Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why Chinese Consumer Stocks Are Falling Despite Strong Data
Transcript
- Lucas: So Chinese consumer stocks are having a rough week. Alibaba down more than 6 percent in five days, JD.com off 8 percent, Pinduoduo down 4 and a half percent. And this is despite some pretty solid trade data. Luna: Yeah, I saw that. Exports are up year-over-year, the trade surplus is widening. You'd think markets would be cheering. Instead, the FXI ETF is down nearly 4 percent. Lucas: Right, and that's the puzzle. The headline numbers look fine — China's goods exports grew in April, the latest month we have. But the market is voting with its feet. I think the issue is that the strength is all in exports, not in domestic consumption. Luna: So the market is saying the consumer story is still broken. Even with all the stimulus Beijing has rolled out. Lucas: Exactly. And if you look at the companies getting hit hardest — JD, Alibaba, Pinduoduo — they're all exposed to Chinese household spending. Meanwhile, the yuan is weakening again, trading at 6.77 to the dollar as of last week. That helps exporters, but it squeezes domestic purchasing power. Luna: Right, because imports get more expensive. And a lot of consumer goods have imported components. So margins get squeezed. Lucas: And the weakening yuan also means that any earnings these companies report in yuan are worth less to foreign investors. Alibaba reports in yuan, so a 6.77 exchange rate versus, say, 6.4 a year ago — that's a real headwind for dollar-based returns. Luna: That's a good point. So even if Alibaba's revenue is flat in yuan, in dollar terms it's down maybe 5 percent just from currency. Lucas: Now, the conventional wisdom a few months ago was that Beijing's stimulus — rate cuts, infrastructure spending, some consumer subsidies — would revive demand. But the data isn't showing it yet. Retail sales in May were soft. And the property market is still in the doldrums. Luna: So what's the market pricing in? That the consumer slowdown is structural, not cyclical? Lucas: I think that's part of it. There's a growing sense that Chinese consumers are saving more and spending less, partly due to uncertainty about jobs and incomes. Youth unemployment is high, as we've discussed before. And the property wealth effect is gone — people feel poorer. Luna: And that feeds into e-commerce. If people are tightening their belts, they're not buying as many discretionary goods on Taobao or JD. Lucas: Right. And there's a second-order effect: the trade surplus means China is exporting deflation. It's sending cheap goods abroad, which helps keep global inflation down, but it also means domestic producers are competing with each other on price. That's good for consumers but bad for corporate profits. Luna: So you've got weak pricing power at home, a currency that's making dollar returns less attractive, and a consumer who isn't spending. No wonder the stocks are getting hammered. Lucas: And the market is also worried about tariffs. The US is still imposing significant tariffs on Chinese goods, and there's talk of more. Even though exports are holding up, the threat of escalation is real. Luna: So what's the bull case here? Is there one? Lucas: The bull case would be that valuations have gotten cheap. Alibaba is trading at maybe 9 times forward earnings. JD is even cheaper. If you believe that consumer spending eventually recovers — maybe after more stimulus — then you're buying at a discount. Luna: But that's a 'if' and a 'maybe.' The market seems to be saying it's not convinced. Lucas: Exactly. And that's the tension. The data on exports is strong, but the data on consumption is weak. The market is choosing to focus on the weakness because that's where the uncertainty is. Luna: It's funny — we talk a lot on this show about factory towns outperforming Shanghai stocks. Now we're seeing that same divergence in real time. Lucas: That's a great connection. Factory towns are benefiting from the export boom and the weak yuan. But the consumer-facing companies are suffering. It's a tale of two Chinas. Luna: And it's making it really hard for investors to get a simple read on the economy. Lucas: If walking through the economy with us has made something click — the kind of thing you might mention to a friend over coffee — we'd love it if you considered supporting what we do here. We deliberately don't run ads on these episodes. If you want to support that choice, the link is buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small gesture that goes a long way. Keeps us independent and ad-free. Lucas: So back to the consumer stocks — one thing to watch is the People's Bank meeting later this week. There's speculation they might cut rates again, or ease reserve requirements. That could give a short-term boost. Luna: But would it change the fundamental picture? If consumers aren't spending because they're worried about their jobs, another rate cut might not do much. Lucas: Probably not. The property market is the key. If housing stabilizes, that would restore some wealth effect. But so far, the policy signals haven't been enough. Luna: So what are you watching for in the next few weeks? Lucas: I'm watching the earnings calls from Alibaba and JD. They report in August. If management gives cautious guidance, that confirms the market's fears. If they sound more optimistic, we could see a rally. Luna: And the yuan. If it weakens further, that's another headwind. Lucas: Right. 6.77 is already weak. If we go to 7, that's a psychological level that could spook markets. On the other hand, if the PBOC steps in to defend it, that could signal they're serious about supporting consumption. Luna: So the next few weeks are critical. Either the data improves, or the market prices in a longer slowdown. Lucas: Exactly. And for now, the market is voting with its feet — and it's selling Chinese consumer stocks.