Chinese stocks are falling in price as the country’s central bank cuts reserve requirements in the face of the U.S. trade war.
This is creating what could prove to be great bargains, especially for companies involved in the internet. Alibaba (NASDAQ:BABA) opened for U.S trade Oct. 8 down 16% for the year, falling another 1.7% in pre-market trading to $152, and the pain continued after the open. Rival JD.Com (NASDAQ:JD) has had an even more spectacular fall, dropping 45% so far this year and opening for trade Oct. 8 at around $23 per share. Many U.S. analysts are cheering this news. But trade wars are never easy, and their results are seldom clear-cut.
China bears might notice how the administration can quickly back down when it decides to, as it did with Canada and Mexico — with whom it has a new deal little different from the last one, which it yet proclaims a great victory.
China Doubles Down
U.S. tariffs are making China double down on changes it was planning on making anyway, changes the U.S. had been encouraging. It is increasing its research budget, pushing low-wage industries overseas, becoming more protective of intellectual property and, ironically, more like the U.S.
China’s latest move is the fourth cut in reserve requirements this year but they’re not the only quivers in the policy bow. Targeted tax cuts, devaluation of the yuan and the sale of U.S. debt on the open market are all waiting to be used.
In the near term, Chinese stocks are falling, the Chinese A50 index was down nearly 5% on Oct. 8, the equivalent of a 1,500-point drop in the Dow Jones Industrial Average. The fall is exaggerated because the country’s “Golden Week” holiday was last week, and markets are adjusting to a week’s market news in the rest of the Asia.
American analysts love to claim that “China does not play by the same rules we do,” but it does, if by the same rules you mean those the U.S. pursued before we became an economic superpower. The U.S. relied on tariffs to fund the government until the 20th century and did not even recognize international copyright until the 1880s.
China’s moves to catch the U.S. in research, with growing ties to Silicon Valley and U.S. universities, combined with the growing trade friction, are leading to a bi-polar economic world, with China dominating the fast-growing economies of Asia and the U.S. controlling the slow-growth markets of Europe.
That doesn’t sound like a losing hand.
In the end, the present “crisis” could prove to be just as manufactured as the one with Canada, designed to increase Washington’s control as dispenser of economic favors and (ironically) create an economic system more like China’s.
The Bottom Line on Chinese Stocks
Right now “everyone’s fleeing Chinese stocks,” and the yuan is trading at 6.93 to the U.S. dollar, with JPMorgan Chase and Morgan Stanley giving up bullish calls on China.
But that doesn’t mean growth there is ending. Consider Alibaba. Even when taking out the fall of the yuan, that company is still growing at 20% per year, and while margins are falling as it invests more in retail and delivery infrastructure, profits are still growing as well.
The main thing that’s happening is that Alibaba’s sky-high price-to-earnings ratio, which was once similar to that of Amazon.Com (NASDAQ:AMZN), is now readjusting, and was below 45 as trade began in the U.S.
If this were a U.S. growth stock, we’d call that a bargain.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA and AMZN.