Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why Alibaba's Rally Signals More Than a Bounce
Transcript
- Lucas: So, Alibaba is up almost twelve percent in the last five days. And KWEB, the China internet ETF, is up close to four percent. That's a big move for a week. Luna: Yeah, that's not a slow grind. That's a sprint. What's driving it? Lucas: A few things. One is the hope for a deal to reopen the Strait of Hormuz. Treasury Secretary Bessent said there might be a deal as soon as this week with 'freedom of movement'. Oil prices tumbled on that news, and for a net importer like China, cheaper oil is a big deal. Luna: Right, because China's import bill has been a drag. The trade deficit was over 73 billion in June. Though that's actually improved from the month before. Lucas: Exactly. The goods and services deficit narrowed from about 77.6 billion to 73.3 billion. But the current account deficit is still running at an annualized rate of over 226 billion dollars. That's a structural story, not a blip. Luna: So the market is rallying in the face of a pretty big current account gap. That seems like a disconnect. Lucas: It is, unless you think the deficit is going to narrow. And there are reasons to think that might happen. If Hormuz reopens, oil prices could stay lower. That directly reduces China's import costs. Plus, exports have been picking up. April exports were 3.75 trillion dollars, up from 3.5 trillion the month before. Luna: So the trade data is not all bad. Exports are growing, imports are growing too, but the gap is still there. Lucas: Right. And the yuan has been remarkably stable. It's trading at 6.75 per dollar, flat over the last week. Beijing hasn't had to burn reserves to defend it. That stability is a signal to investors that the authorities are comfortable with the current trajectory. Luna: But how long can that last if the current account deficit keeps widening? At some point, doesn't the currency come under pressure? Lucas: That's the question. The current account deficit is a relatively new phenomenon for China. For decades, it ran surpluses. Now it's in deficit, partly because of the import bill and partly because of structural changes in the economy. But the yuan hasn't crashed, which suggests the market is looking through this. Luna: Looking through it how? Are investors betting on a recovery in exports, or are they just ignoring the deficit because the stocks are cheap? Lucas: Probably a bit of both. Chinese tech stocks have been beaten down for years. Valuations are low compared to their US peers. And there's a sense that the worst of the regulatory crackdown is over. Beijing has been more supportive lately, talking about stimulus for consumer spending. Luna: So this rally is a bet on policy support and a recovery in the real economy, not just a bounce on oil news. Lucas: That's right. And the fact that it's broad-based matters. It's not just Alibaba. JD is up over two percent, Baidu is up over seven percent, NIO is up slightly, PDD is up three percent. That's a broad move across Chinese tech. Luna: But can it last? I mean, the current account deficit is still huge. And if the Hormuz deal falls through, oil goes back up, and the trade deficit worsens again. Lucas: Absolutely. There's a lot of uncertainty. But the market is a discounting machine. It's looking ahead to a scenario where China's export machine kicks back into gear, and the import bill moderates. If that happens, the deficit narrows, and the yuan stays stable. That's the bull case. Luna: So what would break that case? What should we watch for? Lucas: The obvious thing is oil. If the Hormuz talks collapse and oil spikes, that's a direct hit to China's terms of trade. Also, watch the yuan. If it starts to weaken past 6.80 or so, that could signal that Beijing is less confident than it appears. Luna: And what about the actual trade data? The June deficit was 73 billion. If July's number comes in wider, that could spook the market. Lucas: Yeah, the July data will be released in early September, I think. That'll be a key test. But for now, the market is choosing to focus on the positives: the potential oil deal, the stable yuan, and the prospect of more stimulus. Luna: It feels like a bet on the future rather than a reaction to the present. Lucas: Exactly. And that's what makes it interesting. We're seeing a shift in sentiment from 'China is uninvestable' to 'China is a market you can't ignore'. If that shift sticks, it could have legs. Luna: So, if I'm an investor, is it too late to get in? Or is this just the beginning? Lucas: I'm not going to give investment advice, but I can say that the current rally is still below the levels we saw in early 2021. So there's room to run if the fundamentals improve. But it's not a one-way bet. There are risks. Luna: Like the trade deficit, the geopolitical tensions, and the risk of a global slowdown. Lucas: Right. And that's what makes this such a fascinating moment. You have a market that's rallying on hope, while the economic data is still mixed. It's a classic tension between the forward-looking investor and the rearview-mirror economist. Luna: That's a nice way to put it. And speaking of looking forward, if you're finding this conversation useful, there's a small way to keep the show going — if today's episode was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small thing, but it helps us stay ad-free and keep digging into these stories. We appreciate it. Luna: So, back to the markets — what do you think is the single most important metric to watch between now and the next data release? Lucas: For me, it's the yuan. It's been the anchor of stability. If it stays at 6.75, that tells me Beijing is comfortable. If it drifts to 6.80 or beyond, that's a signal that the current account deficit is starting to bite. Luna: And what about the stock rally itself? Is it sustainable, or are we setting up for a pullback? Lucas: I think the rally can hold if the Hormuz deal goes through and oil stays low. But a lot of that is already priced in. The real test will be whether the next round of trade data confirms the improvement. If it does, this could be the start of a longer re-rating. Luna: So we're at a pivotal point for China's markets and economy. Lucas: Absolutely. And that's why we're spending the time on it. The next few weeks will tell us a lot about the direction of Chinese assets for the rest of the year.