What’s going on
The stock prices of several Chinese companies have been struggling this week due to a combination of factors, including ongoing economic concerns, the impact of COVID-19, and the release of earnings reports across the industry.
Kanzhun, an online recruitment firm, saw shares on NASDAQ (symbol BZ) drop by more than 19% as of 12:42 p.m. ET Thursday, while RLX Technology (NYSE: RLX), an e-vapor company, experienced a corresponding drop of approximately 12% and grocery delivery company Dingdong (Cayman) Limited (NYSE: DDL) was down close to 14%.
Image sourced from Getty Images
So, what’s the issue?
In 2020, Chinese laws surrounding “zero-COVID” policies instituted widespread lockdowns, which negatively impacted the economy and consumer demand. This year, however, the Chinese government has been promoting economic growth through more accommodative policies, resulting in a 4.5% surge in the economy in the first quarter. Yet, despite these measures, many investors and experts remain apprehensive about the economy’s health and its capacity for prolonged growth.
Rockefeller International’s Chair, Ruchir Sharma, explained in an op-ed published in the Financial Times earlier this week that there are several discrepancies in Chinese economic data. For example, analysts currently project a Chinese economy growth rate of 5% for 2023, requiring a projected 8% corporate revenue growth rate, when the first quarter only saw a 1.5% rise in corporate revenue. Furthermore, April saw a decline of 8% in imports.
Concerns are also increasing over the XBB COVID-19 subvariant and its potential impact in contributing to a new wave of cases. According to Zhong Nanshan, an expert in respiratory disease, this new wave, already active from April, may hit 40 million cases per week towards the end of June, with potential growth to 65 million cases per week.
Alternatively, Kanzhun has released reports showing first-quarter earnings that exceeded consensus estimates on both revenue and earnings, with an expected rise in second-quarter revenue of between $200 million and $210 million; this would mean an increase of 7.5% from the first-quarter revenue at the lower limit of the projected range.
What’s next?
Given the multiple issues: economic data concerns, renewed concerns about the impact of COVID-19, it appears this is primarily causing the downturn. While many Chinese firms are surpassing earnings expectations, it is not convincing enough to ensure investors’ faith in the economy’s direction of movement.
Further, a resurgence of COVID cases could become a significant problem if the government implements policies that further decrease consumer demand.
Thus with these ongoing concerns, it may be best for investors to wait for more data to emerge, especially with smaller- and mid-cap Chinese stocks.
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