Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why China Tech Stocks Are Splitting From the Yuan
Transcript
- Lucas: So the yuan is sitting at 6.81 per dollar — near its weakest level in over a year. Normally, when a country's currency drops, its export-heavy stocks rally. But look at Chinese tech stocks this week: the KWEB ETF, which tracks a basket of Chinese internet companies, is down more than 4 percent in five days. Baidu off 7 percent. NIO down nearly 12 percent. That's not a normal pattern. Luna: So the old playbook — weak yuan, buy Chinese stocks — is breaking down? Or has it already broken? Lucas: I think it's broken, at least for now. And the split tells us something about what's actually driving these markets in May 2026. The yuan weakness is deliberate — the People's Bank of China wants it weaker to support exports, especially with trade tensions ramping up. But the stock selloff is about something else entirely. Luna: Let me guess — regulatory fears, plus a domestic demand problem. Lucas: Exactly. On the regulatory side, there's fresh anxiety about U.S. delisting risks. The Holding Foreign Companies Accountable Act hasn't gone away, and with the political climate where it is, investors are pricing in a nonzero chance that some of these names could be forced off U.S. exchanges. That's a huge overhang for Alibaba, Baidu, JD.com — stocks that trade as American depositary receipts. Luna: And on the domestic side, we've talked before about Chinese consumers saving rather than spending. That's hitting the revenue stories for companies like Alibaba and Pinduoduo. Lucas: Right. PDD is only down half a percent this week, which is relatively resilient — probably because its discount model works better in a cautious consumer environment. But Alibaba's down 2.4 percent. JD down 3.4 percent. These are companies that need consumption to grow, and it's just not there. Luna: So the currency is being managed to help exporters — the factory sector — but the stock market is reflecting the service and tech sectors, which are under different pressures. Lucas: That's a great way to frame it. And it's not just a China story. This divergence is spilling into other Asian markets. When the yuan weakens, it puts pressure on currencies like the Korean won and the Taiwanese dollar — their export goods become relatively more expensive. So you get this ripple effect across the region. Luna: And meanwhile, U.S. dollar strength is compounding everything. The trade-weighted dollar index hit 119.3 last week — that's up from 118.67. A strong dollar makes dollar-denominated debt more expensive for emerging market companies. Lucas: A lot of Chinese tech companies have dollar-denominated bonds. So they're getting squeezed on two fronts: weaker revenue in yuan terms, and higher debt service costs in dollar terms. That's a margin compression story that doesn't show up in the headline GDP numbers. Luna: You know, I was looking at the trade balance data earlier. Exports are actually up — $3.52 trillion annualized in the first quarter. But imports are up even more, to $4.42 trillion. So the trade deficit is widening. Lucas: That's a sign that domestic demand, while weak relative to history, is still consuming imports — especially energy and raw materials. But the export number is being boosted by volume, not price. Chinese exporters are cutting prices to stay competitive, which eats into their margins. So the currency depreciation helps, but it's not a magic bullet. Luna: And the stock market is pricing that in. The Shanghai composite isn't in freefall, but the U.S.-listed names are taking a beating because they're more exposed to global capital flows and regulatory headlines. Lucas: Exactly. The domestic A-share market is somewhat insulated. But the ADRs trade on sentiment, and right now sentiment is sour. The interesting question is whether this decoupling is temporary or structural. Luna: Speaking of structural, I want to ask about the bond market. Chinese government bonds have been rallying — yields falling — even as stocks sell off. That's a classic flight to safety within China. Lucas: Right. The ten-year Chinese government bond yield has dropped about 20 basis points over the past month. That tells you domestic investors are cautious. They're not buying the dip in stocks. They're moving into the safest asset they have. That's a vote of no confidence in the near-term growth outlook. Luna: So the same capital that might normally buy the yuan weakness story is instead hiding in bonds. That explains why the stock selloff has been so persistent. Lucas: It does. And look, we're not saying China is headed for a crisis. But the market is sending a signal that the old correlation — weaker currency, higher stocks — isn't reliable anymore. The drivers have changed. It's more about regulatory risk, consumer confidence, and global capital flows. Luna: If you're an investor holding Chinese ADRs right now, what do you do? Wait for a catalyst, or cut losses? Lucas: I think you have to differentiate. Baidu is down 7 percent this week partly because of its own issues — its AI monetization story hasn't delivered yet. NIO is down almost 12 percent because the EV price war in China is brutal. But Alibaba, at $130, is down only 2.4 percent. Its cloud business and international commerce are growing. The selloff there feels more macro than micro. Lucas: Right. And the macro environment isn't going to change overnight. The yuan is likely to stay weak as long as the PBOC wants to support exports. Trade tensions aren't easing. And the U.S. dollar is strong because the Fed is still hawkish. So the headwinds are persistent. Luna: But there's a flip side: if you believe China's stimulus will eventually work, then the weakness in stocks could be a buying opportunity. The question is timing. Lucas: And that's the hard part. Fiscal stimulus has been announced, but the implementation is slow. The property sector is still a drag. And consumer confidence, as we've discussed, is fragile. So the market is waiting for proof that the economy is turning, not just promises. Luna: Alright, let's bring it back to the listener. If someone has exposure to Chinese stocks through an ETF like FXI or KWEB, what's the one thing they should watch this week? Lucas: Watch the yuan fix. Every morning, the PBOC sets a daily midpoint for the yuan. If they start fixing it weaker than expected, it signals they want more depreciation to boost exports. That could pressure stocks further because it implies the economy needs more help. If they fix it stable or stronger, that's a sign they're comfortable — and stocks might stabilize. Luna: So the yuan fix is the daily tell. Lucas: Exactly. It's the single most important data point for Chinese equities right now, in my view. More than any earnings report or economic indicator, because it encapsulates the PBOC's stance. Luna: I think that's a really useful lens. And maybe a simpler way to think about this whole decoupling: the currency is being managed for trade, but stocks are being driven by fear. Those two things don't have to move together. Lucas: They don't. And until the fear subsides — either through policy clarity, a catalyst like a trade deal, or a clear upturn in domestic demand — the divergence is likely to persist. That's where we are in late May 2026.