China's AI-Fueled Stock Rally Bucks Economic Ills

Latest stories

Brazil will remain China's preferred soybean supplier, not the US

Japan's Liberal Democratic Party in search of answers

How US could turn Pakistan into an energy export powerhouse

Now here comes Alibaba to prove that Xi's 2015 strategy to increase China's global footprint in technologies of the future, including biotechnology, electric vehicles , renewable energy, semiconductors and now AI, is paying dividends.

Take BYD. Though the EV upstart that last year surpassed Elon Musk's Tesla had a rough second quarter - revenues plunged a staggering 30% - China's auto revolution continues to upend the global auto market.

Alibaba is also turning heads by finding ways to capitalize on AI with the best of them, including OpenAI, Google and Microsoft. The Shanghai stock surge owes much to these tech wins.

The $50 billion stock rally that Alibaba triggered helped calm investor fears about the costs of the intensifying battle for e-commerce with Meituan and JD. The AI arms race has Western tech giants Alphabet, Amazon, Meta, Microsoft, Nvidia, Tesla and others investing aggressively.

Yet the“old economy” part of the split-screen matters, too. The reason investors are debating whether Shanghai shares are getting ahead of their skis is China's unbalanced economy.

The return of China Evergrande Group to global headlines is the last thing Asia's biggest economy needs. Late last month, China's top property developer had its shares unceremoniously removed from the Hong Kong Stock Exchange.

On August 28, Fitch Ratings downgraded China Vanke Co, citing“further weakening” of the homebuilder's liquidity. Fitch analyst Rebecca Tang says it's“essential for China Vanke to address its financial obligations, as Fitch forecasts its free cash flow to remain negative in the near term.”

Trouble is, there are dozens of giant developers across China's $18 trillion economy facing the same exact pressure as domestic demand slows.

Economist Sunny Kim Nguyen at Moody's Analytics points out that“sentiment is gloomy as firms grapple with weak demand and squeezed margins. A temporary trade truce with the US has offered some respite, but sporadic US threats are keeping the [manufacturing] sector on edge.”

Risks emanating from abroad are colliding with numerous pre-existing conditions at home. China's property crisis resulted in the longest deflationary streak since the 1997-98 Asian financial crisis. Weak household demand and near-record youth unemployment are slamming confidence.

Things may soon get much worse if Trump decides to raise the current 30% tariff rate should Xi play hard to get on a US-China trade deal. So far, Trump has moved much slower in deploying trade curbs than global investors expected.

These risks only increase the urgency for Xi's team to stabilize China's financial system . Immediate priorities include repairing a weak property sector that fuels deflation, building more vibrant capital markets, reducing youth unemployment, addressing runaway local government debt, curbing the dominance of state-owned enterprises and increasing transparency.

Team Xi also must create a vibrant network of social safety nets to encourage consumption over saving.

In recent months, Xi's government intensified efforts to support China's volatile stock markets by encouraging pensions and mutual funds to invest more in domestic stocks and prodding mainland households to buy more shares.

Such steps are only necessary, though, because Team Xi has been too slow to address the economy's pre-existing conditions. One big debate in financial circles is whether Beijing might resort to weakening the yuan to boost economic growth.

The pros are obvious. A weaker exchange rate would further boost exports, a key reason why China may reach 5% growth this year.

Yet the cons are stopping Team Xi from going the weaker yuan route. For one thing, it might make it harder for highly indebted property developers to make payments on offshore bonds .

That would increase default risks in Asia's biggest economy. Seeing #ChinaEvergrande trending again is not what Xi's party wants in 2025.

For another, the monetary easing required to depress the yuan could squander years of deleveraging efforts. In recent years, Beijing has made important strides in reducing China's financial excesses and improving the quality of gross domestic product.

As a result, Xi and Premier Li Qiang have been reluctant to let the People's Bank of China ease more assertively, even as deflation deepens .
Xi's government has proved more skilled at talking the talk than walking the walk on earning the trust of global investors. Too often, Xi's reform team put the proverbial cart before the horse. Team Xi has tended to over-promise and under-deliver on financial reforms.