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Why Chinese Stocks Popped Today

By Rich Smith – Jul 9, 2020 at 4:39PM

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A strong currency and government support have boosted them all week long.

What happened

Five months into a recession that began with the discovery of a novel coronavirus in China, investors are turning for relief to ... Chinese stocks.

U.S. markets are mostly in the red today, but over in the Middle Kingdom, the Shanghai-based SSE Composite Index is glowing a reassuring shade of green, up 1.4% -- and many Chinese stocks are doing even better than that. Search engine Sogou (SOGO) is surging 13.1%, for example, and online clothier Mogu (MOGU -5.62%) is right behind it at 13%. Recent IPO stock and Chinese online grocer Dada Nexus (DADA -0.21%) is up a solid 10.5% in 1:20 p.m. EDT trading. Online gamers NetEase (NTES 0.10%) and Sohu.com (SOHU -0.82%) are up 7% and 9.7%, respectively.

A man examines a stock chart superimposed on a Chinese flag.

Image source: Getty Images.

So what

Why? Hong Kong-based newspaper the South China Morning Post (SCMP) says it's the Chinese economy -- a good two or three months ahead of the rest of the world in recovering from the coronavirus -- that's doing the trick.  

After announcing "a series of steps to open its financial markets in recent weeks," reports the paper, China is enjoying a surge in investor sentiment and an influx of foreign dollars investing in Chinese stocks. More than just gains today, SCMP notes that the SSE Composite Index is on course to deliver its best week of gains in five years -- up 9% already so far this week.

China's real economy looks to be improving as well, with the local manufacturing purchasing managers' index notching its second straight month of expansion (at 50.9, where any number above 50 means expansion) in June.

Now what

The Chinese currency, meanwhile, is benefiting from all this economic confidence, recently topping an exchange rate of 7 yuan to $1 -- its strongest valuation since global stock markets tanked in March. And because strong yuan profits translate into more dollars in profits when these U.S.-listed stocks report earnings on the Nasdaq and NYSE, this bodes well for earnings at Chinese stocks like Sogou, Mogu, Dada, NetEase, and Sohu.com.

Reinforcing that view, the government-backed China Securities Journal observed over the weekend that China's stock market is enjoying a "healthy" bull market. Moreover, experts cited in the SCMP article noted that encouraging investors to pile onto the rally is a cost-effective way for the Chinese government to boost its real economy as well, because -- to put it simply -- words are cheaper than economic stimulus projects.

And if this is China's objective, then it stands to reason that the rally will continue -- at least for as long as the government can hype it up.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NetEase. The Motley Fool recommends Sohu.com. The Motley Fool has a disclosure policy.

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Stocks Mentioned

NetEase, Inc. Stock Quote
NetEase, Inc.
NTES
$78.05 (0.10%) $0.08
Sohu.com Inc. Stock Quote
Sohu.com Inc.
SOHU
$16.87 (-0.82%) $0.14
Sogou Inc. Stock Quote
Sogou Inc.
SOGO
MOGU Inc. Stock Quote
MOGU Inc.
MOGU
$2.35 (-5.62%) $0.14
Dada Nexus Limited Stock Quote
Dada Nexus Limited
DADA
$4.82 (-0.21%) $0.01

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

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