What happened
Shares of several Chinese stocks fell in April in what was a bumpy ride for the sector that saw both tailwinds and headwinds from broader economic data as well as rising geopolitical tensions between the U.S. and China.
Shares of the large Chinese tech conglomerate Alibaba Group (BABA 0.28%) fell more than 17% in April, according to data from S&P Global Market Intelligence. Meanwhile, shares of another large Chinese tech company, JD.com (JD 0.20%), fell 18.6%, while shares of the agricultural e-commerce company PDD (PDD -0.18%) ended April down more than 10%.
So what
Chinese stocks rode into April on a high. There were signs that the Chinese economy was recovering and at the very end of March, Alibaba surprised investors with the announcement that it would split the company into six different divisions, all of which would explore the idea of spinning out and going public. Many believed the move could unlock shareholder value because splitting the company would enable it to be valued on a much higher sum-of-the-parts valuation.
Image source: Getty Images.
But the rally would fade pretty abruptly for a number of reasons. For one, in early April CNN reported that PDD's flagship app, Pinduoduo, may have had malware on it that allowed the company to gain unprecedented access to data on a person's cellphone.
Investors also seemed to be losing faith in China's economic recovery. While gross domestic product (GDP) in the country rose 4.5% in the first quarter of the year, its fastest GDP growth since the first quarter of 2022, there were some concerning data points. For instance, manufacturing data remained weak in the first quarter, with profits at industrial firms in China falling by more than 21% year over year in the first quarter. Additionally, youth unemployment in the country for those between 16 and 24 years old remains strikingly high near 20%.
Then geopolitical fears also helped lead to the sell-off. Rumors began to circulate that the Biden administration is contemplating an executive order that would further limit American investment in certain Chinese tech companies and also limit activity in certain sectors like the semiconductor space.
This comes after the Biden administration toward the end of last year passed rules stating that U.S. companies can no longer sell certain equipment to Chinese companies that develop certain types of chips without a license, among other restrictions. All of this is an attempt to curb China's ability to develop certain technology, which has become the latest international battleground.
Then a group of U.S. lawmakers asked the Biden administration to place sanctions on certain Chinese cloud service providers like Huawei.
Chinese tech companies are also facing pressure from Chinese regulators on new artificial intelligence (AI) technology like ChatGPT. Almost immediately after Alibaba rolled out its own version of the technology, Chinese regulators laid out specific rules for generative AI including that content created from this technology should align with core Socialist values.
Now what
It was clearly an eventful month for Chinese stocks and while each matter presents a risk, regulatory issues and geopolitical concerns are the cost of doing business when it comes to investing in the sector.
While each stock should be studied carefully, I do believe that Alibaba and JD.com represent good long-term opportunities given their size and scale and the massive markets they operate in. However, while I like the business concept, I would avoid PDD until more is known about the CNN report and any potential ramifications.
