Investors are less confident over whether stimulus can lift the Chinese economy out of its slump.
Chinese stocks pulled back this week as investors questioned how much stimulus the Chinese government would implement. Doubt has also started to creep in about the direction of inflation and how much the Federal Reserve will cut interest rates in the U.S.
Shares of the search engine giant and artificial intelligence company Baidu (BIDU -3.32%) declined more than 11% this week, as of late Thursday afternoon. Shares of the e-commerce companies PDD Holdings (PDD -2.96%) and JD.com (JD -4.17%) traded 14.6% and 11.4% lower, respectively.
Is there going to be enough stimulus?
Several weeks ago, China’s government and central bank unveiled new stimulus measures to help the country’s economy, which is dealing with weak consumer demand, a housing downturn, and high unemployment. The central bank lowered interest rates, mortgage rates, and bank reserve requirements and said it intends to inject capital into financial firms in the country. A surprise Politburo gathering added a sense of urgency and seemed to assure the market that the Chinese government was serious.
But investors seem to be losing enthusiasm after several press conferences in recent weeks haven’t provided enough details or the firepower to maintain the rally. That continued in a press conference today. China’s Ministry of Housing and Urban-Rural Development said it plans to increase lending at banks for certain property developments to more than $560 billion by year-end, nearly double the previous amount. Investors were not impressed.
“Housing supports announced today remain incremental in nature,” Macquarie China’s Chief Economist Larry Hu told CNN. “They can help ease the financial distress for developers but may not be enough to stabilize the housing market.”
Chinese stocks could also be facing pressure today, as the market gets less certain about the trajectory of inflation and how much the Fed will lower interest rates. The latest jobs report and reading of the Consumer Price Index (CPI) have all pointed to a strong economy. Retail sales in September, which came out Thursday, rose 0.4% this month, higher than August and ahead of what economists expected. A strong economy will make the Federal Reserve less likely to lower interest rates as much as the market expected. Lots of popular Chinese stocks are tech and growth names that would likely benefit from more rate cuts.
Another thing to watch for Chinese stocks is the fast-approaching U.S. presidential election. Former President Donald Trump’s chances of defeating Vice President Kamala Harris have recently increased in the betting markets. Trump has said that he plans to impose trade tariffs if elected and that tariffs could get as high as 60% on Chinese imports.
Expect volatility
There is a lot of great opportunity in China and PDD, Baidu, and JD.com will benefit if consumer demand rebounds in the world’s second-largest economy. All three of these companies currently trade between 12 and 14 times earnings. Given their growth and market potential, this isn’t overly expensive.
But there is a lot of uncertainty right now over the extent of stimulus and what a potential Trump victory could mean for China. I wouldn’t try to time anything right now and suggest only buying if you plan on holding long-term. Expect volatility in the near term.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Baidu and JD.com. The Motley Fool has a disclosure policy.
