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Why Chinese Tech Stocks Were Bouncing Back Today

By Jeremy Bowman – Jul 28, 2021 at 4:40PM

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After a three-day sell-off, investors were buying the dip.

What happened

After a three-day slide, Chinese tech stocks were recovering today. That followed the gains over the last two days in Chinese for-profit education stocks, which had previously plunged after the government said it would require the tutoring sector to become nonprofit companies. 

Tutoring stocks like New Oriental Education and Tal Education Group started rebounding after nearly all of their value was wiped out in the sessions on Friday and Monday, and today much of the Chinese tech sector followed suit as news of the crackdown faded. Investors seemed to be eager to capitalize on the sell-off, anticipating that prices would only temporarily be depressed.

Among the tech winners today were JD.com (JD 5.00%), which was up 8.5% at the close; GDS Holdings (GDS 15.80%), which gained 15.8%; Full Truck Alliance (YMM 8.94%), 13.5% higher; Pinduoduo (PDD 3.10%), which was up 15.5%; and Vipshop Holdings (VIPS 4.64%), which climbed 8.3%. At the same time, the iShares MSCI China ETF (MCHI 2.44%) was up 6.2%, showing Chinese stocks in general were having a strong rebound.

A woman on her phone surrounded by people rushing past.

Image source: Getty Images.

So what

There was no specific news out on any of these companies today. Rather, investors are buying the dip after the three-day slide as a number of big fund managers, including ARK Invest's Cathie Wood, have bailed on Chinese stocks, fearing further restrictions from the government.

Additionally, a number of big tech companies in the U.S reported earnings last night, including MicrosoftApple, and Alphabet, and all delivered strong results, topping estimates. That might have reminded investors that there's still a lot of growth left in companies like JD and Pinduoduo, in spite of worries about what China's government might do after it recently slapped restrictions on peers like Alibaba and Didi Global, a sign that its relationship with the tech industry is changing. 

It's difficult to quantify the actual regulatory risks to the stocks above. And with earnings season approaching, investors buying these stocks seem to think the attention will soon shift to the businesses themselves rather than the regulatory climate in China, and all of them are expected to delivery strong growth.

JD is expected to report second-quarter earnings in mid-August, with analysts forecasting the e-commerce giant to grow 36% to $38.5 billion. GDS Holdings, a data center operator, is expected to deliver 46% revenue growth; while Full Truck Alliance, a digital freight platform that recently went public, saw revenue double in its first quarter.

JD's e-commerce peers Pinduoduo and Vipshop are also expected to deliver strong results as they lap the pandemic a year ago. Pinduoduo, an innovative social commerce platform, is on track for revenue to grow 125% to $4.1 billion, according to analysts, while Vipshop is expected to grow its top line by 28% to $4.6 billion.

Now what

The volatility in these stocks is likely to continue as investors search for price equilibrium and look for any signs of danger from the ruling Communist party.

Investors in these stocks will want to keep an eye on Alibaba's earnings report next Tuesday. As China's biggest e-commerce company, Alibaba should act as an indicator for the rest of the sector. And the company, which was fined $2.8 billion in April as the result of an anti-monopoly investigation, might have some comments about adjustments it's made following the fine. Both its results and commentary should affect the broader tech sector in China. If the stock gains on the report, the rest of the sector is likely to follow. 

Still, given the fallout from the education crackdown, these stocks are unlikely to return to their prior heights anytime soon.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman owns shares of Alibaba Group Holding Ltd. and JD.com. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Alphabet (A shares), Alphabet (C shares), Apple, JD.com, and Microsoft. The Motley Fool recommends New Oriental Education & Technology Group and Tal Education Group and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

Stocks Mentioned

JD.com Stock Quote
JD.com
JD
$58.64 (5.00%) $2.79
Vipshop Stock Quote
Vipshop
VIPS
$11.96 (4.64%) $0.53
iShares MSCI China Index Fund Stock Quote
iShares MSCI China Index Fund
MCHI
$47.76 (2.44%) $1.14
Gds Stock Quote
Gds
GDS
$17.22 (15.80%) $2.35
Pinduoduo Stock Quote
Pinduoduo
PDD
$86.34 (3.10%) $2.60
Full Truck Alliance Stock Quote
Full Truck Alliance
YMM
$9.26 (8.94%) $0.76

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

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