China’s gross domestic product (GDP) data is taking a backseat to strong tech company results that some reckon signal better days ahead for Xi Jinping’s mainly underperforming economy.
China’s official data readouts these days can make for sobering reading. Though headline economic growth is progressing, there are few signs of clear and sustainable acceleration as deflationary pressures grab headlines.
Case in point: news on Friday (May 17) that China’s consumer spending lost steam in April, rising just 2.3% year on year versus 3.1% in March.
Industrial production accelerated, though, expanding 6.7% over the same period. The disconnect demonstrates the lopsided nature of Chinese growth and how the economy remains at the mercy of global demand.
“The story of this month’s data is that of prevailing caution by households and the private sector, as retail sales and fixed asset investment came in weaker than expected,” says Lynn Song, chief Greater China economist at ING Bank.
Yet Alibaba Group, Tencent Holdings and other Chinese tech behemoths are presenting a welcome counternarrative of economic green shoots that suggest Beijing’s stimulus efforts are gaining certain traction.
E-commerce juggernaut Alibaba reported its biggest jump in annual growth since 2021 in the first quarter, with net profit up 10%. Gaming giant Tencent, meanwhile, reported a 62% surge in net profit.
Examples abound among other mainland internet platforms, suggesting Beijing’s efforts to achieve this year’s 5% GDP growth target are somewhat working.
They also point to improved confidence that Team Xi is finally serious about ending the property crisis at the root of weak consumer prices and dim investor views of the economy’s prospects.
“From a macro perspective, recent property sales and new starts have yet to hit bottom, while overall earnings remained pressured amid subdued demand in the first quarter,” says strategist Meng Lei at UBS.
But “looking ahead, earnings are set to pick up as property activity stabilizes and inflation recovery fuels household income and consumer spending growth,” Meng predicted.
Venu Krishna, strategist at Barclays, adds that “Big Tech fundamentals still look good here and we think there’s room to run over the next couple of quarters, even though the bar for the group to deliver has been set very high. Big Tech revisions have strengthened further post-first-quarter earnings, bifurcating even more from the rest of the S&P 500.”
This week, Xi’s team unveiled plans to address real estate troubles some economists compare to Japan’s 1990s bad-loan debacle. Reports suggest Beijing is cajoling local governments and state-owned enterprises to buy millions of unsold homes.
Bold efforts to clear China’s massive unsold housing inventory could go a long way toward boosting household and business confidence.
Reversing the crisis narrative would also give Xi and Premier Li Qiang breathing room to strengthen capital markets, recalibrate growth engines toward innovation and services and build more vibrant social safety nets. The latter endeavor is crucial to getting consumers to spend more and save less.
“We believe this could be a game changer in the sense that property sales may at least stabilize rather than turn worse,” JPMorgan argues in a new report.
In a note to clients, Franklin Templeton also highlighted encouraging signs the real estate nightmare is ending. It’s encouraged by signs “Chinese authorities have been easing home purchase restrictions – these restrict buyers to purchases in their home province and/or limit the purchase of a second property – and lowering mortgage interest rate floor limits.”
As Beijing addresses economic headwinds more forcefully, count Michael Burry among the China tech optimists. The investor made famous by the book “The Big Short” upped his bets on Alibaba and JD.com in the first quarter of this year.
According to recent filings, JD is the top holding by Burry’s Scion Asset Management, with its stake in the e-commerce giant increasing by 80% in the first quarter, representing an additional 50,000 shares.
China tech investments by Burry, who saw the 2008 US subprime crisis coming better than peers, have zigged and zagged in recent years.
Burry’s latest bets speak to the cautious yet discernible return by global investors as China’s stock market moves beyond its US$7 trillion rout from a 2021 peak to January 2024.
Among Burry’s new holdings is in search engine giant Baidu, sometimes likened to China’s Google. Those on which he’s scaling back include Amazon, Google parent Alphabet and Warner Bros Discovery.
Of course, the decisions of one investor don’t make or break global investment trends. Nonetheless, it’s noteworthy when a household-name value investor infamous for grave warnings and cataclysmic predictions is bullish on a sector many Western peers left for dead in recent years.
“We believe many Asia-focused investors who have been overweight India and Japan are growing concerned about India’s high valuations and Japan’s continued currency weakness,” says Brendan Ahern, chief investment officer at KraneShares, a China-focused provider of exchange-traded funds.
“China’s equity market could be a beneficiary of investors moving profits from high-valuation markets to low-valuation markets,” Ahern said.
Yet it also highlights the risks of Xi and Li failing to meet the moment with bold financial upgrades. A well-established cycle of boom-bust cycles has plagued Chinese markets since 2015. In the summer of that year, Shanghai shares plunged 30% in just a few weeks.
Since then, success in strengthening capital markets, increasing transparency and reducing the dominance of state-owned enterprises has been too patchy for many top fund managers. Xi’s headline-grabbing clampdown on tech platforms, including Alibaba and Tencent, beginning in late 2020 and arguably still ongoing, also torpedoed confidence in the sector’s future profitability.
And so John Woods, chief investment officer for Asia at Lombard Odier, speaks for many when he worries China’s equity rally is at odds with fundamentals.
“The equity rally may be driven by a combination of fear of missing out, hopes of a Chinese economic recovery, Beijing’s pro-growth policy stance, foreign investor rotation from US and Japan stocks, as well as attractive valuations, particularly in technology-related names.”
Furthermore, Woods notes, “the stability and consistency of Hong Kong’s dollar peg to the US dollar also offers foreign investors some confidence. Meanwhile, Chinese authorities would like to sustain the rally with policy proposals. The latest plan would exempt individual mainland investors from a 20% tax on Hong Kong-listed dividends.”
Yet the rally “seems to be expectation-based and liquidity-driven,” Woods says. “Whether it can continue largely depends on China’s corporate revenue outlook.”
And the broader economy’s ability to turn the corner. The good news is that first-quarter earnings for China’s big tech names are suggesting green shoots.
As Allianz Global Investors puts it, “while top-line growth has generally been as muted as expected, tighter control of costs has fed through into improved bottom-line profitability. Alongside the improved earnings picture has been a notable increase in dividend payouts. The dividend hikes have, to an extent, been spurred by a recent regulatory push, but from a fundamental perspective, there certainly appears to be room to increase dividends.”
The bad news is that Xi’s reform team has much to prove given the market’s often-wild gyrations since 2015.
Analysts at Morgan Stanley, for example, counsel caution about the upside for mainland shares. “We see near-term technical overbought signals, which could deter further buying by global quant funds,” they write. “Consumption and the housing market likely need more time to pick up, implying ongoing pressure on deflation and corporate earnings.”
The same goes for financial reforms. Along with China’s ever-present regulatory risks and concerns about growth, tech shares face headwinds amid fears about the property crisis and the exodus of capital out of yuan assets as the US dollar rallies.
This latter dynamic is being complicated by the US Federal Reserve’s reluctance to ease interest rates, extending the “higher for longer” era for yields.
Part of the bull case on China tech stems from the success of Huawei Technologies and certain others in navigating around US sanctions aimed at stunting the sector.
One of the perhaps unintended consequences of attempts by US presidents Donald Trump and Joe Biden to undermine the semiconductor industry is how it’s catalyzed China Inc. to innovate and move up the value-added ladder.
Bernstein analyst Qingyuan Lin called US sanctions a “double-edged sword.” It “may slow China’s progress in cutting-edge areas, they also compel China to develop its supply chain, pursue self-sufficiency and thrive in segments that benefit from increased domestic substitution.”
Yet whether Chinese tech shares win a broader audience depends on Xi’s success in championing private sector innovation over antiquated state-owned enterprises. In theory, this requires Beijing to act faster and more credibly to level playing fields, build stronger capital markets, increase transparency and strengthen corporate governance.
And, of course, to end a property crisis that has China in global headlines for all the wrong reasons. It’s thus significant that Beijing is now calling on SOEs to purchase unsold property, introducing non-commercial distortions in a market already rife with them.
In February, Premier Li called for “pragmatic and forceful” steps aimed at “boosting confidence.” He urged policymakers to “focus on solving practical issues that concern the masses and enterprises.”
Li’s comments came around the time Beijing statisticians were confirming the lowest annual foreign direct investment since 1993 — just $33 billion in 2023. The figure, which records monetary flows involving foreign-owned entities in China, was 82% lower than the 2022 tally.
MSCI’s decision earlier this year to delete dozens of Chinese companies from multiple indexes has complicated Xi’s efforts to restore confidence. The move highlighted the need for reform is growing as investors look for less volatile destinations for capital, including neighboring Japan.
The key is to internalize the lessons from 2015 and since then.
At the time, Xi’s Communist Party loosened rules on leverage, reduced reserve requirements, delayed all initial public offerings, suspended trading in thousands of listed companies and allowed mainlanders to use apartments as collateral to buy shares. Then, Xi’s government rolled out advertising campaigns to buy stocks out of patriotism.
The severity of today’s property crisis and deflationary pressures suggest that mere stimulus will be even less effective this time.
Another problem is intensifying US efforts to curb China’s development as a tech superpower. Earlier this week, Biden unveiled a new round of Trump-like tariffs on Chinese electric vehicles — to the tune of 100%.
Biden also slapped new taxes on mainland solar cells, batteries, construction cranes and medical equipment as well as steel and aluminum.
Team Xi has already said it will “take resolute measures to defend its rights and interests.” That could, in turn, see Biden up the sanctions ante ahead of the November 5 election, putting China’s tech industry on edge.
Odds are, the next wave of curbs will seek to stymie China’s ambitions in the artificial intelligence space. Already, the specter of heavy-handed regulation – and Xi’s party putting its own priorities ahead of tech development – are clouding China’s AI future.
Even before Biden’s latest tariffs, analysts at Barclays were doubtful about China’s ambitious goal of reaching 70% self-sufficiency in semiconductors by 2025. The endeavor is still “at the start of a very long journey,” Barclays says.
Yet China is indeed stepping up the pace of transforming its economy away from property to technology and services. Tech profits are telling the story – and generating optimism in some circles that the economy is on a more dynamic, value-added track.
Follow William Pesek on X at @WilliamPesek
