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Why Chinese Tech Stocks Soared This Week

By Rich Smith – Aug 27, 2021 at 9:53AM

Key Points

  • For months, it seemed like all the new laws coming out of China were aimed at killing China's own tech stars.
  • On Monday, investors began to hope that a final law on data privacy might spell the end of this trend.
  • But here in the U.S., the threat of delisting Chinese tech stocks for transparency violations remains.

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And more importantly -- what happens next?

What happened

At long last, investors in Chinese tech stocks caught a break this week.

From close of trading last week, to close of trading last night, here's where shares of several Chinese tech stocks landed:

  • Baidu (BIDU 0.35%) rebounded 12.2%.
  • NetEase (NTES -1.17%) bounced back 13.2%.
  • Bilibili (BILI 4.42%) popped 16.5%.
  • Baozun (BZUN -2.30%) was up 25.7%.

But why did this happen?

Person examines a stock chart superimposed on a Chinese flag.

Image source: Getty Images.

So what

For months, shares of some of the biggest tech stocks in China have been under pressure from their own government, which has passed a slew of new laws aimed squarely at the tech sector -- antimonopoly laws to curb their market power, regulations against unfair competition, and on Monday, a new data privacy law to limit cross-border transfers of personal information.  

All this bad news has kept a lid on tech stock valuations in China for months.

BZUN Total Return Price Chart

BZUN Total Return Price data by YCharts.

But with the announcement of the new data privacy law Monday, investors began to jump back into the Chinese pool, hoping that the storm is over and China has passed all the laws it had planned to pass to rein in rogue tech companies.

Now what

And maybe they're right. Although in earnings reports earlier this month, Baozun "missed earnings," both Baidu and Bilibili appear to have exceeded expectations, and published guidance that is at least close to (if not quite superior to) the targets Wall Street had set for them.      

That being said, while I certainly understand the temptation to go bottom-fishing at the end of a sell-off, the sudden onslaught of legislation against Chinese tech companies by their own government does highlight the risks of investing in this sector of the stock market. Moreover, even if China is done shooting itself (and its investors) in the foot for now, there's still the U.S. to worry about.

On Tuesday, new SEC chairman Gary Gensler reiterated his agency's support for a plan, first announced under the Trump administration but apparently supported by the current one, to "strictly enforce a three-year deadline that requires Chinese firms to permit inspections of their financial audits" or suffer delisting from U.S. stock markets, reports Bloomberg.  

For investors, it may already feel like a time bomb has gone off and blown up Chinese stocks. But here in the U.S., warns Gensler, "the clock is still ticking."

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Baidu, Baozun, and Bilibili. The Motley Fool recommends NetEase. The Motley Fool has a disclosure policy.

Stocks Mentioned

Baidu Stock Quote
Baidu
BIDU
$117.33 (0.35%) $0.41
NetEase Stock Quote
NetEase
NTES
$68.21 (-1.17%) $0.81
Baozun Stock Quote
Baozun
BZUN
$4.67 (-2.30%) $0.11
Bilibili Stock Quote
Bilibili
BILI
$20.56 (4.42%) $0.87

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

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