E is just a mirage. The market is essentially saying, 'We don't trust these numbers.' Lucas: Right. And you can see that in the options market. Put premiums on the KWEB and FXI are elevated. Investors are hedging, not buying the dip. Luna: So what would change the narrative? What would make foreign capital come back to China tech? Lucas: A few things. One: a clear de-escalation on tariffs. Two: a stabilization in the yuan. If the yuan strengthens back below 6.7, that would signal confidence. Three: a catalyst like a major IPO that reignites interest. But none of those are imminent. Luna: There's also the domestic consumption story. If China's consumers start spending again — and there are some signs of life in retail sales — that would boost companies like JD and Alibaba that depend on e-commerce. Lucas: Yeah, the export data we saw earlier this year showed exports growing, but imports growing faster. That suggests domestic demand is picking up. It's just not happening fast enough to offset the external headwinds. Luna: So for a long-term investor, this might be a time to start building a position slowly. For a trader, it's probably a 'don't catch a falling knife.' Lucas: I think that's a fair framing. And listen, if today's episode was useful to you and you want to keep it ad-free, buy me a coffee dot com slash fexingo helps. Even a couple of dollars a month means we can keep producing these. If it's worth that to you, that's the link. Luna: Yeah, it genuinely makes a difference. Appreciate everyone who chips in. Lucas: So let's zoom in on one stock that's been particularly punished: NIO. Down eleven percent in a week. That's brutal. Luna: NIO is a interesting case because it's not just macro. The company reported delivery numbers that missed expectations. And they're burning cash faster than some competitors. Lucas: Right. NIO is caught in a perfect storm. The EV market in China is hyper-competitive — BYD is dominant, and new players like Xiaomi are entering. NIO's premium brand positioning means they need to maintain pricing power, but they're being squeezed. Luna: And the tariffs on Chinese EVs in the US and Europe are a real threat. NIO had ambitions to expand globally, but that's getting harder. Lucas: Exactly. So for NIO, the selloff is partly macro, partly company-specific. That's a dangerous combination. The stock is down more than fifty percent from its 2021 highs. It's not a value play — it's a turnaround story that hasn't turned yet. Luna: Compare that to PDD, which is only down one percent this week. PDD's business model — discount e-commerce — actually benefits from a weaker economy. Consumers trade down, and PDD wins. Lucas: That's a great point. PDD is almost a defensive play within China tech. Their Temu business is also growing internationally, which diversifies their revenue away from China. So the market is rewarding that resilience. Luna: So it's not a uniform selloff. There's differentiation. Alibaba is down more than PDD, but less than Baidu. The market is discriminating. Lucas: Right. And that tells you that active stock picking matters in this environment. You can't just buy the KWEB and hope. You have to be selective. Luna: What about the broader China economy? The trade balance data we mentioned — imports growing faster than exports — is that a positive or a negative? Lucas: It's mixed. Stronger imports mean domestic demand is improving, which is good for consumption stocks. But it also means the trade surplus is shrinking, which reduces the cushion against capital outflows. If the surplus keeps narrowing, it puts more pressure on the yuan. Luna: And a weaker yuan then feeds back into stock market sentiment. It's a loop. Lucas: Exactly. So the near-term outlook for China tech is uncertain. But if you're a long-term investor, the valuations are attractive. The question is whether you have the patience to wait for the macro clouds to clear. Luna: And whether you believe the earnings will hold up. That's the bet. Lucas: Right. And for now, the market is saying 'no.' But markets are forward-looking. If the data starts to improve, sentiment can turn quickly. Luna: I guess we'll see what next week brings. Lucas: We will. And we'll be here to break it down.