China tech stocks: relief rally eases lockdown pain

“Slowest growth since going public’‘ is the latest catchphrase linked to Chinese stocks. Alibaba has just recorded the second straight quarter of such a slowdown, as have peers such as Tencent. A slim beat on market expectations should not be reason for investors to celebrate.

Nonetheless, shares of Alibaba rose more than 12 per cent on Friday. Shares of peer Baidu, which also reported first-quarter results late on Thursday, rose 14 per cent, even as sales rose just 1 per cent and it booked a net loss.

More attention should be given to Alibaba’s decision to not provide a forecast for the current fiscal year. That breaks a long-running tradition, suggesting the worst is yet to come. Baidu also stopped giving revenue guidance in the fourth quarter.

The biggest impact on earnings from two months of drastic lockdowns should be reflected in the financial results of the current quarter. Even as lockdowns in Shanghai show signs of easing, disrupted supply chains and a severe backlog at local plants and ports mean a quick return to normal is unlikely. Lockdowns in the capital Beijing cannot be ruled out as new cases hit records this week.

Then there is the possibility of fresh political risk. The US and Taiwan are reported to be negotiating ways to deepen economic ties and boost supply-chain resiliency, which could further strain ties between China and the US. Earlier this week, Biden vowed to militarily support Taiwan if China were to invade it.

While Biden walked those comments back, the comments highlight the current fragile state of US-China relations. Trump-era trade disputes and blacklists were the single biggest factor behind Chinese tech stock weakness before Beijing’s crackdowns on the sector.

Tech groups such as Baidu and Tencent trade at multiples of over 17 times on a forward earnings basis. Given the political risks and their faltering growth rates, that is still much too optimistic.