The latest economic figures from China were disappointing and the outlook doesn't look any better. Shares of Alibaba Group Holding and other major Chinese companies including PDD and JD.com fell on Wednesday.
China's gross domestic product grew 5.2% in the fourth quarter and 2023 overall, according to data released by the National Bureau of Statistics on Wednesday. Although this was above the Chinese government's official growth target of around 5%, it was still one of the lowest levels in decades.
Chinese internet company Alibaba's American depositary receipts fell 1.9% in early trading. Competitor JD.com's ADRs fell 5.1% and those of PDD – the parent company of Pinduoduo and Temu – fell 2.8%.
The declines followed similar moves in Hong Kong stocks, with the Hang Seng index closing down 3.7% on Wednesday, hitting its lowest level in nearly 15 months.
The slump could prompt the Chinese government to intervene and take measures to restore economic confidence, but that has not yet happened.
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“We expect China's economy's sequential growth momentum to stabilize at subdued levels throughout 2024, with annual growth slowing to 4.4% in 2024 as the impact of reopening continues to fade in the real estate sector is a burden and government policy is focused on that.” “Containing downside risks rather than providing a big growth spurt,” wrote Julius Baer economist Sophie Altermatt in a research note on Wednesday.
Although valuations of Chinese stocks are currently trading at seemingly cheap levels – Alibaba ADRs have a price-to-earnings ratio of 9.6, for example – investors have been deterred by tight regulatory measures, US-China tensions and sluggish economic growth.
Weak consumer confidence and concerns about China's demographics – its population shrank for a second consecutive day in 2023 – are bad news for the e-commerce activity on which major Chinese technology companies have built their businesses.
Companies like Alibaba and Tencent Holdings
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have diversified into areas such as cloud computing and now artificial intelligence, but are vulnerable to disruption caused by tensions between the U.S. and China over access to advanced technology. Alibaba said last year that it would not move forward with spinning off its cloud computing division, which also houses its artificial intelligence efforts, citing risks to the company from U.S. export controls on advanced computer chips.
Vulnerability to U.S. sanctions fears was highlighted again this week when shares of Chinese search firm Baidu fell following a report that its AI chatbot had been tested by scientists linked to the Chinese military. The internet company denied any knowledge of the study, but its ADRs are still 13% lower than before the report.
Still, some analysts believe there are bargains to be had. UBS analysts have given “Buy” ratings to Alibaba, Baidu and Tencent.
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“Among Chinese internet companies, we believe Alibaba will benefit from the increasing use of edge computing [the] Due to years of research and development in edge computing, the age of generative AI has arrived. “We believe other Internet cloud providers Tencent and Baidu will also directly benefit from this theme,” UBS analyst Kenneth Fong wrote in a recent research note.
Write to Adam Clark at [email protected]