Why PDD Holdings, LVMH and GDS Holdings Plunged Today

Shares of Chinese stocks PDD Holdings (PDD -5.64%) and GDS Holdings (GDS -8.14%)as well as the European luxury brand giant LVMH Moët Hennessy (LVMUY -2.97%)sold off today, down 6.2%, 6.8% and 3.1%, respectively, as of 1:15 PM ET.

The general sell-off in Chinese and China-exposed stocks such as LVMH followed disappointing news on expected stimulus measures from China. Moreover, a new tariff on brandy imported from the European Union did not help.

High hopes lead to disappointment after a massive run

Chinese stocks have rallied over the past month, with PDD Holdings up 55% over the past month and GDS Holdings up 21%, even factoring in today’s selloff. LVMH’s 5.6% gain, while weak compared to China’s domestic names, is still a significant one-month return for any stock.

PDD Holdings has become one of China’s largest e-commerce platforms with market-leading growth, while GDS Holdings is one of the country’s largest data center operators. Both would be helped by a stronger Chinese consumer and economy, and GDS, as a somewhat capital-intensive business, would particularly benefit from lower interest rates. LVMH, like most luxury brands, has a large exposure to China, with 30 percent of its sales coming from East Asia last year, most of which was China. That’s why these stocks have catapulted from very low valuations following last month’s interest rate cuts and promises of fiscal stimulus from Chinese authorities.

However, investors sold off the rally today as China’s top economic planning agency, the National Development and Reform Commission, failed to specify a specific economic stimulus package that some investors had expected. Reform Commission Chairman Zheng Shanjie said it would “support growth,” but the lack of specificity may have unsettled investors hoping for more. After all, there have been several years of low growth and recessionary conditions in China, and the government has until recently been reluctant to launch aggressive stimulus. Therefore, the lack of details may have injected some fear that officials may not follow through on the stimulus measures that were widely expected following last month’s Politburo commentary.

In addition to the lack of clarity on the incentives, Chinese authorities also said today that the country will impose tariffs on European brandy imports in quantities between 30.6% and 39%. The move is reportedly in retaliation to new tariffs the EU imposed on electric vehicles made in China just days ago. This has the potential to directly harm LVMH’s sales to China. LVMH’s wines and spirits segment collected 2.8 billion euros in sales in the first half of 2024, or just under 7% of its total sales.

Will trade with China dry up?

Very smart investors are divided on China trade right now, and we can see that in the extreme volatility in Chinese stocks both up and down in recent weeks.

On the one hand, Chinese stocks and stocks exposed to China are mostly trading at depressed valuations after several years of virtually recessionary conditions after the government imposed “zero-Covid” lockdowns, took a heavy hand in regulating large tech companies and punctured the country’s property bubble. So if the government really changes its tune, that could lead to a big recovery.

However, in the medium to long term, if the same bureaucrats continue to lead the Communist Party, it is hard to get much confidence that the government will comply, relax regulations more permanently, and improve geopolitical relations.

Today’s hesitance to trigger massive stimulus and the return of tit-for-tat tariffs with other global players appear to have reminded bulls of these continuing risks.