Chinese stocks continued their downward trend today, reflecting the broader unease in the markets. The sell-off on Hong Kong and Chinese exchanges illustrates a worrisome decline in investor confidence toward China, despite the government’s efforts in stabilizing the economy.
Investor sentiment dwindled after China’s state-owned banks tightened liquidity to bolster the yuan, following a 2.7% drop in the Shanghai Composite.
This downturn negatively impacted Chinese stocks with U.S. listings, including Alibaba (NYSE: BABA), JD.com (NASDAQ: JD), and PDD Holdings (NASDAQ: PDD), parent company of Pinduoduo and Temu.
During mid-day trading, Alibaba stock was down 2%, JD.com down 3.3%, and PDD had given up 1.6%, despite a positive trend in the broader U.S. indexes.
Image source: Getty Images.
Chinese Stocks Continue to Decline
A multitude of factors contribute to the persistent decline in Chinese stocks. Reduced economic growth, weakened consumer demand, a real estate crisis, and a prolonged period of underperformance have dissuaded foreign investors, resulting in a widespread crisis of confidence.
In 2023, China reported a 5.2% GDP growth, a robust figure for most countries, yet marking the slowest growth in approximately 30 years. The fourth quarter saw a further deceleration to 4.1%, compounded by a second consecutive year of population shrinkage in China. These factors compound structural concerns about economic growth, as birth rates have continued to plummet despite the lifting of the one-child policy.
Both Alibaba and JD.com have grappled with sluggish growth since the pandemic’s onset, following years of rapid expansion. As a result, their valuations have plummeted amid slowed growth, despite remaining profitable. Furthermore, attempts to spin off non-core businesses like Alibaba Cloud were hindered by new U.S. chip export rules. JD.com has also suffered from diminishing market share, with top-line growth slowing to 1.7% in the third quarter.
PDD Holdings, however, has outperformed its e-commerce rivals. Temu has gained traction in international markets, while Pinduoduo’s Groupon-like social commerce model remains popular in China. PDD’s revenue surged 94% to $9.4 billion in the third quarter, showcasing robust profit margins, reinforcing its 52% stock surge over the last year, despite its vulnerability to the Chinese economy.
Outlook for Chinese Stocks
The exodus of foreign investors from Chinese stocks is expected to persist, especially given the disappointing economic reports emerging from the country. Consequently, investor funds are being redirected to Japan, signalling an uncertain future for Chinese stock resurgence.
Alibaba and JD’s diminished valuations present an enticing prospect for investors, yet prematurely identifying a market bottom would be foolhardy amidst prevailing uncertainties and the stocks’ unfavorable momentum.
Conversely, Pinduoduo presents an attractive investment opportunity among the three stocks. Its robust growth and international market exposure through Temu have defied broader headwinds, with its success partly at the expense of Alibaba and JD.
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Jeremy Bowman has positions in JD.com. The Motley Fool has positions in and recommends JD.com. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.