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Stock Markets Finish Sharply Higher for a Surprising Reason: China

By Dan Caplinger - Jul 6, 2020 at 4:30PM

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An upbeat outlook and a big deal show some signs of life in the world's second-biggest economy.

The U.S. stock market came out of the holiday weekend with just as much upward momentum as it had last week. All three major market benchmarks gained ground, with the Dow Jones Industrial Average (^DJI 0.71%), S&P 500 (^GSPC 0.19%), and Nasdaq Composite picking up 1.5% to more than 2% on the day.

Today's stock market

Index

Percentage Change

Point Change

Dow

1.78%

460

S&P 500

1.59%

50

Nasdaq Composite

2.21%

226

Data source: Yahoo! Finance.

Investors have largely ignored international markets in 2020, as the coronavirus pandemic has focused most people's attention closer to home. Today, however, some news from China caused more bullish sentiment to appear across the globe, and even Wall Street benefited from some of the optimism that market participants felt as a result.

A deal for Sina

Leading the way higher for Chinese stocks was Sina (SINA), whose shares rose 11%. The internet media company has seen its stock languish for years, but a big strategic move signaled a path forward not just for Sina but for a host of other potentially undervalued Chinese companies.

Sina received a buyout offer from a group of investors, valuing the company at a 12% premium to where the stock traded at the end of last week. The investor group, New Wave MMXV Limited, is controlled by Sina's CEO, Charles Chao. The group wants to take the company private. Sina is considering the offer, having formed a committee of independent directors to consider the $41 per share bid.

The offer is also interesting in what it leaves out. Sina has a controlling interest in the microblogging provider Weibo (WB -0.31%). However, there was nothing in the announcement from Sina that suggested that Chao's group was looking to take Weibo private as well. Weibo's stock jumped 18% and perhaps coincidentally closed not too far below $41 per share. It might well be that Chao would be content to have Sina's stake in Weibo while leaving current Weibo shareholders to hold on to their stock.

Hand holding smartphone, with Chinese flag behind.

Image source: Getty Images.

Will more Chinese companies go private?

Investors could have taken the Sina news as an isolated event, but they instead drew the conclusion that the entire tech industry in China could be undervalued. Several of Sina's Chinese peers gained ground even without any buyout offers of their own.

The sentiment even went beyond tech stocks. Luckin Coffee (LKNC.Y 3.79%), which got delisted from the Nasdaq near the end of June, climbed 17% Monday. The stock has doubled so far this month, with some shareholders having speculated even before Luckin left the Nasdaq that delisting could prompt the company to go private.

Indeed, Luckin might already be taking steps to move in that direction. Over the weekend, a shareholder meeting led to the ouster of the chair of the board of directors, along with three other board members. That could set the stage for a more shareholder-friendly set of directors to run the company.

Luckin's fraud was one of several sources of consternation among U.S. investors about Chinese stocks. Now, it looks as though Chinese companies are fighting back to defend their value. If that means taking shares out of the hands of foreign shareholders by going private, then investors might never come close to recouping what they've lost -- but the companies might still survive and thrive in time.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Luckin Coffee Inc. The Motley Fool recommends Sina and Weibo. The Motley Fool has a disclosure policy.

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Stocks Mentioned

SINA Corporation Stock Quote
SINA Corporation
SINA
Luckin Coffee Inc. Stock Quote
Luckin Coffee Inc.
LKNC.Y
$14.79 (3.79%) $0.54
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$34,152.01 (0.71%) $239.57
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$4,305.20 (0.19%) $8.06
Weibo Corporation Stock Quote
Weibo Corporation
WB
$19.26 (-0.31%) $0.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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