Shares of Chinese stocks were rallying today after an annual parliamentary meeting came to a close and China posted some promising economic data. Beijing also announced another round of support for the economy, which investors hope will revive struggling Chinese stocks.
Investors seemed encouraged by an improvement in the consumer price index, which was up 0.7% in February, showing increased demand during the key Lunar New Year holiday season. The producer price index, however, continued to fall. Investors have been concerned about deflation as consumer spending has been weak in the world's #2 economy, so rising consumer prices is a good sign.
Investors also seemed to like Beijing's plans to support the economic recovery and its target of 5% economic growth for the year.
It will still be an uphill climb for China stock investors, but shares of top Chinese tech stocks have fallen so far that it won't take much to give them a lift. As a result, Alibaba (BABA 0.59%) was up 2% as of 3:30 p.m. ET; JD.com (JD 6.12%) had gained 5.5%; and Pinduoduo parent PDD Holdings (PDD 2.80%) rose 1.8% on the news.
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China has a big hole to climb out of
Chinese stocks have largely fallen over the last three years after Beijing started cracking down on the tech sector. This followed disrespectful comments from Alibaba Founder Jack Ma toward Chinese finance officials.
The crackdown, a strict Covid lockdown, and a weak economic recovery have contributed to disappointing returns. Stocks like Alibaba and JD have fallen far enough that they trade at a price-to-earnings ratio of around 10 as their former growth rates shrunk, though that's made it easier for these stocks to climb on any sign of an improving economic outlook coming out of China.
Alibaba is coming off another quarter of underwhelming growth with revenue rising just 5%. The company said back in November that it would abandon its plan to spin off its cloud-computing unit due to the impact of chip-export restrictions from the U.S. Alibaba's core e-commerce business has also struggled in the face of a weak consumer and competition from Pinduoduo as price competition has intensified. Revenue from Taobao and Tmall rose just 2% in the quarter, though support from Beijing could help that accelerate. Investors are also hopeful that new CEO Eddie Wu can help turn around the business.
JD has faced similar headwinds, and its stock has fallen even further than Alibaba's. In its earnings report last week, the stock jumped as it reported a mild acceleration in revenue growth to 3.6%, and it announced a $3 billion share-buyback program. The company is getting more aggressive in response to demands from Founder Richard Liu by moving into cheaper items and doing more discounting. Investors seem to like the strategy, but the financial results are still likely to underwhelm in the near term.
Finally, PDD Holdings has been the exception in the Chinese e-commerce sector, but the stock trades in response to economic data. PDD has benefited from the rapid growth of its social commerce marketplace Pinduoduo in China and Temu, the bargain-priced e-commerce site rapidly growing in international markets. PDD hasn't reported fourth-quarter earnings yet, but its revenue jumped 94%, showing it's clearly outperforming its two peers above. It's also delivered strong growth on the bottom line, making it more attractive than the slow-growth China stocks.
Will Chinese stocks recover?
Chinese stocks have been volatile this year, swinging up and down on economic data and related news. Beijing is clearly interested in reviving the Chinese stock market, but it will take more than interest to drive an extended comeback in the sector.
For now, the Chinese economy still seems to be struggling, and the intense competition in e-commerce will lead to winners and losers. Until Alibaba and JD show they can deliver significant growth again, PDD seems like the safest bet of the three stocks above.
