Investor concerns over the rivalry between the United States and China were momentarily eased by President Joe Biden and Chinese leader Xi Jinping's recent efforts to maintain stability. However, Alibaba Group's unexpected decision to cancel its highly anticipated cloud spinoff has once again raised anxieties.
Chinese stocks have experienced a significant downturn, especially internet stocks that are widely held. The KraneShares CSI China Internet ETF (KWEB) saw a 5% decline on Thursday.
Several factors contribute to this situation. The Chinese economy has struggled to regain momentum following the relaxation of strict Covid-19 measures. Additionally, the government's crackdown on the property and technology sectors, along with geopolitical tensions, has left the US and China seeking a delicate balance between partnership, competition, and adversity.
Bargain-hunters in the market have been disappointed. This includes investors who cautiously reentered Alibaba (ticker: BABA) believing that the government's crackdown on internet platform companies was winding down. The appointment of new management and plans for a restructuring, including the spinoff of Alibaba's cloud and other businesses, enticed investors further.
However, Alibaba unexpectedly abandoned its plans for the spinoff, citing the adverse impact of US export restrictions on advanced chips. The Biden administration has been actively countering China, resulting in an intensified regulatory environment. As a result, Alibaba's stock suffered a 9% drop.
To complicate matters further, the US recently tightened export controls on advanced semiconductors, creating additional challenges not only for Alibaba but also for other major Chinese cloud providers.
The future remains uncertain as investors grapple with these developments in the US-China relationship and their implications for Chinese stocks, particularly in the internet sector.
The Impact of Restrictions on Access to Advanced GPUs in China
The restrictions imposed recently have raised concerns about the access to reliable long-term supply of advanced GPUs used for various applications by major Chinese companies, such as Alibaba, Baidu, Tencent, and Huawei.
Challenges Faced by Nvidia and Huawei
Nvidia, for instance, has been compelled to compromise the performance of its advanced GPUs in order to comply with US export control requirements. On the other hand, Huawei's capacity remains uncertain due to its reliance on Chinese chip maker SMIC, which is currently subject to export restrictions imposed by the US.
Uncertainty Surrounding Huawei and SMIC
Although companies like Baidu and Tencent have shifted their focus to Huawei as a supplier, the question remains as to how Huawei and SMIC can continue to design and produce advanced hardware amidst the existing restrictions on semiconductor manufacturing tools. Moreover, these restrictions might become even more stringent as policymakers scrutinize the latest advancements.
The Consequences for Internet Cloud Companies
These restrictions are anticipated to have a significant impact on internet cloud companies like Alibaba. The ability of such companies to provide AI-related services will be constrained, consequently limiting the growth prospects for their cloud businesses. This, in turn, may make these companies less appealing for potential spinoff opportunities.
Investor Perspective on Alibaba
Despite these challenges, Ramiz Chelat, a portfolio manager at Vontobel Asset Management, remains invested in Alibaba. He acknowledges that investors will have to exercise patience while the new management works on fixing the company's core e-commerce business and stabilizing market share. Chelat also highlights that Alibaba's strong free cash flow generation supports share buybacks and dividends. Additionally, margins outside of its e-commerce business have shown improvement, particularly in the logistics segment.
Alibaba Faces Challenges as Chinese Consumers Migrate to Competitors
Despite recent quarterly earnings reports indicating weak discretionary spending and a shift towards lower-cost alternatives, Alibaba remains one of China's most widely held stocks. However, these developments do not bode well for investor and consumer confidence in the company. Rajiv Jain, Chief Investment Officer for GQG Partners, believes that Alibaba's decision to cancel its spinoff plans only reinforces the notion that the company is struggling to regain its footing.
This troubling situation at Alibaba reflects broader concerns about China's economy and its impact on the country's consumers and businesses. Market expert Chelat, for instance, has already adjusted his investment strategy to reduce exposure to China and is now trimming stocks that have performed well, as he foresees a prolonged period of stabilization for China's property market.
To recover and inspire greater confidence, Chelat suggests that a broader macroeconomic recovery is necessary. However, this seems unlikely given the current oversupply issues affecting once-booming sectors like electric vehicles and solar power. These challenges have begun to erode profit margins and limit investment opportunities.
Additionally, Alibaba's recent financial results have done little to assuage concerns about the overall state of the economy. Instead, they have raised flags regarding geopolitical tensions that could further hinder growth. Even though Chinese President Xi Jinping has attempted to downplay tensions with the United States following his recent visit, the potential obstacles remain.
In conclusion, Alibaba's struggles reflect a larger trend in Chinese consumer behavior and pose significant challenges for both investors and the country's economy.
