Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / How China Stocks Benefit from a Weaker Dollar
Transcript
- Lucas: Luna, I spent the morning staring at the China internet ETF — KWEB — up nearly seven percent over the past five trading days. Baidu alone jumped fourteen percent. And this is happening while the dollar is finally starting to soften. Luna: Which is interesting because for most of this year, the dollar has been the 800-pound gorilla crushing emerging markets. So what changed? Lucas: Let's look at the numbers. The trade-weighted dollar index — the one that measures the greenback against a basket of major currencies — it slipped from 121.06 to 120.9 in the last week. That's not a crash, but it's a signal. And the yuan has held steady at 6.80 per dollar, which is actually pretty stable for China. Luna: Right, because a weaker dollar usually means emerging market currencies strengthen, which draws capital into those markets. But the yuan isn't moving much here. Lucas: Exactly. The yuan's stability is partly by design — the People's Bank of China sets the daily fixing, and they've been keeping it tight. But a softer dollar globally reduces the drag on Chinese assets. Dollar-denominated debt gets cheaper to service, and export-oriented companies see better margins when their revenues are in dollars but costs are in yuan. Luna: So the mechanism is: weaker dollar -> less pressure on EM currencies -> more appetite for risk -> Chinese stocks rally. But is this just a short-term relief rally, or could it have legs? Lucas: That's the big question. The tech names — Alibaba, JD.com, Pinduoduo — they've all had a rough couple of years. Regulatory crackdowns, trade war escalation, slowing consumer spending. But look at Pinduoduo: it's up twelve and a half percent in five days. That's not just dollar weakness; that's investors betting the worst is behind them. Luna: And Baidu — fourteen percent — that's a huge move. What's driving that? Lucas: Baidu has been pivoting hard into AI and autonomous driving. They have this robotaxi service, Apollo Go, that's now operating in ten Chinese cities. And with the dollar easing, the narrative shifts from 'China is uninvestable' to 'maybe the valuation is cheap enough.' Baidu's price to earnings ratio is around 12, which is low for a tech company with its pipeline. Luna: Still, we're in an environment where the Fed is saying inflation is too high. Kevin Warsh just said that yesterday. So the dollar could strengthen again if the Fed hikes more. Lucas: That's the risk. The Fed's hawkish stance caps the downside for the dollar. But the market is pricing in a peak — maybe one more hike this year, then cuts in 2027. If that's the case, the dollar's strength might have peaked. And that would be a tailwind for Chinese equities. Luna: Also worth noting: the trade surplus is still massive. Exports are up, imports are up too. China's current account surplus is narrowing, but it's still positive. That supports the yuan. Lucas: Yeah, the current account ran a $226 billion surplus in the first quarter. That's down from $221 billion in Q4, but still huge. And exports of goods and services hit $3.5 trillion annualized. So the underlying trade engine is strong. Luna: That surplus gives the PBOC room to keep the yuan stable without burning reserves. And a stable yuan, plus a weaker dollar globally, creates a sweet spot for Chinese stocks. Lucas: Let's talk about the sectors benefiting most. It's not just tech. The KraneShares CSI China Internet ETF — ticker KWEB — is up nearly 7%. But also look at the broader China ETF, FXI, which is up 1.4%. That's more modest because it includes banks and industrials, which aren't as sensitive to dollar moves. Luna: Tech is the high-beta play. If the dollar weakens further, tech rallies more. But if the dollar reverses, tech gets hit hardest. Lucas: Precisely. Now, one headwind: trade tensions haven't gone away. The US just said it won't renew the USMCA, opening new negotiations with Canada and Mexico. That's not directly about China, but it signals a protectionist stance that could spill over. And China's own export curbs on Japan — targeting drone and defense sectors — show Beijing is playing hardball too. Luna: So the rally is happening against a backdrop of ongoing geopolitical risk. That makes it fragile. Lucas: Exactly. But market moves are about marginal buyers. The marginal buyer right now sees a weaker dollar, cheap valuations, and a policy environment in China that's becoming more supportive. The government has been rolling out stimulus for consumer spending, and they're easing regulatory pressure on tech. Luna: So the question for investors: is this the start of a rotation back into China, or just a dead cat bounce? Lucas: I think it's more than a bounce, but it's not a straight line. The dollar index at 120.9 is still historically high. If it drops to 115 or lower, you could see a significant re-rating. But that would require the Fed to signal cuts, which isn't happening yet. Luna: One thing I want to circle back to: the yuan is steady, but if the dollar weakens and the yuan doesn't appreciate, that's actually good for Chinese exporters. Their goods become cheaper in dollar terms, boosting competitiveness. Lucas: That's a key point. A stable yuan against a falling dollar means the yuan is effectively weakening against other currencies. That's a tailwind for exports, which helps the earnings of companies like JD.com and Alibaba that have large cross-border businesses. Luna: So the setup is: dollar down, yuan stable, exports strong, tech stocks cheap. That's a pretty compelling narrative. Lucas: It is. But let's not ignore the consumer side. Chinese consumer spending is still sluggish. Retail sales growth has been below 5% for months. And youth unemployment is over 20%. So the domestic demand story is weak. Luna: Which is why the rally is concentrated in tech and export-oriented names, not consumer staples or domestic plays. Lucas: Exactly. The MCHI ETF, which is the broad China ETF, is up only 1.9% in the last week. That's less than KWEB because it has more exposure to the domestic economy. Luna: So the dollar-driven rally is real, but it's selective. Lucas: Yes. And that selectivity tells you where the smart money is flowing. If you believe the dollar has peaked, you buy Chinese tech. If you're not sure, you sit on your hands. Luna: Speaking of sitting on hands, Lucas, we've been doing this podcast for a while now, and one thing I hear from listeners is that they appreciate the ad-free, data-driven format. If you've gotten something out of walking through the economy with us, buy me a coffee dot com slash fexingo is a simple way to keep this going. Lucas: Yeah, it genuinely makes a difference. A couple of dollars a month helps us keep the lights on and the mics running. No pressure, just a way to support if you've found value here. Luna: Right. And now back to the macro picture. So we've got this dollar weakness, but the Fed is still hawkish. How do you reconcile that? Lucas: The market is looking through the hawkish rhetoric to the data. Inflation is coming down, even if it's still above target. The Fed funds rate is at 5.5% or so. Once the market believes the next move is a cut, the dollar will weaken further. That's when Chinese stocks could really take off. Luna: But until then, it's a tug of war. Lucas: Exactly. And that's why you're seeing these sharp rallies followed by consolidation. The trend is your friend, but the volatility can be brutal. Luna: Let's zoom out. China's economy is still growing at around 5% annually. That's slower than before, but it's still growth. And the stock market is pricing in a lot of bad news. Lucas: Right. The forward P/E on the MSCI China Index is around 10, which is a discount to the S&P 500's 20. So there's a value argument even without the dollar story. Luna: So the dollar weakness is the catalyst, but the fundamental case is there too. Lucas: That's the way I see it. The market is waiting for a reason to buy, and the dollar giving ground is that reason. If the trend continues, we could see a sustained rally through the rest of the year. Luna: Interesting. So to sum up: watch the dollar index. If it breaks below 120, that's a signal. And keep an eye on the yuan fixing — if the PBOC lets it strengthen, that could accelerate the move. Lucas: Great point. And as always, we'll be watching. For now though, the data says this rally has more room to run, but it's not without risks. Trade tensions, Fed policy, and China's own domestic challenges could all throw a wrench in the works. Luna: Alright, Lucas. Good conversation. Let's see what next week brings. Lucas: Sounds good. Until then.