Why Chinese Tech Stock Probably Peaked




For several weeks before the big rally on Tuesday, shares of Alibaba (BABA), PDD, and JD trended higher. They broke out to up to a double-digit percentage gain. China’s central bank (the PBOC) announced a big stimulus package and a cut in mortgage rates.

Yesterday, the rally faded. The weakest firms like Oriental Education (EDU) fell by around 4%. Conversely, neighboring South Asian firms like Sea Ltd. (SE) and Coupang (CPNG) did not change by much.

Issues

Economists doubt that China’s loose monetary policy will change the domestic demand for real estate. Evergrande is among the many real estate firms to file for bankruptcy. Unless the central bank fixes the unfinished homes problem, the tech stock rally risks fading.

China needs to accompany the rate cut with a fiscal policy that boosts spending. The country is facing growing deflation as demand worsens. Many foreign firms like Sony (SONY), Microsoft (MSFT), IBM (IBM), and Toyota (TM) closed some or all of their offices in China.

Buy EMEA e-Commerce Stocks

Sea and Coupang are still the best bets. They will thrive as PDD, JD, and Alibaba struggle to compete. Investors who lost money in the latter three companies by holding the stock over three years ago have the most to think about. The stock is unlikely to re-visit old highs that reflected China’s glorious economic years.



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