Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why China Stocks Are Falling Despite Strong Yuan and Trade Surplus
Transcript
- Lucas: It has been a brutal week for Chinese stocks listed in the US. Alibaba down ten percent in five days. JD.com, Baidu, NIO all off seven percent or more. The big China ETFs, FXI and KWEB, are each down around five percent. Luna: And this is happening even though the yuan is basically flat against the dollar. China's trade surplus is still huge. So what gives? Lucas: Right. And that's exactly the puzzle I want to drill into. Because if you look at the macro data — yuan at 6.77 per dollar, trade balance still positive — you'd think Chinese assets should be fine. But there's a specific mechanism here involving the dollar index and how Chinese ADRs are priced. Lucas: By the way, this is the kind of thing we dig into every day on this show, and we can do it because a handful of listeners chip in monthly at buy me a coffee dot com slash fexingo. It keeps the show ad-free and independent. If you've gotten something out of our economics coverage, that's the place to help. Luna: Absolutely. It makes a real difference. Appreciate everyone who does. Lucas: So let's unpack the dollar angle. The trade-weighted US dollar index hit 120.4 as of last week. That's up from around 119 a month ago. When the dollar strengthens broadly, it puts downward pressure on dollar-denominated Chinese stocks for a couple of reasons. Luna: One factor is that these ADRs are priced in dollars, but the underlying value is in yuan. So if the dollar gets stronger, the yuan-denominated earnings are worth less in dollar terms. Lucas: Exactly. But there's a more immediate channel. Many of these Chinese tech companies — Alibaba, Baidu, JD — have significant revenue exposure outside China. A strong dollar makes their products more expensive for overseas customers, which can hit earnings. And the market is pricing that in right now. Luna: Plus, there's the tariff headline risk. Trump just threatened 100 percent tariffs on countries that impose digital services taxes on American companies. That's directly aimed at Chinese tech giants. Lucas: That's the second layer. The digital services tax issue has been simmering for a while. Several European countries have these taxes, and the US has threatened retaliation before. But now Trump is explicitly naming it, and that creates uncertainty for Chinese firms with global digital advertising and e-commerce revenue. Luna: And it's not just a threat. The executive order mechanism is already in place from previous trade actions. So this could move quickly. Lucas: Let me give listeners a specific number. Over the past 12 months, there's been a 0.85 correlation between the weekly change in the trade-weighted dollar index and the weekly return of the KWEB China internet ETF. That's a tight relationship. So when the dollar jumps, Chinese tech stocks almost always fall. Luna: And this week we saw the dollar index rise about one percent. That alone could explain a big chunk of the selloff. Lucas: Right. But it's not the whole story. Look at Alibaba specifically. It's down ten percent in five days. That's more than what a one percent dollar move would suggest. So there's something else going on. Luna: My guess is the digital services tax threat is hitting Alibaba hardest because it has a huge cloud computing and advertising business outside China. Alibaba Cloud is one of the top three cloud providers in Asia. Lucas: Exactly. And Alibaba's international commerce revenue grew 30 percent last quarter. A tariff on digital services would directly impact that growth. The market is pricing in a worst-case scenario. Luna: So what about the other big names? Baidu is down seven percent. That's mostly search advertising, but they also have autonomous driving and cloud. JD is also down seven percent — more e-commerce, less international exposure. Lucas: JD is interesting because it's more domestically focused. Its revenue is almost entirely within China. So the dollar strength and digital services tax shouldn't hit it as hard. But it's down the same as Baidu. That tells me there's a broad risk-off move happening across Chinese ADRs. Luna: Probably a liquidity factor. When foreign investors get nervous about China, they sell everything, not just the names that are directly exposed. Lucas: And that's consistent with what we're seeing in the ETF flows. The iShares China Large-Cap ETF, ticker FXI, had net outflows of about 300 million dollars this week. That's a significant move for a fund that size. Luna: Meanwhile, the macro data is still solid. China's trade surplus was 56 billion dollars in April. Exports are growing. So this selloff is really about policy uncertainty and currency, not about a deterioration in the underlying economy. Lucas: That's a key distinction. The economy is fine. The stock market is reacting to specific risks. And those risks are real. But they're not the same as a recession or a credit crisis. Luna: So for someone holding these stocks or thinking of buying, what's the takeaway? Lucas: I'd say watch two things: first, the trade-weighted dollar index. If it keeps rising, expect more pressure. Second, watch for any clarification on the digital services tax threat. If Trump backs down or negotiates, you could see a sharp rebound. But if he follows through, the selloff could deepen. Luna: And the yuan itself? It's been stable at 6.77. But if the dollar keeps strengthening, the People's Bank of China might let the yuan weaken further. That would be another headwind for ADR valuations. Lucas: It's a complicated picture. But the core lesson is: when you invest in Chinese stocks, you're not just betting on China's economy. You're also betting on US trade policy and global currency markets. Luna: And that's why we're seeing these big moves. Thanks, Lucas. Lucas: Thanks, Luna. And if you want to keep following these threads, you know where to find us.