What happened

Shares of several Chinese stocks traded on U.S. exchanges bounced back this week after struggling in recent months.

Shares of the Chinese-based fintech firm 360 DigiTech (QFIN -1.28%) had risen nearly 15% on the week as of market close Thursday. Meanwhile, shares of the consumer finance company FinVolution Group (FINV 1.21%) traded roughly 13% higher this week, while shares of the online personal lender and wealth management company Lufax Holding (LU 4.24%) had climbed about 10%.

So what

Shares of many Chinese stocks that can be purchased on U.S. exchanges have taken a hit this year and in the third quarter as regulators in China have swiftly cracked down on the sector.

QFIN Chart

QFIN data by YCharts

The onslaught began toward the end of last year when the Shanghai Stock Exchange halted Ant Group's initial public offering, and now rumors are swirling that the massive payments company may not be able to try again until 2023.

Alibaba Group Holding, which has a large stake in Ant, also got hit with a $2.8 billion fine in an antitrust case. Then the Cyberspace Administration of China took Didi Global's app off of app stores in China, citing data and privacy concerns.

There has also been legislation discouraging companies from acting like a monopoly and legislation regarding how Chinese companies collect and use data. All of this has hurt investor confidence in Chinese stocks.

Blue line with arrow moving upward.

Image source: Getty Images.

However, sentiment seems to be shifting, as some believe the worst of the crackdown and regulation may now be in the past. On Wednesday, analysts and strategists at BlackRock and UBS improved their ratings on Chinese stocks from underweight to overweight, meaning the two firms expect the group to outperform. The group at UBS in their research note said they believe "policy is already moving through its tightest point" and that earnings will improve in 2022. 

"The regulatory crackdown is coming to an end, probably over the next few months, and the valuations of Chinese stocks are very inexpensive and attractive, especially for tech stocks," added Tom Masi, who works at GW&K Investment Management as a portfolio manager.

The favorable calls come as Chinese stocks have bounced back in October, with the Nasdaq Golden Dragon China Index, a measure of stocks traded on U.S. exchanges but that do most of their business in China, up roughly 13% in October. The index is on track for its best month since June 2020.

Now what

360 DigiTech, FinVolution, and Lufax all seem to be following the broader sector this week, although FinVolution also appears to be benefiting from recently raising its full-year guidance.

While there is massive potential in a lot of these Chinese stocks due to the big markets they operate in, I suspect they will likely continue to stay volatile for some time.

I am sure there is money to be made, but you really need to know a lot more than just the fundamentals behind the company. Understanding the regulatory landscape in China and how it impacts the specific sector the company is operating in is also crucial. It is for these reasons that I prefer to stay on the sidelines when it comes to these Chinese stocks.