Shares of Chinese stocks such as Alibaba(NYSE: BABA) and China-exposed stocks Estee Lauder(NYSE: EL) and Nike(NYSE: NKE) rallied on Monday, up 6.2%, 5.2%, and 2.9%, respectively, as of 2:20 p.m. ET.
Alibaba has been clawing its way back from a multiyear downturn, and both Estee Lauder and Nike had especially bad weeks last week.
Yet in a counterintuitive move, China-exposed stocks rallied today after President Donald Trump announced 25% tariffs on imported steel and aluminum over the weekend. Here's why.
Trump's tariffs spark stimulus hopes
Over the weekend, Trump announced 25% tariffs on all steel and aluminum imports to the United States, and vowed reciprocal tariffs on countries that tax U.S. imports, which could affect additional Chinese products.
While the U.S. barely imports any steel from China, China is a big exporter globally, and many countries to which China exports steel and aluminum products in turn export their own more expensive steel and aluminum products to the U.S., increasing supply here. In addition, China exports semi-processed steel to countries like Vietnam for processing, which then export the finished product as "Vietnamese" steel, for example, to the U.S.
So if the new tariffs increase prices on steel imported to the U.S., those indirect channels for Chinese steel may be cut off, incrementally harming China's steel exports.
Why would Chinese-exposed stocks go up on that news? Likely, investors believe the new trade restrictions may spur China's leaders to increase domestic stimulus to consumers, making up lost industrial revenue with domestic consumption. Of note, there are key political meetings coming up in March, in which additional stimulus measures could be announced.
Increased consumer spending in China would obviously benefit e-commerce leader Alibaba, as well as Nike and Estee Lauder. Nike derived over 15% of its revenue from China in fiscal 2024, and Estee Lauder's stock has recently been decimated by a downturn in Chinese makeup sales. At its peak in 2021, China accounted for 34% of Estee Lauder's revenue, before the business segment descended into a severe multiyear decline.
Estee Lauder and Nike are also coming off especially bad weeks, with Nike receiving an analyst downgrade on Friday, and Estee Lauder plunging following its fiscal second-quarter earnings report. So, it's perhaps not a surprise to see each bouncing back off recent lows today.
Image source: Getty Images.
Alibaba may also be benefiting from increased optimism for Chinese tech stocks following the unveiling of DeepSeek's R1 artificial intelligence (AI) model last month, which sent shockwaves through the global artificial intelligence industry. DeepSeek seemed to reinvigorate sentiment around the competitive prowess of Chinese technology firms.
Not to be outdone, Alibaba also has a family of open-source AI models on the market named "Qwen," and there was additional positive news around Qwen AI models today. According to the South China Post, researchers at Stanford and Berkeley published a paper claiming they have produced a new AI reasoning model for just $50 using Alibaba's Qwen2.5-32b-Instruct model as the "base" model. Like DeepSeek, Qwen models are open-source, which allows outside parties and researchers to access the model's weights. According to the researchers, their new model bested OpenAI's o1-preview on math and programming skills. While OpenAI is already out with its next o3 reasoning models today, building a competitive model to the recent prior generation for just $50 is notable.
It's unclear exactly what financial benefit Alibaba may reap from others training reasoning models with its open-source technology. But the fact that the Chinese tech giant is offering competitive AI models was enough to boost sentiment today.
China's stocks could boom or bust
Coming out of a multiyear downturn, Chinese stocks have risen over the past year on hopes for significant stimulus from the government. While new measures have been announced and officials have pledged to do what it takes to get growth going again, some analysts have remained skeptical, as the government has eschewed direct subsidies to consumers for more indirect infrastructure stimulus and lower interest rates.
Still, leading Chinese tech stocks trade at much lower valuations than their U.S. counterparts, and China-exposed consumer discretionary stocks like Nike and Estee Lauder have been decimated. Certainly, Trump's election could also flame tensions between the U.S. and China.
But if the recovery continues and the government delivers more powerful stimulus measures in March, there could be a continued recovery for these stocks.
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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
