China’s trade activity fell sharply in July, indicating a slowdown in the world’s second-largest economy and a potential threat to the global recovery. China’s imports and exports both dropped more than expected last month, as domestic and foreign demand weakened amid the COVID-19 pandemic and rising trade tensions.
According to the customs data released on Tuesday, China’s imports plunged by 12.4% year-on-year in July, much worse than the 5% decline forecast by analysts. Exports also contracted by 14.5%, after falling by 12.4% in June. The trade surplus narrowed to $42.8 billion, down from $51.5 billion in June.
The dismal trade figures suggest that China’s economic recovery is losing momentum, as the initial rebound from the easing of lockdown measures in late 2022 fades. China’s gross domestic product (GDP) grew by 7.9% year-on-year in the second quarter of 2023, down from 18.3% in the first quarter.
The weak trade data also reflects the challenges that China faces in maintaining its growth amid the resurgence of COVID-19 cases in some regions, the regulatory crackdown on its tech sector, and the rising tensions with the US and other major trading partners.
Alibaba and other Chinese tech stocks tumble on Wall Street
The disappointing trade data from China weighed heavily on the stock market on Tuesday, especially on the Chinese tech giants that rely heavily on online consumption and cross-border e-commerce. Alibaba (BABA), one of China’s largest online retailers and cloud service providers, saw its stock price plummet by 5% on Tuesday, closing at $96.90 per share.
Alibaba was not the only Chinese tech company that suffered a steep decline on Tuesday. JD.com (JD), another leading e-commerce platform in China, dropped by 4.5%, while Tencent Holdings (TCEHY), the owner of popular social media and gaming apps such as WeChat and PUBG Mobile, fell by 3.8%. All three companies underperformed the S&P 500 index, which slid by 1.4% on Tuesday.
The slump in Chinese tech stocks was also driven by the ongoing regulatory crackdown by Beijing, which has targeted various aspects of the tech industry, such as antitrust, data security, online education, and gaming addiction. The Cyberspace Administration of China (CAC) recently proposed strict limits on the use of smart devices by minors, which could affect the revenue and user growth of many online platforms.
What does this mean for investors?
The sharp drop in Alibaba’s stock price on Tuesday reflects the uncertainty and volatility that investors face when investing in Chinese tech stocks. Alibaba has lost more than 40% of its market value since its peak in October 2020, when it was preparing for the initial public offering (IPO) of its fintech affiliate Ant Group. The IPO was abruptly halted by Chinese regulators, who later imposed a record $2.8 billion fine on Alibaba for violating antitrust rules.
Despite the challenges and risks that Alibaba and other Chinese tech companies face, some analysts believe that they still offer attractive opportunities for long-term investors who are willing to endure short-term fluctuations. Alibaba, for instance, still boasts a strong competitive position in China’s e-commerce and cloud computing markets, as well as a diversified portfolio of businesses that span across various sectors and regions.
Moreover, some analysts argue that the current valuation of Alibaba and other Chinese tech stocks is too low compared to their growth potential and profitability. According to FactSet data, Alibaba trades at a forward price-to-earnings ratio of 16.6, while JD.com trades at 21.9 and Tencent trades at 23.8. These are much lower than the average forward P/E ratio of 25.6 for the S&P 500 index.
Therefore, investors who are interested in Chinese tech stocks may want to take advantage of the recent sell-off and buy some shares at a bargain price. However, they should also be prepared for more volatility and uncertainty in the future, as China’s economic outlook and regulatory environment remain unpredictable.
