Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / How China Consumer Stocks Are Getting Crushed by Trade War Pain
Transcript
- Lucas: Alibaba down 11 percent in five days. JD.com down almost 10. Baidu off 7 percent. The sell-off in Chinese tech and consumer stocks this week has been brutal, and it's not just the usual volatility. Luna: Yeah, the numbers are ugly. The iShares China Large-Cap ETF, FXI, lost over 5 percent in the same stretch. And the KWEB, the China internet ETF, dropped more than 6 percent. Lucas: Right. And what's interesting is that this isn't a broad emerging-market sell-off. Other EM markets are relatively calm. This is China-specific, and it ties directly to the trade war escalation we've seen over the past couple of weeks. Luna: So what's the trigger? Because earnings from these companies haven't been terrible. Alibaba's last quarter was actually decent. Lucas: The trigger is policy-driven. On June 18, Beijing announced a new round of retaliatory tariffs on U.S. goods, targeting everything from agricultural products to semiconductors. That came right after the White House imposed 25 percent tariffs on an additional $50 billion of Chinese imports. The market's reading this as a spiral with no clear off-ramp. Luna: And that hits a company like Alibaba specifically because of its cross-border operations. Its international commerce revenue has been a growth driver. Trade friction directly threatens that. Lucas: Exactly. And then you add the yuan factor. The yuan is now at 6.77 per dollar, weakening further this week. A weaker yuan makes Chinese exports cheaper, which sounds good, but for companies that import components — and many Chinese tech firms do — it raises costs. It also spooks foreign investors who worry about capital outflows. Luna: Right. And we saw that in the FXI flows. There was over $400 million in outflows from that ETF in the past week alone. Lucas: Look, there's a deeper story here too. The sell-off is concentrated in consumer-facing names. PDD Holdings, the parent of Pinduoduo and Temu, is down 7.5 percent this week. That's interesting because PDD is supposed to be the discount play, the one that benefits when consumers trade down. But when the whole macro outlook darkens, even discount gets hit. Luna: And on that point — China's retail sales data for May came in weaker than expected. Consumer confidence is clearly softening. So you have both external trade pressure and internal demand weakness. Lucas: That's the one-two punch. And it's why I think this sell-off feels different from earlier dips this year. In February, when Chinese stocks sold off, it was mostly about regulatory fears — the crackdown on tech platforms. That was a policy risk you could model. This is a macro risk with multiple variables: tariffs, currency, consumer spending, and geopolitical tension. Luna: So where does that leave an investor who's been waiting to buy Chinese stocks at a discount? Because valuations are certainly lower now. Alibaba's price to earnings ratio is below 12. Lucas: It's tempting. But I think the key question is earnings visibility. Can Alibaba and JD deliver earnings growth in the next two quarters if the trade war escalates further? If tariffs go from 25 percent to 50 percent, and if the yuan weakens to 7 per dollar, the margin pressure becomes severe. Luna: And don't forget about the U.S. election cycle. Both parties are talking tough on China. Whoever wins in November, the pressure on trade isn't going away. Lucas: Yeah, that's a structural headwind. So the bull case for Chinese stocks right now is basically 'it's already priced in.' But is it? The FXI is still only down about 15 percent from its 52-week high. That's not a crash. It's a correction within an ongoing bear market. Luna: I want to talk about one more stock that's been hit hard: NIO. Down about 5 percent this week. EV makers are facing their own set of problems. Lucas: NIO is a good example because it sits at the intersection of several pressures. The EV market in China is saturated, competition is brutal, and tariffs on Chinese EV exports to the U.S. and Europe are rising. NIO has been trying to expand into Europe, but now the EU is considering its own tariffs on Chinese EVs. Luna: And that's on top of the domestic demand slowdown. Chinese consumers are postponing big-ticket purchases like cars. Lucas: Right. So NIO is getting squeezed from all sides. Its stock is down almost 50 percent year to date. That's not a buying opportunity — that's a company in distress. Luna: Yeah. And that brings us back to the broader theme: Chinese stocks are cheap for a reason. The question is whether the reasons are temporary or permanent. Lucas: I think that's the right framing. And it's a genuinely hard call. On one hand, these are real businesses with real revenues. Alibaba generates over $30 billion in free cash flow annually. On the other hand, the operating environment is deteriorating in ways that aren't easily reversible. Luna: One thing that keeps me up at night is the yuan. If it keeps weakening, it could trigger a more significant capital flight. And that would crater the stock market further. Lucas: Absolutely. The People's Bank of China has been managing the yuan's decline carefully, letting it weaken gradually rather than in a sudden devaluation. But if the trade war intensifies, they may have to choose between defending the currency and supporting exports. Luna: And that choice has huge implications for anyone holding Chinese equities or bonds. Lucas: Quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these shows. If walking through the economy with us has made something click, that's where you can keep it going. No pressure at all. Luna: Yeah, it's a small group that makes it possible to keep this ad-free and focused. We appreciate every one of you. Lucas: Alright, back to the sell-off. So we've talked about trade war and currency. Let's talk about one more factor: the U.S. dollar. The trade-weighted dollar index hit 120.4 this week. That's a 20-year high. A strong dollar is terrible for emerging markets, and China is no exception. Luna: Because it makes dollar-denominated debt more expensive, and it draws capital away from EM assets into U.S. treasuries. Lucas: Exactly. So you have this triple threat: trade war headwinds, a weakening yuan, and a surging dollar. That's a recipe for sustained underperformance in Chinese equities. I think the bottom is not in. Luna: So what would change your mind? What would make you turn bullish on Chinese stocks? Lucas: Two things. First, a credible de-escalation in the trade war. If we see a tariff rollback — even a small one — that would signal that both sides are willing to negotiate. Second, stabilization in the yuan. If the PBOC can hold the line around 6.8 or 6.9 per dollar, that would reduce uncertainty. Luna: And without those? More of the same. Lucas: I think so. But it's worth noting that some value investors are starting to nibble. I've seen some fund managers buying Alibaba at these levels. They're playing a long game, betting that the trade war is cyclical, not structural. Luna: That's a bold bet. It could pay off, but the timing is treacherous. Lucas: It is. And that's why I think for most investors, the prudent move is to wait for clearer signals. There's no rush to catch a falling knife. Luna: Good advice. For now, the sell-off looks like it has further to run. Lucas: Yeah. We'll be watching the FXI and KWEB closely. If those ETFs start to stabilize, that might be the first sign of a bottom. But we're not there yet. Luna: Thanks, Lucas. And thanks to everyone listening. We'll keep tracking this. Lucas: Take care. We'll talk tomorrow.