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What Alibaba’s Strong Earnings Say About a Slowing China

Packages are piled up in a small shop's Cainiao servicePackages are piled up in a small shop's Cainiao service
Workers prepare goods for shipment at a warehouse run by Cainiao, Alibaba’s shipping network.Zhang Peng — LightRocket/Getty Images

Alibaba beat the market’s expectations for sales and profit. But what does that say about China’s economy?

Revenue rose by 32% year-over-year to $5.3 billion in the quarter ending Dec. 31st, the company reported Thursday, while gross merchandise volume (the total cost of stuff sold on its platforms) grew 23% from the year before. Not included in the graphic Alibaba sent out to announce the earnings report was the company’s actual earnings. Non-GAAP net income rose at a slower rate than sales, by 25%, to $2.5 billion, but still beat analysts’ predictions.

Some Westerners have argued that Alibaba’s earnings provide a window into China’s economy. But the company is in some ways a poor proxy for the Chinese economy because it mostly sells stuff to the best-performing part of it—consumers. The consumer side of China’s story hasn’t dimmed. Retail sales are climbing at double-digit percentages year over year, and consumer services near that, even if that growth now comes from relatively small pockets of the country’s 1.35 billion people. McKinsey says growth in Chinese spending on discretionary categories—think ski vacations and lattes–will exceed 7% annually between 2010 and 2020. It’s the country’s old industries in recession, and the debt they’ve incurred, that is most likely what’s been driving panicking markets over the past couple months.

For now, if Alibaba struggles, it will be because of its own execution and competition from Chinese rivals Tencent and, rather than because of the broader economy.

Alibaba acknowledges this. Vice Chairman and former CFO Joe Tsai started Aliababa’s earnings conference call by emphasizing that company growth should stay strong despite the structural shift happening in China.

Also noteworthy: Alibaba recorded just 6% of its sales from overseas. Despite high-profile incursions into the U.S. with a shopping site and cloud-services business, and despite its online payment option Alipay expanding to 100 countries, the company remains far from reaching founder Jack Ma’s goal of earning 50% of revenues from overseas in a decade.

Alibaba’s stock has fallen 14% this year after a 22% drop in 2015. Investors initially liked the earnings report, with shares up 3% before the U.S. market opened, but by mid-afternoon they were sinking again, down almost 2% for the day to trade at around $68.