Chinese stocks have sparked to life as shares of several key players took off in response to a raft of positive economic indicators following the conclusion of China’s annual parliamentary meeting. Investors found cause for cheer in the consumer price index’s 0.7% uptick for February, reflecting a surge in demand over the Lunar New Year festivities. This upswing, juxtaposed against the ongoing descent of the producer price index, is a welcome beacon amid prior worries of deflation in the world’s second-largest economy.
Against a backdrop of looming challenges, Beijing’s recent economic bolster – coupled with a targeted 5% growth forecast for the year – has evoked a sense of optimism among investors.
Although the road to recovery remains steep for Chinese stocks aficionados, the depressed state of top Chinese tech shares has cushioned the fall enough that even the slightest hint of an economic recovery jolts them into action. Consequently, Alibaba (NYSE: BABA) enjoyed a 2% surge by 3:30 p.m. ET; JD.com (NASDAQ: JD) recorded a 5.5% gain; and Pinduoduo parent PDD Holdings (NASDAQ: PDD) saw a 1.8% increase following the positive developments.
Image source: Getty Images.
Clawing out of the Pit
The recent downturn in Chinese stocks traces back over the last three years, catalyzed by Beijing’s regulatory grip on the tech sector following Jack Ma’s ill-advised comments. This crackdown, conjoined with Covid lockdowns and a sluggish economic rebound, played a pivotal role in the lackluster returns observed on the stocks.
Established players like Alibaba and JD now dangle at a tantalizing price-to-earnings ratio of roughly 10 as their blooming growth story withers. Yet, this depressed valuation has made it easier for these equities to stage a rebound at the slightest whiff of a resurgent economic narrative emerging from China.
Alibaba found itself in the doldrums after reporting a mere 5% revenue uptick in the last quarter. The decision to ditch the cloud-computing unit spin-off plan due to U.S. chip-export constraints only compounded its woes. Its core e-commerce business is grappling with a lackluster consumer environment and fierce price wars from Pinduoduo. Revenue from Taobao and Tmall crept up a meager 2% in the last quarter, with investors now pinning their hopes on a business resurgence under new CEO Eddie Wu’s stewardship.
JD faced a parallel narrative, with its stock plunging even deeper than Alibaba’s. In its latest earnings report, the company witnessed a tepid revenue acceleration to 3.6% and announced a $3 billion share buyback program. Responding to Founder Richard Liu’s demands, JD has delved into low-cost items and intensified its discounting strategies. While investors seem enticed by these tactics, tangible financial results might still linger below par.
PDD Holdings bucks the trend in the Chinese e-commerce realm, yet its stock’s performance remains in lockstep with economic signals. Leveraging the meteoric rise of its social commerce platform Pinduoduo in China and Temu, the bargain-oriented e-commerce platform expanding globally, PDD witnessed a staggering 94% revenue surge. This outperformance vis-a-vis its peers underscores a robust bottom-line growth, rendering it a more appealing bet compared to the sluggish China stock fraternity.
The Road to Redemption
The trajectory of Chinese stocks in recent times has been akin to a rollercoaster ride, swaying back and forth in response to economic cues and market developments. Beijing’s evident intent to rejuvenate the Chinese stock market is palpable, yet a sustained renaissance within the sector hinges on more than mere intent.
As it stands, the Chinese economic landscape grapples with challenges, while the cutthroat nature of the e-commerce arena portends a clear demarcation between victors and vanquished entities. Until Alibaba and JD can exhibit a resolute return to robust growth, PDD sits as the discerning choice among the trio of stocks discussed.
Illustration by Jeremy Bowman.