What happened
Chinese tech stocks made big gains in today's trading. E-commerce industry giants Alibaba (BABA 0.12%) and JD.com (JD -0.80%) surged 6.9% and 14.5%, respectively, according to data from S&P Global Market Intelligence. And they weren't the only big Chinese tech names posting impressive momentum.
After a battering of sell-offs driven by regulatory concerns over the past month, investors are suddenly showing an increased appetite for beaten-down Chinese tech names. Bilibili (BILI -1.35%), Full Truck Alliance (YMM 0.91%), KE Holdings (BEKE -1.14%), 360 DigiTech (QFIN 0.06%), Tencent Music Entertainment Group, and Vipshop Holdings all managed to post double-digit stock rallies in Tuesday's trading.
Image source: Getty Images.
So what
After slumping 3.4% across last week's trading, the Invesco China Technology ETF rose roughly 5.6% across Tuesday's daily session. The recent recovery may have been aided by the strong second-quarter earnings JD.com published on Aug. 23 and news that Cathie Wood's Ark Invest firm had taken a substantial new position in the stock. However, a general reassessment of regulatory risks affecting Chinese stocks seems to be the biggest overall factor in the rebound.
Now what
Even for risk-tolerant, growth-focused investors, Chinese tech stocks may be something of a conundrum. The country represents a massive market with a population of roughly 1.4 billion people, and it has the added benefits of rapidly increasing per-capita income and discretionary spending power. However, the country's regulatory climate means investors have to tread carefully and view traditional valuation metrics and financial performance through a different lens.
Many Chinese companies look very cheap based on traditional valuation metrics such as price-to-earnings and price-to-sales multiples, but investors have to weigh the possibility that the country's government will introduce new standards that affect business operations or the trading of stocks listed on U.S. exchanges. It's also possible that U.S. regulators could take a tougher position on Chinese companies listed on major exchanges such as the Nasdaq and the New York Stock Exchange.
Some Chinese tech stocks will go on to serve up big wins, but investors should proceed with the understanding that investing in the space currently has the makings of a high-risk, high-reward game.
