China Stocks Rise Despite Tariffs and Property Woes. Will It Last?

Chinese stocks, particularly e-commerce giants Alibaba (BABA), Tencent (TCEHY), and PDD Holdings (PDD), have been rallying despite the announcement of new tariffs by U.S. President Donald Trump and ongoing struggles in the Chinese property market. This article explores the factors contributing to this rally and examines whether it is likely to continue.

Factors Driving the Rally

1. Mild Response by China to U.S. Tariffs: China's countermeasures were perceived as relatively mild, targeting only about $20 billion of U.S.-imported goods and leaving off some key strategic items. This was seen as a warning rather than a full-blown retaliation, giving investors hope for a negotiated settlement (Source: "Tariff tit for tat to start Trump's tenure").
2. Delayed Tariffs on Mexico and Canada: The postponement of tariffs on goods from Mexico and Canada for a month, after Trump struck deals with both countries regarding border security, also contributed to the positive market sentiment (Source: "Tariff tit for tat to start Trump's tenure").
3. Optimism about Stimulus Measures: The Chinese government's recent introduction of more than 10 key measures and papers, spanning monetary and fiscal policy and property and equity markets, has raised investor expectations for policy support. This includes measures to stabilize the real estate sector, which could benefit companies like Alibaba and Tencent (Source: "Chinese stocks may be poised to climb again").
4. Improving Earnings Outlook: Goldman Sachs Research raised its price-to-earnings targets for MSCI China companies and CSI300 stocks, forecasting that they could trade at 12.0x earnings and 14.2x earnings, respectively. This reflects a more optimistic outlook for corporate earnings growth (Source: "Chinese stocks may be poised to climb again").
5. Undervalued Stocks: Despite recent gains, Chinese stocks remain relatively undervalued compared to other global benchmarks. This, combined with the potential for policy follow-through and earnings growth, makes them an attractive investment opportunity (Source: "Chinese stocks may be poised to climb again").
6. Investor Sentiment: The rally in Chinese stocks may also be driven by investor sentiment, with some investors believing that the worst is over and that the market is poised for a rebound. This is supported by the fact that the rally occurred despite the announced tariffs and property market struggles (Source: "Chinese stocks may be poised to climb again").



Geopolitical Tensions and Future Performance

Geopolitical tensions play a significant role in the market's perception of Chinese stocks, as seen in the recent rally of Chinese e-commerce stocks despite China announcing countermeasures to U.S. tariffs. Investors perceived the countermeasures as relatively mild, leading to a positive market reaction. However, the market is also aware of the potential risks associated with geopolitical tensions, such as the possibility of an escalation in the trade war or increased isolation of China due to its perceived status as a geopolitical rival. This could lead to further market volatility and potential downside for Chinese stocks if a deal is not reached.

In conclusion, the rally in Chinese stocks, particularly Alibaba, Tencent, and PDD Holdings, can be attributed to several factors, including a mild response by China to U.S. tariffs, delayed tariffs on Mexico and Canada, optimism about stimulus measures, improving earnings outlook, undervalued stocks, and investor sentiment. However, geopolitical tensions and the potential for an escalation in the trade war pose risks to the market's perception of Chinese stocks and could lead to further market volatility. Investors should remain vigilant and monitor the situation closely as it unfolds.