Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why China Tech Stocks Are Tumbling Despite Strong Earnings
Transcript
- Lucas: So Luna, let's talk about the elephant in the room: Chinese tech stocks are having a rough week. JD is down more than eleven percent in five days, PDD is off nearly eight, and the KWEB ETF has shed over six percent. And this isn't just a blip — it's a broad sell-off across the board. Luna: Yeah, and what's striking is that this isn't happening in a vacuum. The yuan is basically flat at 6.75 per dollar, and we haven't seen any major negative headlines out of Beijing. So what's actually driving this? Lucas: Right. The usual suspects — trade tensions, currency weakness — aren't really in play here. The yuan is steady, and the trade deficit actually narrowed slightly in June. So the market is telling a different story, and I think it's a mix of a few things. Luna: Walk me through that. What are the moving parts? Lucas: Well, first, there's the AI trade. Money is pouring into US AI names, and that's pulling capital away from just about everything else, including Chinese tech. When NVIDIA and the like are ripping, investors sell their laggards to fund those positions. Luna: So it's a rotation, not necessarily a rejection of China fundamentals. Lucas: Exactly. And second, there's profit-taking. These stocks had a massive run-up over the past year. The KWEB ETF nearly doubled from its lows. So some of this is just people locking in gains. Luna: That makes sense. But there's also that headline about Steve Eisman — the 'Big Short' guy — warning about an Achilles' heel in the AI boom. Does that play into the China sell-off? Lucas: It's connected. If the AI trade is the thing pulling money out of China, any fear about AI sustainability could trigger a double whammy — investors might sell their AI winners and also reassess the whole risk appetite. But China tech isn't just a passive victim here; there are China-specific factors too. Luna: Like what? Lucas: Regulatory overhang, for one. Even though we haven't seen new crackdowns, the memory of 2021 is fresh. And then there's the broader macro picture — the current account deficit is still wide, about 227 billion as of the first quarter. That keeps some investors cautious on the yuan and Chinese assets in general. Luna: So the deficit is still a drag, even if the trade balance improved a bit. Lucas: Right. The trade deficit is narrowing but the current account is still deeply negative, which is unusual for China. That makes the currency more vulnerable over the long haul, and that's a headwind for foreign investors. Luna: But hold on — the yuan has been stable at 6.75. Why isn't it weakening if the current account is so negative? Lucas: Because the central bank is managing it. They've been using a mix of tools — setting a firm daily fixing, keeping onshore liquidity tight, and maybe guiding state banks to support the currency. They want stability, and so far they're getting it. But it's a delicate balance. Luna: So the stability is somewhat artificial. That's a bit concerning for someone looking at these stocks. Lucas: It's something to watch. But let's not forget that the earnings story is actually pretty solid. JD and PDD both reported strong numbers recently. So the sell-off isn't about fundamentals deteriorating — it's more about positioning and sentiment. Luna: That's the classic disconnect. Stocks fall despite good earnings because expectations were too high. Lucas: Exactly. And that's probably the biggest factor here. These stocks ran up so much that even good news wasn't enough to justify the valuations. When JD missed on some metrics, the market punished it brutally. Luna: So is this a buying opportunity for someone with a longer horizon, or is the pain not over? Lucas: That's the million-dollar question. On one hand, if you believe in the long-term growth of Chinese consumption and tech, these prices are more attractive than they were a week ago. On the other hand, the regulatory and geopolitical risks are still there, and the ai driven rotation could continue. Luna: So it's a classic risk-reward trade-off. I'd lean towards saying that for a patient investor, the fundamentals do matter more than the weekly zigzag. Lucas: I think that's fair. But you need to be selective. Not all these companies are created equal. JD has a solid logistics moat, PDD has its overseas growth, Alibaba is investing heavily in AI. You have to pick your spots. Luna: And speaking of AI, what about the Anthropic IPO news? Does that have any bearing on China tech? Lucas: Indirectly, yes. If Anthropic does go public and gets a huge valuation, it could fuel more enthusiasm for AI plays globally, which might actually renew interest in Chinese AI names like Alibaba. But it could also just reinforce the 'AI is the only game in town' mentality, which drains capital from other sectors. Luna: So the IPO could cut both ways. It's not a clear catalyst for China tech, at least not yet. Lucas: Right. And that's kind of the theme of this sell-off — it's not a single narrative. It's a mix of global rotation, profit-taking, and lingering China-specific concerns that are hard to shake. Luna: So what should an investor actually do right now? Just sit tight, or use this as a chance to add? Lucas: I think it depends on your time horizon. If you're a long-term investor who believes in the China consumption story, days like these are actually when you want to be adding — but only in names where you're confident in the underlying business. If you're more of a trader, you might want to wait for the dust to settle. Luna: That's a sensible way to look at it. And honestly, that kind of thoughtful approach is what keeps me coming back to this show. We try to make sense of the noise without getting caught up in the daily drama. Lucas: We do. And you know, if episodes like this have helped you think more clearly about your own investments, that's the kind of thing that makes this whole project worthwhile. If you've ever considered showing some support, there's a link on our website — buy me a coffee dot com slash fexingo. The smallest coffee keeps us going. Luna: Yeah, it really does help us keep the lights on and stay independent. Lucas: Anyway, back to the sell-off. I think the key takeaway is that this is more about positioning than fundamentals. The question is whether the market will start to refocus on earnings again, or if the AI trade will keep dominating for the rest of the year. Luna: And that's the thing to watch in the coming weeks. If we see a stabilisation in these ETFs, it might signal that the selling is done. But if the broader market weakens, China tech could get caught in the downdraft again. Lucas: Exactly. So keep an eye on the KWEB and FXI, and also on the yuan. If the yuan starts to weaken past 6.8, that would be a red flag. But for now, it's holding firm. Luna: I guess the bottom line is: don't panic, but don't be complacent either. It's a time for careful stock-picking rather than blanket bets. Lucas: Well said. And that's the kind of nuance we'll keep bringing you every day on this show. Until tomorrow, keep your head straight and your horizon long.