What happened

Shares of Pinduoduo (NASDAQ:PDD) surged last month for one reason. Investors speculated that a crackdown on rival Alibaba (NYSE:BABA) would be good news for Pinduoduo. According to data from S&P Global Market Intelligence, the stock finished December up 28% on the news. 

As you can see from the chart below, the surge in the stock came at the end of the month after the Chinese government had announced an antitrust investigation into Alibaba.

PDD Chart

PDD data by YCharts

So what

Pinduoduo stock jumped 16% on Dec. 29 and 8% the following day after a UBS analyst said that he thought the probe against Alibaba could be good news for Pinduoduo, the rival e-commerce marketplace. The investigation could lead to Alibaba being less aggressive with its merchants, thereby favoring Pinduoduo and JD.com, another Chinese e-commerce company.

An Asian woman holding a package and talking on the phone.

Image source: Getty Images.

Pinduoduo stock also jumped 9% on Dec. 24, the day the news about the Alibaba antitrust probe came out, showing investors already believed that it would give an advantage to Pinduoduo. Among the government's accusations against Alibaba is that it has restricted its vendors from selling on other platforms.  

The crackdown against Alibaba comes after Chinese regulators blocked the IPO of Ant Group, Alibaba's financial arm that had been spun off. The blocking was a response to public comments Alibaba Founder Jack Ma had made belittling financial regulators. Ma has since avoided public appearances and is reportedly "laying low," adding to worries about further punishment for Alibaba, though Ma no longer holds a formal position in the company.

Now what

Pinduoduo and its Chinese tech peers have been volatile in the first trading days of the new year amid back-and-forth announcements on delisting Chinese stocks in the U.S. and other threats from the Trump administration. U.S. policy toward China will change in two weeks when President-elect Joe Biden is inaugurated, but investors should keep an eye on developments with Alibaba as well as the Biden administration's stance.

The high-growth stock has been a market darling, rising more than 800% since its IPO in 2018, but investors are clearly nervous about tensions in and around China. Expect the volatility to continue.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.