Chinese stocks have bounced back in the past few weeks, helped by investors' risk-on sentiment and rising hopes of China’s stimulus.
The iShares MSCI China ETF, which tracks the biggest Chinese firms like Alibaba, Tencent, Meituan, PDD Holdings, and Xiaomi has rallied by almost 50% from its lowest point this year.
Similarly, indices tracking Chinese companies like the Hang Seng and Shanghai Composite have bounced back.
China’s technology companies have been some of the most notable gainers in the past few weeks.
Nio, one of the biggest players in the electric vehicle industry, has surged by 103% from its lowest point this year. Similarly, Alibaba soared by 72%, while Li Auto, PDD Holdings, and JD.com soared by more than 50% in the same period.
Chinese government stimulus
Chinese stocks have been under pressure in the past three years, underperforming most of their global peers like the Dow Jones, Nasdaq 100, and S&P 500.
There have been three key reasons for this underperformance. First, most of the sell-off accelerated after Russia invaded Ukraine, leading to severe sanctions from Western governments. As a result, many investors estimated that China would also receive such sanctions if it invaded Taiwan. This explains why foreign investors have dumped Chinese stocks in the past few years.
Second, there have been significant tensions between the United States and China. As a result, the US has announced a series of sanctions on key areas like semiconductors. These challenges will likely continue in the coming years, especially if Donald Trump wins the general election.
Third, Beijing’s regulatory actions have contributed to this sell-off. For example, its crackdown on technology companies like Alibaba, Tencent, Meituan, and JD pushed their stocks down significantly.
For example, Chinese authorities fined Alibaba $2.8 billion and ordered it to stop monopolistic behaviors. It also fined Ant Financial and Meituan and ordered them to change their business models.
Additionally, there have been concerns about the country's economic slowdown after the collapse of top real estate companies like Evergrande and Country Garden.
Real estate is an important one in China because most residents have stored their wealth in the industry. As a result, many people who borrowed heavily to finance their real estate acquisitions have embarked on savings instead of spending.
China stimulus
Chinese stocks have recovered recently because of the actions by the government and the central bank.
In a statement last week, the central bank reduced interest rates and a key reserve requirement to banks. The new changes mean that these banks will unlock over $100 billion in funds, which will be used to buy stocks. It also asked banks to lower mortgage rates to stimulate the property market.
At the same time, the government has announced new measures to boost liquidity in the economy.
As a result, analysts believe that these stimulus measures will help the country achieve its 5% growth prospects this year. The most recent economic numbers showed that the economy grew by 4.7% in the last while retail sales and industrial production retreated.
Therefore, the stocks have jumped as investors, including foreign ones, start investing in Chinese companies that are seen as being undervalued compared to their global peers.
Also, investors have allocated cash in these companies because the Fed decided to start cutting interest rates. The bank slashed rates by 0.50% in the last meeting and hinted that the trend would continue now that inflation has retreated.
China stocks risks remain
Still, there are potential risks to investing in Chinese stocks. The most significant risk is that relations between China and the United States will not improve as the latter goes to an election.
Donald Trump has vowed to implement large tariffs on Chinese goods because of the massive trade deficit. The risk is that these new tariffs will take us back to the trade war that happened when he was in power.
That trade war led to a sharp decline in Chinese stocks, which are listed in Mainland China and in the United States. At the time, most of these stocks dropped sharply as the trade war accelerated.
The other major risk is that many Chinese companies are struggling to expand internationally because of rising competition from their western peers. A good example of this is firms like Alibaba and Tencent, whose cloud computing businesses have found robust competition from companies like Amazon and Microsoft.
Additionally, Chinese EV companies like Li Auto, BYD, and Nio have also faced substantial competition and slow growth. Also, some companies like PDD and Alibaba have published relatively weak financial results this year.
Summary
Chinese stocks have staged a strong comeback in the past few weeks after Beijing intervened by a series of stimulus packages. These measures have attracted local and international investors to take advantage of the rally.
While this recovery may continue, there are risks, especially as market participants wait for the upcoming US election.
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