What happened
Wednesday was not the best day to own Chinese stocks, as rumors of a change in stimulus policy sent shares of education companies New Oriental Education & Technology Group (EDU +0.79%) and TAL Education Group (TAL +2.54%), down 14% and 11.6%, respectively.
Shares of Daqo New Energy (DQ 2.04%), a Chinese producer of materials for solar panels, weren't particularly healthy either, down 10.9%.
Image source: Getty Images.
So what
What rumors are we talking about? In a headline long on shock value, but short on specifics, Benzinga.com reported today that investors are worried that China may reduce economic stimulus this year.
According to the BBC, analysts who follow China have been predicting that its gross domestic product (GDP) this year could grow as much as 8% to 9% as its economy rebounds from the depressing effects of the coronavirus.
Problem is, China itself doesn't seem to think that is likely. At last week's National People's Congress, Premier Li Keqiang set a target for only 6% GDP growth in 2021. And the theory is that for growth to be that slow, China would have to reduce the amount of monetary stimulus it pumps into the economy to below the level that analysts had anticipated.
Now what
What might cause the Chinese government to do that? Consider that last year, to combat the coronavirus, the Chinese central government sent $1.3 trillion in stimulus to local governments. Problem is, tax revenue is down in China and government deficits are up -- to the point that the central government may not be able to maintain such high levels of stimulus indefinitely.
And if it cuts back, that could be bad news for economic growth, and for parents' ability to spend on their children's education by buying courses at New Oriental and TAL.
This wouldn't be good news for Daqo, either, with its business model largely tied to subsidies for solar power in China. And adding to Daqo's problems, this morning analysts at Roth Capital lowered their price target for its stock. Roth cut its target only to $97, still 22% above where Daqo trades today. But that's less than half the potential profit promised by Roth's previous price target of $115, giving Daqo investors yet another reason to be nervous today.
