What happened
Shares of many Chinese stocks struggled this week as earnings season pressed on, economic concerns lingered, and fears around a resurgence of COVID-19 cases crept back into the picture.
Shares of the online recruitment firm Kanzhun (BZ -1.39%) traded more than 19% lower on the week as of 12:42 p.m. ET Thursday, according to data from S&P Global Market Intelligence.
Meanwhile, shares of the e-vapor company RLX Technology (RLX 0.84%) traded roughly 12% lower, while shares of the grocery delivery company Dingdong (Cayman) Limited (DDL -2.17%) were down almost 14%.
Image source: Getty Images.
So what
China's economy was bogged down last year by the government's "zero-COVID" policies, which included widespread lockdowns that really sapped consumer demand and hit the economy hard. This year, the Chinese government has tried to use more accommodative policies to promote economic growth. In the first quarter of the year, the Chinese economy grew a promising 4.5%.
But investors and experts are now growing increasingly concerned about the state of the economy and whether a recovery will truly materialize.
"Something is rotten in the Chinese economy, but don't expect Wall Street analysts to tell you about it," Rockefeller International chair Ruchir Sharma wrote earlier this week in an op-ed published in the Financial Times. "Further, global growth may prove weaker than expected in 2023, since the hope is that a US downturn will be countered by the China reopening boom, which may never come. It is time to expose this charade before the fallout gets worse."
Sharma points out several discrepancies in the data. For instance, analysts are assuming the Chinese economy will grow 5% this year, which suggests 8% corporate revenue growth. However, corporate revenue only grew 1.5% in the first quarter. Additionally, imports declined by 8% in April.
Investors are also growing concerned about a new COVID-19 subvariant called XBB that is responsible for a new wave of cases. Zhong Nanshan, a respiratory disease specialist, reportedly said at a conference earlier this week that this wave, which started in April and had been expected, is likely approaching 40 million cases per week and could peak at 65 million per week by the end of June.
In other news, Kanzhun reported first-quarter earnings earlier this week and beat consensus estimates on both earnings and revenue. The company is also guiding for total revenue in the second quarter to come in between $200 million and $210 million, which would be a 7.5% increase from first-quarter revenue at the bottom end of the range.
Now what
There was a lot going on this week with more questions about economic data and renewed concerns about COVID-19, which looks to be the main culprit for the sell-off. While many Chinese companies are beating earnings estimates, it doesn't seem to be enough to fully convince the market that the economy is moving in the right direction.
My big worry right now is the resurgence of COVID cases, which could turn into a big problem for the economy if it causes the Chinese government to revert to policies that further hurt consumer demand.
Ultimately, with these concerns lingering, I don't think it's a bad idea for investors to wait on the sidelines until more data becomes available, especially when it comes to some of these small- and mid-cap Chinese stocks.
