Another day, another bearish plunge for Chinese tech stocks. The market on both Hong Kong and Chinese exchanges displayed a clear downward trajectory on Tuesday, perpetuating the erosion of investor confidence in the region. This transpired in the midst of surprising but futile measures by the government to reinstate faith in the economy.
Notably, China’s state-owned banks took measures to tighten liquidity on Monday to bolster the yuan, a move catalyzed by a 2.7% plummet in the Shanghai Composite, underscoring the plight of Chinese stocks, including entities like Alibaba (NYSE: BABA), JD.com (NASDAQ: JD), and PDD Holdings (NASDAQ: PDD), responsible for Pinduoduo and Temu.
Alibaba stock was down 2% whereas JD.com suffered a 3.3% dip, and PDD experienced a 1.6% decline, despite the concurrent surge in all three major U.S. indexes. The dire situation for these stocks is indicative of the dismal state of Chinese equities.
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Struggles Continue for Chinese Stocks
The downward spiral in Chinese stocks can be attributed to a melange of factors such as underwhelming economic indicators, concerns regarding feeble consumer demand and a real estate crisis. The stagnation of China’s growth is accentuated by its 5.2% GDP growth in 2023, the slowest in approximately three decades. Additionally, the GDP grew a meager 4.1% in the fourth quarter, indicating a continuous deceleration in 2024.
Furthermore, China’s population decline for the second consecutive year, reflecting issues concerning structural economic growth, exacerbated by the plunge in birth rates even after the abolition of the one-child policy.
Both Alibaba and JD.com have been grappling with subdued growth post-pandemic, leading to precipitous declines in their valuations. Alibaba’s plan to divest noncore ventures like Alibaba Cloud failed to materialize due to the ramifications of new U.S. chip export regulations. Meanwhile, JD has witnessed a loss in market share to rivals like Pinduoduo and the TikTok parent company, Bytedance, resulting in minimal 1.7% revenue growth in the third quarter.
On the other hand, PDD Holdings has exhibited a markedly stronger performance than its e-commerce counterparts, with Temu gaining traction in international markets and Pinduoduo’s Groupon-like social commerce model gaining momentum in China. PDD’s revenue increased by 94% to $9.4 billion in the third quarter, generating an operating profit of $2.3 billion, consequently boasting robust profit margins.
Future Trajectory for Chinese Stocks
The exodus of foreign investment from Chinese equities seems irreversible, especially in light of continued disappointing economic reports. Some investors are redirecting their capital to Japan, and the possibility of a reversal for Chinese stocks remains uncertain as Beijing grapples with the ramifications of declining population and economic deceleration, echoing Japan’s historical turmoil.
Although the diminished valuations of Alibaba and JD.com may seem enticing, attempting to gauge a nadir for Chinese stocks remains a perilous endeavor with myriad uncertainties clouding the horizon. In contrast, Pinduoduo presents a more promising investment option due to its resilient growth and international exposure through Temu. Moreover, Pinduoduo’s success has been partly at the expense of Alibaba and JD.
As Chinese tech stocks continue to flounder, the prospect of an upturn remains bleak, challenging investors to tread cautiously in these turbulent waters.
Jeremy Bowman has positions in JD.com. The Motley Fool has positions in and recommends JD.com. The Motley Fool recommends Alibaba Group.
