Reciprocal Tariff Hits China: 3 Key Insights for Pinduoduo Investors

The recent plunge in stock prices was a direct reaction to President Donald Trump’s announcement regarding reciprocal tariffs. These tariffs, which the president has signaled as a strategy to address the significant trade deficit that the United States has with various nations, caught investors off guard due to their substantial scale. Notably, the tariffs imposed on goods imported from China have reached an alarming 54%, which includes a previous 20% tariff rate that Trump had already enacted.

The immediate fallout saw U.S. stocks drop sharply, while the repercussions for Chinese listings were comparatively muted. The iShares MSCI China ETF only experienced a minor decrease of 0.9% on that Thursday, indicating a relative resilience in the face of these economic shifts.

This year, international stocks are notably outperforming their U.S. counterparts, which can be attributed to several factors. For one, these international equities seem to have less exposure to the fallout from Trump’s trade war and the declining consumer confidence in the U.S. Furthermore, the valuations of international stocks are considerably lower, particularly as the year unfolds.

Stocks from China are currently viewed as especially undervalued, and a notable player in this arena has been PDD Holdings (PDD -8.37%), which operates Pinduoduo and Temu, intensifying competition against e-commerce giants like Alibaba and JD.com. Investors in PDD stock should closely monitor the implications of these tariffs.

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1. Understanding the Economic Impact of Tariffs on China

The implementation of the 54% tariffs on Chinese imports is poised to have far-reaching effects on the Chinese economy. A significant number of companies, including well-known brands like Nike, have already begun relocating some of their production operations from China to nearby countries such as Vietnam. This trend is likely to gain momentum as businesses strive to circumvent these hefty tariffs by moving their manufacturing to regions with more favorable trade conditions or even back to the U.S.

In 2024, U.S. imports from China amounted to an astounding $438.9 billion. The ongoing trade war could further strain an already fragile Chinese economy by driving up prices, making consumer goods less affordable. Additionally, China has announced plans to implement its own tariffs in a bid to safeguard its economic interests and stabilize the market.

The precise extent of the tariffs’ impact on the Chinese economy remains uncertain, but a potential increase in consumer weakness may adversely affect e-commerce platforms like PDD Holdings, which rely heavily on consumer spending.

2. Examining the Effects of Tariffs on U.S. Imports

While PDD Holdings does not publicly disclose its revenue by region, it has noticeably invested in promoting Temu, its cost-effective e-commerce platform. This strategic focus has intensified competition in the digital advertising market and allowed the company to capture market share from various other retailers and e-commerce giants.

In response to the competitive threat posed by platforms like Temu and Shein, Amazon has introduced its own low-cost platform named Haul. However, the performance of this new initiative remains uncertain at this time.

In the year 2024, PDD Holdings reported revenues totaling $54 billion, but the gross merchandise volume (GMV)—essentially the total value of goods sold on its platform—likely exceeds that figure. The company may have achieved a minimum GMV of around $5 billion in the U.S. alone, but given Temu’s influence on the e-commerce landscape, it is plausible that the actual GMV is significantly higher.

Advertising revenue constitutes the primary income source for PDD Holdings, indicating its reliance on advertisers’ confidence in consumer spending behaviors on its platform.

3. Opportunities for U.S. Investors in Chinese Stocks

Before the announcement of the tariffs, several investors, including billionaire David Tepper, had already begun reallocating their portfolios towards Chinese stocks, recognizing a compelling opportunity presented by the lower valuations compared to U.S. equities.

In this context, PDD Holdings might stand to gain if the tariffs push the U.S. economy into a recession, as it is one of the more favored Chinese stocks among American investors.

Although PDD’s growth rate has slowed in recent quarters, it still reported a remarkable 24% revenue growth in the fourth quarter, continuing to outperform rivals such as Alibaba and JD.com.

With a price-to-earnings ratio of only 11, there exists a compelling argument for acquiring shares of PDD based on its solid financial fundamentals and growth potential.