The latest economic figures from China were disappointing, and the outlook doesn’t look any better. Alibaba Group Holding stock and shares of other major Chinese companies including
PDD
and JD.com were falling on Wednesday.
China’s gross domestic product expanded 5.2% in the fourth quarter and for 2023 overall, according to data released by the National Bureau of Statistics on Wednesday. While that was ahead of the Chinese government’s official target of around 5% growth, it was still one of its lowest levels in decades.
American depositary receipts of Chinese internet company
Alibaba
dropped 1.9% in early trading. The ADRs of peer
JD.com
were down 5.1% and those of
PDD
—the parent of Pinduoduo and Temu—were down 2.8%.
The drops followed similar moves for the stocks in Hong Kong, with the
Hang Seng Index
closing down 3.7% on Wednesday, finishing at its lowest level in nearly 15 months.
The slump may trigger the Chinese government to step in and take measures to restore economic confidence, but that hasn’t been forthcoming so far.
“We expect the sequential growth momentum of the Chinese economy to stabilize at a subdued level over the course of 2024, with annual growth slowing to 4.4% in 2024 as the reopening effects fade, the property sector remains a drag, and government policies focus on containing downside risks rather than providing a major growth boost,” wrote Julius Baer economist Sophie Altermatt in a research note on Wednesday.
Despite valuations of Chinese equities now trading at levels that appear cheap—Alibaba ADRs for example have a trailing price-to-earnings multiple of 9.6—investors have been put off by regulatory crackdowns, U.S.-China tensions, and sluggish economic growth.
Shaky consumer confidence and concerns over China’s demographics—the population shrank for the second year in a row in 2023—are bad news for the e-commerce operations that big Chinese technology companies have built their businesses on.
Companies like Alibaba and
Tencent Holdings
have diversified into areas such as cloud computing and now artificial intelligence, but they are vulnerable to disruption caused by tensions between the U.S. and China over access to advanced technology. Alibaba said last year that it wouldn’t proceed with spinning off its cloud-computing arm—which also houses its efforts in artificial intelligence—citing risks to the business from U.S. export controls on advanced computer chips.
The vulnerability to fears of U.S. sanctions was on show again this week when shares Chinese search company
Baidu
dropped following a report that its AI chatbot had been tested by scientists affiliated with the Chinese military. The internet company denied any knowledge of the research but its ADRs are still down 13% from where they were before the report.
Still some analysts think there are bargains to be had. UBS analysts have Buy ratings on Alibaba, Baidu, and Tencent.
“Among Chinese internet companies, we believe Alibaba will benefit from the increasing usage of edge computing in [the] generative AI era, due to its years of research and development in edge computing. We think other Internet cloud vendors Tencent and Baidu are also direct beneficiaries under this theme,” UBS analyst Kenneth Fong wrote in a recent research note.
Write to Adam Clark at [email protected]
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