What happened
Chinese stocks have proved mostly resistant to the chaos in U.S. markets around the coronavirus pandemic as China's economy is largely returning to normal following an earlier outbreak of the virus. But today, Chinese stocks were rattled by a broader earnings-driven sell-off in the U.S., and as President Trump renewed his trade war with China, calling for tariffs in retaliation for the virus.
News reports revealed that the Trump administration is considering multiple tactics to punish China for being the origin of the virus and to use the country as a scapegoat in his reelection campaign. Among the tools the administration is considering are sanctions, cancellation of debt, and a new round of tariffs. Trump aides are also seeking to prove against evidence that the virus originated in a lab in Wuhan.
Prior to the coronavirus, the trade war between the U.S. and China had been one of the biggest factors influencing Chinese stocks, and renewal of Trump's threats could further destabilize the global economy and weaken China's recovery from the pandemic.
Not suprisingly, Chinese stocks reacted poorly to the news. Among the losers were Baozun (BZUN 0.46%), which closed down 10%, Sohu.com (SOHU +0.95%), which lost 10.7%, and Momo (MOMO +1.87%), off 10.5%. The S&P SPDR China ETF (GXC +0.26%) finished down 4.1% on the day.
Image source: Getty Images.
So what
There was no company-specific news on these stocks, but the worries about the China threat were enough to cause them to fall by double digits. Additionally, earnings reports from Apple and Amazon.com showed that the impact from the coronavirus would hit profits hard at even the biggest tech companies and that the impact would last longer than expected.
Baozun, Momo, and Sohu all operate in different industries, but the three are seen as growth stocks and sensitive to China's overall economic health.
Baozun may have the most to lose here on renewed tensions between the two superpowers since the company handles services like warehousing, IT, and marketing for multinational companies like Microsoft and Nike engaging in e-commerce in China. In a letter to shareholders earlier this week, Baozun CEO Vincent Qiu noted the challenges from the pandemic, but also said, "it has also been a watershed moment for our business, convincing many of our brand partners of the value and importance of developing a greater online profile." Still, the company remains vulnerable to a trade war between the U.S. and China and a further splitting of their business relationship, as some have called for.
Momo, best known as China's Tinder, last updated investors in March when it reported fourth-quarter earnings. At the time, the company forecast a decline in first-quarter revenue of 4.6% to 7.3% due to COVID-19, which follows an increase of 22% in the fourth quarter. Though Momo may not be directly exposed to tariffs, other threats to damage China's economy could impact the stock.
Sohu.com, an online media company that offers a search engine and games, said in its fourth-quarter earnings report in March that revenue would be severely impact by COVID-19 in the first quarter. The company anticipated that brand advertising revenues would fall by 30% to 42% in the first quarter and that revenue from its Sogou search engine would land between a decline of 5% and an increase of 3%. Since part of its revenue comes from advertising, Sohu is sensitive to China's overall economic health.
Now what
There was already plenty of uncertainty in the global economy before President Trump's tirade against China, and though the world's No. 2 economy is recovering from its shutdowns, it's still sensitive to the collapse in demand in North America and Europe as economies there have been widely shut down. Therefore, a trade war or similar action could puncture China's recovery.
All three stocks have fallen by double digits since the S&P 500's peak in February, showing they've been vulnerable as the U.S. economy has shut down. Keep your eye on tensions between the U.S. and China as these stocks could fall more if the situation is further enflamed.
