Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Chinese Tech Stocks Are Rallying While EM Currencies Struggle
Transcript
- Lucas: Luna, I want to start with a number that's been sticking with me: Baidu is up nearly nine percent over the past five days. That's not a typo. We're talking about a Chinese tech giant, listed in the US, rallying hard while the broader emerging market ETF, EEM, is down 2.2 percent over the same stretch. That's a pretty sharp divergence. Luna: Yeah, and it's not just Baidu. PDD Holdings is up seven and a half percent, JD up almost five percent. Chinese ADRs are having a moment, but the EM currency story is still grim. The trade-weighted dollar index is at 120.9, and the yuan is pinned at 6.80 per dollar. So what's driving this? Lucas: Right, let's start with the currency piece because I think that's the backdrop. The yuan has been remarkably stable for months now, which is actually a tailwind for these us listed shares. When the yuan doesn't weaken further, the dollar returns from ADRs don't get eaten by currency depreciation. And that stability is partly because the People's Bank of China has been managing the fix tightly, partly because the dollar itself has eased just a hair from its highs. Luna: So the yuan not falling is one factor. But what about the rally itself? Baidu specifically—is the AI narrative finally showing up in the numbers? Lucas: I think that's exactly it. Baidu's Ernie bot and its cloud AI business have been getting a lot of attention. And there was a report last week that Baidu is integrating its AI models into more enterprise applications in China, which could drive revenue growth. The market is pricing in that potential. Plus, Baidu's valuation had gotten so compressed—it was trading at like 10 times earnings—that any positive catalyst can trigger a big move. Luna: And PDD? That's a different story. They're more e-commerce and discount retail. Their rally might be tied to expectations around consumer spending in China, especially after the government hinted at more stimulus. Lucas: Exactly. Beijing has been signaling additional fiscal support—infrastructure spending, maybe more consumption vouchers. That lifts the whole e-commerce space. JD and Alibaba, ticker b a b a, are up too. Alibaba is up 1.4 percent, which is more modest, but still positive in a week where most EM stocks are getting crushed. Luna: Let's talk about that broader EM picture. EEM down 2.2 percent. The Korea ETF, EWY, is down almost nine percent. That's brutal. So while China tech is rallying, a lot of other emerging markets are hurting. What's the common thread? Lucas: The strong dollar is still the dominant force for most EM currencies. The Korean won has been under severe pressure—we talked about the won crisis a few episodes back. But even currencies that aren't in crisis mode are feeling the squeeze. The Indian rupee, the Brazilian real, the South African rand—all down against the dollar this year. That makes it hard for local-currency stocks to attract foreign capital. Luna: So Chinese ADRs are kind of an exception because they're dollar-denominated. You don't have to worry about the currency risk when you buy them on the NYSE or Nasdaq. Lucas: That's a huge part of it. If you're a global investor and you want EM exposure but you're scared of currency depreciation, us listed Chinese stocks are a way to get it without taking on that specific risk. And the valuations are still low relative to US tech. Baidu at 10 times earnings versus, say, Google at 20-plus. That gap is attractive, especially if you believe the AI story has legs. Luna: But is this a genuine rotation or just a short-term bounce? I mean, the volume on Baidu and PDD has picked up, but it's not massive. Could be shorts covering. Lucas: It could be. The short interest on Baidu was elevated before this rally. So a squeeze is definitely part of the story. But I think there's also a fundamental reassessment happening. The Chinese economy isn't booming, but it's not collapsing either. And the government is clearly trying to support asset prices. That combination—stability plus stimulus—can create a floor for these stocks. Luna: And yet, the China-specific ETF, FXI, is only up one percent. So the rally is concentrated in a handful of names, not broad-based. Lucas: Right. FXI holds a lot of financials and state-owned enterprises that aren't participating. It's really the tech and consumer internet names that are moving. KWEB, the China internet ETF, is up 4.4 percent. That's a better proxy for what we're talking about. Luna: So if an investor wanted to play this, KWEB or individual names like Baidu and PDD might make more sense than just buying FXI. Lucas: Exactly. But you have to be comfortable with the regulatory risk. The US and China are still in a tense standoff over audit inspections and potential delistings. That risk hasn't gone away. It's just been overshadowed by the AI excitement. Luna: And the currency piece too. If the yuan suddenly weakens—say, if the Fed surprises with a hawkish move—then the ADR rally could reverse quickly. Lucas: Yeah, the yuan peg is artificial. The PBOC is using its reserves to keep it stable. If they run out of patience or reserves, the release valve could be a sharp depreciation. That would hurt ADR returns in dollar terms. Luna: But for now, the market is rewarding the companies that can tell an AI story or benefit from domestic consumption. It's a selective rally. Lucas: And I think that selectivity is the key takeaway. Emerging markets are not a monolith. Even within China, you have huge dispersion. The Baidu rally doesn't mean the Brazil ETF or the India ETF is going to follow. Each country, each sector, each company has its own narrative. Luna: Speaking of which, one thing that's been interesting is how the strong dollar narrative is starting to crack just a little. The trade-weighted dollar index dipped from 121.06 to 120.9. It's not a big move, but it's a move. Lucas: It's a whisper of a trend. If the dollar continues to ease, that would be a huge tailwind for all EM assets, not just Chinese ADRs. But it's too early to call it a trend. The Fed is still on hold, and the US economy is still growing above trend. The dollar could easily strengthen again. Luna: So for now, the play is narrow. Chinese tech, strong balance sheets, AI buzz, and a stable yuan. Lucas: Exactly. And you have to monitor the headlines. Any escalation in trade tensions or a surprise move from Beijing could change the calculus overnight. Luna: It's a fascinating moment. The market is sending a signal that some EM names are worth the risk, but it's very much a stock-picker's environment. Lucas: And that's what we try to do here—cut through the noise and look at what's actually moving. If walking through the economy with us has made something click for you, we do have a small way listeners keep this going. It's buy me a coffee dot com slash fexingo. No pressure, but it helps us stay ad-free and dig into these specific stories. Luna: Yeah, and we really appreciate those who have chipped in. It lets us spend the time on episodes like this one. Lucas: Alright, back to the divergence. I want to look at one more data point: the India ETF, INDA, is flat over the past five days. No movement. India has been a darling for EM investors, but it's stalling. What does that tell us? Luna: India's valuation has gotten rich. The Nifty is trading at over 20 times forward earnings. And with the dollar still strong, foreign investors have been pulling money out. So you're seeing a pause. Lucas: And India doesn't have the AI catalyst that China has right now. The Indian IT services companies are more about cost optimization and outsourcing, not cutting-edge AI models. So the market is waiting for the next catalyst. Luna: That could be the monsoon season, or the next RBI policy move. But for now, it's a wait and see. Lucas: So to sum up: Chinese tech is rallying on AI and stimulus hopes, underpinned by a stable yuan and compressed valuations. The rest of EM is still wrestling with the strong dollar and high rates. It's a tale of two emerging markets. Luna: And the key is to not paint with a broad brush. If you just look at EEM, you miss the Baidu story. If you only look at FXI, you miss the KWEB rally. You have to go granular. Lucas: That's the takeaway. And we'll keep tracking these divergences. Next week, we'll look at how the Fed's next move—or non-move—could shift the landscape.