On Thursday, significant declines in stock prices were observed following President Donald Trump’s announcement of “reciprocal tariffs.” Although the president had previously indicated his intention to impose punitive tariffs to address the U.S. trade deficit with various countries, investors were surprised by the magnitude of the tariffs. Goods imported from China will now face a 54% tariff, which includes an earlier 20% rate imposed by the president, as China has often been the target of Trump’s trade policies.
As a result of the news, U.S. stocks experienced a steep drop. However, the impact on Chinese stocks was more limited, with the iShares MSCI China ETF declining by just 0.9% on the same day. This year, international stocks have been outperforming their U.S. counterparts, a trend that appears reasonable given their lower exposure to Trump’s trade tensions and the diminished consumer confidence in the U.S. Moreover, international equities entered the year with lower valuations.
Chinese stocks, in particular, are considered currently undervalued. PDD Holdings, the parent company of Pinduoduo and Temu, is one company that stands out for its strong performance in recent years, competing with Alibaba and JD.com for dominance in the Chinese e-commerce market. PDD Holdings is an important case study for understanding the implications of the tariffs.
The 54% tariffs imposed on Chinese goods have several implications for China’s economy. Companies such as Nike have already relocated some production out of China to countries like Vietnam, a trend that may accelerate as companies seek to evade the tariffs by shifting production to regions with lower rates or even back to the U.S. In the previous year, U.S. imports from China were valued at $438.9 billion. The trade war could further strain China’s already fragile economy, making goods more expensive. In response, China has stated its intention to implement countermeasures to safeguard its economy.
The full extent of the tariffs’ impact on China’s economy is uncertain, but increased consumer weakness could adversely affect e-commerce companies like PDD Holdings. While PDD Holdings does not disclose its regional revenue breakdown, it has devoted significant resources to promoting Temu, its cost-effective e-commerce platform. This platform has intensified competition in the digital advertising sector and gained market share from other e-commerce entities and retailers. Amazon has reacted to the competition from Temu and Shein by launching Haul, its low-cost platform, although its performance remains unclear.
PDD Holdings generated $54 billion in revenue in the previous year, with its gross merchandise volume (GMV) likely exceeding this figure significantly, particularly in the U.S. market. The company’s primary source of revenue is advertising, which depends on advertisers’ confidence in consumer spending on the platform.
Before the tariffs announcement, some investors had already begun to shift their investments toward Chinese stocks, attracted by their relatively low valuations compared to U.S. stocks. Billionaire investor David Tepper was among those seeing potential in Chinese stocks. Consequently, if the tariffs lead to a recession in the U.S. economy, PDD Holdings could potentially benefit, being one of the favored Chinese stocks among American investors. Despite a recent slowdown in its growth rate, the company reported 24% revenue growth in the fourth quarter, maintaining its competitive edge over rivals like Alibaba and JD.com. With a price-to-earnings ratio of just 11, there is a compelling case for investing in PDD Holdings based on its strong fundamentals.