Why Chinese Stocks Alibaba, Tencent, and PDD Holdings Were Rallying Despite a Tariff War

Shares of Chinese e-commerce stocks Alibaba (NYSE: BABA), Tencent (OTC: TCEHY), and PDD Holdings (NASDAQ: PDD) were rallying on Tuesday, up 4.7%, 4.1%, and 8.8%, respectively, as of 1 p.m. ET.

It seems counterintuitive that Chinese stocks would be rising, given that China just announced countermeasures today as a response to U.S. President Donald Trump putting a new 10% tariff on goods imported from China.

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However, given the negotiated delays on tariffs for imports from other countries and what might be perceived as a mild response by China, the new "tariff war" may be less severe than investors had anticipated.

Tariff tit for tat to start Trump's tenure

Over the weekend, Trump announced 10% tariffs on most goods imported from China, along with 25% tariffs on goods coming from Mexico and Canada. But the positive move in Chinese stocks today may be due to Monday's delays in tariffs on goods from Mexico and Canada. Those tariffs were postponed for a month yesterday, after Trump struck deals with both countries regarding border security.

But China announced countermeasures today, placing a 15% tariff on a subset of goods including U.S.-imported oil, agricultural machinery, and certain automobile brands, and a 10% tariff on U.S. coal and natural gas. These are set to go into effect on Feb. 10, which gives China and the U.S. some time for negotiations before they go into effect.

Additionally, China launched an antitrust probe into Alphabet, and put PVH Corporation, the owner of Calvin Klein and Tommy Hilfiger brands, as well as gene-mapping biotech Illumina on China's "entity list," accusing these two very different companies of violating fair trade practices in China.

Clearly, an escalating trade war with the U.S. wouldn't be good for the Chinese economy, and therefore these leading Chinese e-commerce stocks. Alibaba is an e-commerce, cloud computing, and fintech giant in China. Tencent is the owner of WeChat, the country's largest social media platform, the country's largest video game publisher, and a leading fintech player as well. Given their size, both companies are sensitive to China's overall economic outlook.

Meanwhile, e-commerce disruptor and Alibaba rival PDD Holdings would not only see headwinds from a continued soft Chinese economy, but it's also the parent company of international e-commerce platform Temu, which has become quite popular in the U.S. Temu might be at greater risk than the others, as it could see its U.S. growth slow or even stop if the U.S. clamps down on small-dollar imports. Currently, shipments of $800 or less can avoid paying import taxes to the U.S., and Temu's bargain-priced goods therefore avoid that threshold. However, it's possible trade tensions will spur a move to close that loophole and thereby increase Temu's cost of doing business in the U.S..

Given all this, why would Chinese stocks be rallying, with PDD Holdings up the most? This is likely because investors consider today's countermeasures to be relatively mild, or better-than-feared. The new Chinese countermeasures only target about $20 billion of U.S.-imported goods, and left off some key strategic items. That's far below the $450 billion worth of Chinese goods included under Trump's broad 10% tariff.

Thus, investors may see these countermeasures as mere warnings, and the week-long window to implementation as time for a negotiated settlement. White House press secretary Karoline Leavitt said Trump and Chinese president Xi Jinping would talk in the next few days.

But China may be different than Canada and Mexico

While investors were encouraged by the relative restraint on China's side and with Trump's deals with Mexico and Canada, investors in China-sensitive stocks shouldn't get too complacent. After all, Mexico and Canada are allies on U.S. borders, while China is considered a geopolitical rival and potential threat.

Chinese and China-exposed stocks are by no means out of the woods, and things could turn down again if a deal isn't reached within a week.

While leading Chinese tech and e-commerce stocks are cheaper than their U.S. rivals, they aren't quite as cheap as they were six months ago following a rally after the announcements of new Chinese stimulus measures. Meanwhile, these three big companies still face risks if China becomes increasingly isolated due to an escalation of this conflict.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Billy Duberstein and/or his clients have positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Tencent. The Motley Fool recommends Alibaba Group and Illumina. The Motley Fool has a disclosure policy.