Temu owner PDD shares slump amid Chinese economic woes

PDD Holdings Inc., the owner of the Temu platform, has sent a troubling signal regarding the health of the world's second-largest economy. The company, known for offering affordable products, presented a surprisingly pessimistic forecast while reporting revenues below analysts' expectations.

PDD CEO Chen Lei mentioned the "inevitable" decline in revenues and profits at least eight times during the earnings conference, citing slowing economic growth as a reason. According to Bloomberg, He highlighted new challenges, including changing consumer demand, increasing competition, and uncertainty in the global environment.

Investors did not take the conference positively. PDD shares plummeted by 29%, marking the largest one-day drop in the company's history. As a result of this sell-off, the company's market value decreased by €52 billion. The domino effect also affected PDD's main competitors - Alibaba Group Holding Ltd. and JD.com Inc., whose stocks fell by about 5% on the Hong Kong Stock Exchange.

PDD's stance surprised investors because the company had long been seen as the main benefactor of China's "consumer downgrade." Its low-price strategy, implemented through Pinduoduo in the domestic market and Temu abroad, was supposed to attract thrifty customers during unprecedented economic volatility.

PDD's disappointing results are yet another warning signal about the Chinese economy. In the same week, the popular fast-food chain Din Tai Fung announced the closure of over a dozen locations. A month earlier, Starbucks Corp. revealed a 14% drop in revenues in China in the second quarter.

Experts emphasise that the main problem is the weakness of the Chinese consumer. Joshua Crabb, head of Asia and Pacific equities at Robeco Hong Kong Ltd., stated that the negative effects of this situation will be felt across the industry.

What scared investors so much? Temu's CEO signalled a fundamental shift in consumer behaviour, moving away from the lowest-priced products that had previously driven the company's revenues. "Consumers are making more thoughtful decisions to balance quality and value", he stated during the earnings call. The company has partnered with high-quality brands and manufacturers to create tailored products that meet these diverse demands.

Consumption, the economy's main engine, weakened this year after a revival linked to the reopening post-COVID-19 pandemic. Amid widespread job and wage cuts and falling real estate prices, Chinese consumers have become more cautious with spending, leading to intense price wars in sectors like automotive.

Retail sales grew by just over 3% in the first seven months of 2024, significantly worse than the 8% growth recorded before the pandemic. Residents' confidence in future income has dropped to its lowest level since the end of 2022, one of the most intense periods of COVID-19 lockdowns, according to a survey conducted by the central bank in the second quarter.

Signs of an impending crisis in China are particularly concerning in the context of data from the US. In July, the US unemployment rate rose to 4.3%, the highest level since October 2021. This marks another month of increase for this indicator, steadily climbing since the beginning of the year.

Particularly troubling is that the average unemployment rate for the past three months exceeded the previous year's minimum by more than 0.5 percentage points. This situation has triggered the so-called Sahm Rule indicator, named after economist Claudia Sahm, who developed it in 2019. Historically, this indicator has accurately predicted the onset of recessions in the United States since the 1970s.

The slowdown in the labour market is also confirmed by July's nonfarm payroll increase, which amounted to only 114,000, well below economists' expectations. Furthermore, the Bureau of Labor Statistics revised the employment data from previous months downward, further heightening concerns about the state of the American economy.