China’s government promised a big stimulus, and these cheap beaten-down consumer stocks rallied hard.
Shares of Chinese consumer stocks PDD Holdings (PDD 5.78%), Baidu (BIDU 3.95%), and JD.com (JD 4.45%) rallied big this week, up 29.5%, 18.9%, and 33.1%, respectively, through Thursday trading, according to data from S&P Global Market Intelligence.
Chinese stocks have been trading very cheaply as of late, as the country suffered from a barrage of headwinds, including a government clampdown on tech companies, a property bubble bursting, and weak consumer sentiment after the country’s long “zero-COVID” lockdowns.
But this week, the Chinese central bank unveiled a slew of new stimulus measures, while the Politburo also made forceful statements pointing toward continued stimulus of the Chinese economy.
This week’s big announcements
On Tuesday, China’s central bank announced several stimulative measures, including lowering several different interest rates, while lowering bank reserve requirements and the amount of money consumers have to put down on housing.
In response, Chinese stocks rallied, even though some expressed doubts as to the effectiveness of mere interest rate cuts. After all, if consumers are still concerned about spending and don’t take on more leverage, lower rates and bank reserves wouldn’t have much of an effect.
But on Thursday, China’s Politburo released the statement of its monthly meeting, which called for strong fiscal stimulus to support household consumption. In response, China’s consumer and tech stocks jumped yet again, leading to this week’s outsize gains.
According to Reuters, the Politburo doesn’t usually discuss economic issues at its September meeting. So, this announcement perhaps signals urgency on the part of party leaders that more needs to be done. More measures could include infrastructure projects and increasing the “whitelist” of unfinished housing projects the government has flagged as recipients of potential bailouts or government loans. In addition, the Politburo even stated it would support lower and middle-income households, perhaps directly, as well as childbirth support policies, among other measures.
The government getting more involved in the housing sector is likely necessary, as some 70% of Chinese consumer savings is in the form of real estate investments. And support of low- and middle-income households as well as childbirth could be a key tenet of a comprehensive package. China, like some other advanced economies, has seen a drastically slowing birthrate, which some economists have flagged as a risk for further economic stagnation.
China’s government had only taken piecemeal half-measures during the economic downturn over the past couple years, but this week’s rate cuts and messaging all point to a more comprehensive and coordinated stimulus package. So, all consumer names, such as e-commerce giants PDD Holdings and JD.com, as well as search giant Baidu, rallied on the news.
In addition to the good macroeconomic news, Baidu presented at an artificial intelligence (AI) event this week. Baidu is one of the Chinese tech giants developing its own large language models for generative AI, so its presentation at the Yunzhi AI Summit this week may have sparked additional optimism.
At the conference, Baidu unveiled its latest Ernie AI models on its Qianfan Foundation Model Platform 3.0. According to Baidu’s executive vice president presenting at the conference, Ernie can fine-tune up to 30,000 large models, and handle 700,000 inquiries on a daily basis.
Well-known risks, but also opportunity for big gains
The risks in Chinese stocks are well known and generally center around a heavy-handed government. In addition, there are risks of a conflict breaking out between the U.S. and China, potentially over Taiwan.
However, this week, it appears China’s government has done a 180, and flipped from foe of business to friend in a significant way. That removes at least one big risk for the immediate future.
With these stocks trading so cheaply — PDD, Baidu, JD.com each trade between 13 and 13.5 times trailing earnings even after this week’s big rally — there could be more in the cards.
