Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why China Stocks Are Rallying Despite New Tariff Threats
Transcript
- Lucas: So it's Wednesday, June third, 2026, and Chinese equities are having their best week in two months — even as the U.S. proposes fresh tariffs on sixty economies over forced labor trade practices. Luna: That headline sounds like it should be bad for stocks. But the numbers tell a different story. Lucas: Completely different. The KWEB China Internet ETF is up nearly five percent in five days. The FXI, which tracks the big China state-owned enterprises, up almost three percent. Baidu gained over five percent in the same window. NIO up four and a half. Luna: So the market is basically shrugging off what would have been a major headline in 2018 or 2019. What changed? Lucas: I think there are three forces at play. First, expectations for Beijing stimulus are building — there's chatter about a potential reserve requirement ratio cut as early as this month. Second, the tariff proposal is broad but still just a proposal. Markets are learning to wait for the final rule. And third, the yuan has been remarkably stable, hovering around 7.2 to the dollar. Luna: Stable yuan matters because if the currency isn't tanking, foreign investors don't have that panic reason to flee. Lucas: Exactly. And that's a big shift from 2018, when every tariff tweet sent the yuan sliding. The People's Bank of China has been much more proactive this cycle — they've been managing expectations through daily fixing rates and keeping the offshore market supplied with dollar liquidity. Luna: There's also the rotation story. We've been talking for weeks about how China tech stocks are decoupling from the broader economy. The KWEB has been climbing even as consumer data remains sluggish. Lucas: Right. And that decoupling is partly driven by a specific bet: humanoid robots. There's a huge wave of investment flowing into Chinese companies that supply components for robotics — sensors, motors, batteries. It's pulling capital into names like Baidu and even some EV makers who are positioning their factories as robotics platforms. Luna: So the trade war narrative is competing with a tech-cycle narrative, and the tech cycle seems to be winning for now. Lucas: I think that's fair. Let's look at the actual trade numbers for a second. The latest data shows China's exports of goods and services hit three point five trillion dollars annualized in January, up from three point three five trillion the previous period. Imports also rose, to four point four trillion. So trade volume is actually increasing — the surplus is narrowing, but the flow is still strong. Luna: Which means the tariff threat isn't hitting actual supply chains yet. It's still in the proposal phase. Markets are pricing the risk, not the reality. Lucas: Yeah. And that risk premium seems to be shrinking. The VIX for Chinese equities — there's a China VIX proxy — has been declining for weeks. Options markets are not pricing in a tail event. Luna: On that point about the yuan — we saw the yen weaken a tick, to 159.2 per dollar. That suggests the broader EM currency complex is under some pressure, but China is holding its own. Lucas: And that's partly because the PBOC has a credibility advantage now. They've been running a very tight ship on currency management. The offshore forward market shows only about two percent depreciation expected over the next twelve months. That's nothing compared to the volatility we saw in 2015 or 2018. Luna: So the market is essentially saying: tariffs are a known unknown, but the currency is a known stable, and stimulus is a likely catalyst. That's a constructive setup. Lucas: I'd add one more thing. The consumer data we've been tracking — retail sales, service PMIs — they're still soft. But the market seems to be looking past that, betting on a stimulus lift. If Beijing does deliver a meaningful package, these current levels could look cheap. Luna: You know, this is the kind of episode where I realize how much time we spend digging into these numbers day after day. And it's genuinely fun — but it also takes work. Lucas: It does. And listener support is what keeps the podcast ad-free and independent. If you've gotten something out of walking through the economy with us, a couple of dollars a month makes a real difference. You can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small thing that adds up. And we appreciate every bit of it. Lucas: Alright, back to the markets. One risk I want to flag: the tariff proposal isn't just about China. It targets sixty economies, which includes Vietnam, Thailand, Mexico — places that have become alternative supply chain hubs. That could actually be a relative positive for China if it disrupts competitors more. Luna: Interesting. So China could actually gain market share if the tariff net is cast too wide. Lucas: It's a plausible scenario. If you're a multinational and your Vietnam factory faces the same tariff risk as your China factory, you might not bother moving. And the China factories are already more efficient. Luna: That tracks with what we're seeing in the export data — China's exports still growing despite all the noise. Lucas: Exactly. So the market's rally may actually be rational if you believe the tariff threat is either a negotiating tactic or too blunt to be effective. Either way, the structural advantages of China's manufacturing ecosystem remain intact. Luna: Let's talk about the tech-specific names. Baidu up over five percent this week — that seems tied to the robotics story. Lucas: Baidu is interesting because it's both an AI play and a robotics play. They've been investing heavily in autonomous driving and warehouse automation, and there's a lot of investor enthusiasm around humanoid robots as the next platform shift. Apollo Go, their robotaxi unit, is expanding to more cities. That narrative is pulling in growth investors who don't care much about the tariff noise. Luna: And NIO? Up four and a half percent. Still an EV company, but also seen as a potential robotics beneficiary. Lucas: NIO is more about the EV space itself. There's a sense that the worst of the price war is behind them, and that the company is stabilizing. They've cut costs, improved margins slightly, and the battery swap network is a differentiator. Plus, any EV stimulus from Beijing would help them disproportionately. Luna: What about Alibaba and JD? Both up but less — two and four percent respectively. They seem more tied to consumer sentiment. Lucas: Right. Alibaba and JD are more exposed to domestic consumption, which remains weak. So their rallies are more muted. The market is rewarding companies with a tech or export angle, not pure domestic consumer plays. Luna: So the rally is selective. It's not a broad China reopening trade. Lucas: Not at all. If you look at the MCHI ETF, which is broader, it's up three percent — decent, but not as strong as KWEB. The divergence between tech and the broader market is still very much intact. Luna: Let's zoom out. Where does this leave us for the rest of the quarter? We're in early June. What catalysts are on the horizon? Lucas: The biggest near-term catalyst is the Politburo meeting later this month, where we could get clarity on stimulus. There's also the Fed meeting in mid-June, which will affect the dollar and EM flows. And then the tariff proposal has a sixty-day comment period, so the next headline could come in August. Luna: So the next few weeks could be quiet for trade news, which gives the rally room to run if stimulus hopes stay high. Lucas: That's the base case. But I always worry about a surprise — like if the U.S. actually follows through on the tariffs faster than expected, or if Beijing disappoints on stimulus. The risk is asymmetric to the downside. Luna: But right now, the data says investors are willing to look through the noise. And as we've seen, the numbers — KWEB up five percent, Baidu up five, NIO up four and a half — those aren't small moves. Lucas: They're not. And they're happening in the face of what would have been a market-moving headline five years ago. That tells you something about how much the China market narrative has evolved. Luna: Or maybe it tells you that markets have a short memory. Lucas: Could be both. But for now, the rally is real. And the fundamentals — stimulus expectations, stable yuan, tech rotation — are supporting it. We'll see how long it lasts. Luna: On that note, we'll keep watching. Thanks for joining us. Lucas: Take care, everyone.