China Daily Briefing

📉 China Large-Cap ETF -0.29%, Internet ETF -0.89% as Risk-Off Pressures Offshore Names

Chinese equities closed lower Thursday, with the China Large-Cap ETF down 0.29% and the China Internet ETF falling a sharper 0.89% as the global risk-off mood — driven by oil above $100, hot US inflation, and rising Fed rate expectations — weighed on offshore-listed Chinese names. The internet sector's underperformance relative to large-cap is the tell: growth-sensitive and high-beta names sell off faster in risk-off environments, and China's internet giants (Alibaba, Tencent, Baidu, Bilibili) carry high forward earnings multiples that reprice when discount rates rise. In specific movers, iQIYI (IQ) was the standout gainer at +2.8%, driven by content pipeline optimism. On the losing side, Bilibili (BILI) fell 2.39%, Futu Holdings (FUTU) dropped 2.27%, and NIO declined 2.16%. Futu's weakness is directly tied to the US rate environment — it is a Hong Kong and US-listed brokerage serving Chinese investors who access overseas markets, and higher US rates mean lower equity valuations globally and reduced trading activity among retail investors. NIO continues to face the twin headwinds of margin pressure in China's intensifying EV price war and slower-than-expected charging infrastructure adoption. The structural story of the day is yuan internationalization. Reports that China is actively expanding RMB use across Central Asian trade corridors represent another incremental step in Beijing's multi-decade project to reduce dependence on USD-denominated settlement. For PBOC, the Central Asian yuan expansion has practical FX management benefits — more of China's trade settled in RMB means less demand for foreign currency to pay trading partners, reducing the current account surplus that creates upward pressure on the CNY or requires sterilization. For investors, watch CIPS (China's cross-border interbank payment system) transaction volumes as the leading indicator of RMB internationalization pace. DeepSeek's announcement of a new model is the AI narrative event of the session. DeepSeek's emergence as a serious competitor to US frontier models — achieved at a fraction of the training cost that American labs report — has been one of the most important developments in the global AI competitive landscape. Each new model release from DeepSeek raises the question of whether China's AI capabilities are advancing on a faster-than-expected trajectory, which has implications for chip restrictions (do they matter if Chinese labs can innovate around them?) and for the competitive positioning of US AI names. Domestic China AI infrastructure plays benefit from DeepSeek's success; the government has clear incentive to support DeepSeek's model development as a sovereign AI capability. For CSI 300 and Shanghai Composite, the near-term picture is complicated by the external risk environment. Oil above $100 raises input costs for China's manufacturing sector and increases the imported inflation pressure that the PBOC has been managing through CNY stability. The PBOC cannot ease aggressively into an environment where commodity-driven inflation is picking up — monetary tools become less effective when the inflation source is external. RRR cuts remain possible if domestic demand data disappoints, but the scale of stimulus will be constrained. Stock Connect flow data is the real-time indicator to watch. Southbound flows (Hong Kong to mainland China) and Northbound flows (foreign capital into A-shares) have been diverging — domestic institutions are increasingly using southbound to access Hong Kong-listed names, while foreign Northbound inflows have been choppy in line with risk sentiment. A reversal of Northbound flows to sustained net buying would be the clearest signal that foreign capital is re-engaging with China equities after the multi-year reallocation away from EM China. Bearish near term on offshore Chinese equities. The Internet ETF's 0.89% decline vs. 0.29% for large-cap confirms the risk-off rotation. Until US rate expectations stabilize and oil retreats from the $100+ range, the external discount rate pressure on high-multiple China internet names will persist. Domestically, watch for any PBOC response to the oil-driven inflation pickup and any government communication on economic stimulus targeting.