Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why China Stocks Are Falling Faster Than the Yuan
Transcript
- Lucas: So the yuan has been basically flat for weeks — holding around 6.77 to the dollar — and yet China ETFs like the FXI and KWEB are down one to three percent just in the last five trading days. That's a pretty clear divergence. Luna: The currency is calm, but the stocks are selling off. What's driving that gap? Lucas: I think the market is starting to price in something that the currency markets are ignoring — or at least haven't fully absorbed yet. And that's the cumulative effect of U.S. tariff policy on China's tech and manufacturing sectors, specifically the semiconductor tariffs that came down in May. Luna: Right, because if you look at the headline from today — Nasdaq had its worst drop in nearly eight months, led by chip stocks. That's not just a US story, that's a global supply chain story. Lucas: Exactly. And China is the assembly hub for a huge chunk of the world's electronics. So when US tariffs on chips escalate, and when the US jobs report comes in hot — like it did this morning — pushing Fed rate cuts further out of reach, that's a double hit for Chinese tech stocks. Higher rates mean lower present value for future earnings, and tariffs mean thinner margins. Luna: And Baidu and NIO have been hit especially hard — Baidu down 8.5 percent over five days, NIO down over 10 percent. That's way worse than the broader China ETFs. Lucas: Baidu's case is interesting because they're heavily tied to autonomous driving and AI, and the new US chip export controls directly limit the kind of high-end semiconductors they can access. So investors are repricing that risk. NIO, on the other hand, is facing both the tariff headwind and a domestic demand environment that hasn't rebounded the way people hoped. Luna: And yet the yuan stays put. That seems contradictory — if China's export machine is getting squeezed, shouldn't the currency weaken? Lucas: You'd think so, but the People's Bank of China has been managing the yuan very tightly. They're using the daily fixing to signal stability, and they have the tools — capital controls, state bank intervention — to keep the currency in a narrow range. So the yuan is a managed choice, not a free market signal. The stock market, on the other hand, reflects real investor sentiment. Luna: And that sentiment right now is pretty downbeat. But let me play devil's advocate — China's exports of goods and services hit a record three point five trillion dollars in January, and imports grew too. So trade volumes are still expanding. Lucas: They are, but the trade balance is actually shrinking. The surplus on goods and services is down from the previous quarter. Exports are growing, but imports are growing faster. That's partly because China is buying more commodities and energy, but it's also a sign that domestic demand is picking up — which normally would be good news. But the market seems to be focused on the tariff risk and the tech crackdown, not on the trade volume story. Luna: So the divergence is really between the real economy — ports full, factories running — and the financial markets, which are looking at policy uncertainty and higher for longer US rates. Lucas: And if walking through the economy with us has made something click, you can support the show — it keeps us ad-free and independent. We're at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a simple way to keep these conversations going. Appreciate anyone who does. Lucas: So back to that divergence — I think the key question is whether the yuan can stay stable if the equity selloff deepens. Historically, when Chinese stocks have fallen this sharply, the PBOC has sometimes allowed a gradual depreciation to support exports. But so far they're holding the line. Luna: And today's headlines add another layer — Alphabet is seeking fresh capital as its stock slides, and OpenAI is in talks with the Trump administration about a government stake. Both are US stories, but they signal that the AI race is entering a new phase, and China is not part of those conversations. Lucas: Right. And that's a competitive concern. China has its own AI champions — Baidu, Alibaba, Tencent — but if the US locks in government backing for OpenAI and restricts chip exports, China's AI sector could be at a permanent disadvantage. That's a long-term risk that might be getting priced into stocks like Baidu right now. Luna: So to summarize: the yuan is stable by design, but China stocks are selling off because of US tariffs, a hot jobs report delaying Fed cuts, and a growing gap between US and China AI capabilities. The trade data is actually decent, but markets are looking through that. Lucas: Exactly. And I think the next catalyst to watch is the Fed's June meeting. If Chair Warsh signals that cuts are even further off, we could see another leg down in China tech. But if the data softens, the yuan could weaken and stocks might catch a bid. For now, the divergence tells you that investors are voting with their feet, not with their currency views. Luna: And that's a useful lens for anyone trying to understand China right now — don't look at the yuan for a signal on growth. Look at what companies like Baidu and NIO are doing. Lucas: Absolutely. Alright, that's our show for today. Thanks for listening.