Can the stimulus save the Chinese economy?
There was great news for China-based companies, and the EV and renewable energy sector reacted strongly this week. According to data provided by S&P Global Market Intelligence, Auto (LI 1.60%) jumped up to 14.9% in trading this week, Zeekr Smart Technology (ZK -0.50%) increased 30.3%, and Daqo New Energy (DQ 10.88%) jumped 19.8%.
Not only were the Chinese stimulus plans a tailwind, Li and Zeekr also announced their shipments for September 2024, and they were not as bad as feared. The pop may not last if China’s economy doesn’t improve, but for now, these stocks are flying high.
Image source: Getty Images.
China’s stimulus is getting bigger and bigger
After initially announcing a week ago, more details about China’s stimulus plans have come in the past week, and it is a considerable amount of money poured into the economy. According to Deutsche Bankthe stimulus could be $1.07 trillion, or about 6% of China’s GDP.
Investors took this as a great sign for the Chinese economy and domestic demand for automobiles. Part of this could be economic growth, but the other piece is lower interest rates, which make borrowing costs lower for consumers.
EV companies are on the rise
We had production and delivery numbers from Zeekr and Li Auto. Zeekr said it delivered 21,333 vehicles in September 2024, up 77% from a year ago, and deliveries were 142,873 in 2024, up 71%.
Li Auto delivered 53,709 vehicles in September, up 48.9% from a year ago and 11.6% from a month earlier.
There was much fear that the EV market in China would be in a downward spiral as prices fell and companies struggled to make money. The market pressure may still be there, but shipments are strong, and that’s what investors are cheering for this week.
Solar shares are increasing
Daqo New Energy is a supplier of polysilicon to the solar industry, and has had an update since HSBC this week The bank upgraded the stock from a hold rating to a buy rating and set a $29.30 target price on the stock.
It was a significant increase from the price of $20 per share that the stock had earlier this week, but after the demonstration, part of the potential upside has already been priced.
Is China’s rise temporary or here to stay?
The fundamental question that investors should be asking is the durability of China’s recent rally. The economy has been struggling because domestic demand is not enough to support China’s industrial base, and exports are being hampered by rising tariffs around the world.
Stimulus might quell some of these struggles temporarily, but they won’t change the fundamental dynamics in the market. EV manufacturers may find it easier to sell cars in China if the rates are lower, but don’t change the rates in the US and Europe, and the increase in supply will eventually lead to an unsustainable glut.
The solar industry has gone through similar supply and commercial challenges. Therefore, this is a leap that I do not buy, because I do not see a fundamental change in how China’s position in the world has changed in EVs or in the solar industry.
HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Travis Hoium has no position in any of the stocks mentioned. The Motley Fool recommends HSBC Holdings. The Motley Fool has a disclosure policy.