What happened
Shares of a large number of Chinese consumer goods stocks were soaring on Thursday. Streaming video leader iQiyi (IQ 5.24%) was up 17.4%, online music titan Tencent Music Entertainment Group (TME 1.70%) gained as much as 15.7%, online entertainment platform DouYu International (DOYU 2.15%) climbed as much as 15.6%, and search giant Baidu (BIDU 0.98%) jumped 10.8%. While each of the stocks gave up some of their gains, the quartet had notched gains of 17.3%, 15.4%, 15.2%, and 10.1%, respectively, as of 1 p.m. ET.
The catalyst that sent these consumer-facing Chinese stocks surging was comments made by government regulatory agencies regarding plans to boost the most populous nation's economy.
So what
Officials from China's commerce ministry said that while the country faced "unprecedented" difficulties stabilizing international trade next year, it would take steps to educate companies on trade opportunities and manage risks related to foreign exchange rates. The agency also said it would increase efforts to ease the logjam caused by logistics and supply chain issues that have rattled the international community.
Image source: Getty Images.
Ren Hongbin, vice minister of commerce in China, said the regulatory body will "make every effort to keep foreign trade running within a reasonable range."
The regulatory body has vowed to take steps to increase consumer spending in 2022 -- which will no doubt help these consumer-facing companies -- as well as to work to attract additional foreign investment. In an effort to support low- and middle-class consumers, China is also planning to cut certain income tax rates, which is expected to reduce taxes by 110 billion yuan (roughly $17.27 billion) in the coming year.
A combination of factors has weighed heavily on Chinese stocks in recent months. The country's economy was already struggling, marked by a real estate slump -- making it even more difficult for debt-burdened property developers. China has also faced falling home prices and weak consumer spending.
The emergence of the omicron variant of COVID-19 has threatened to make an already dubious situation worse, resulting in lower exports and the potential for reintroducing of pandemic-related restrictions, which will further hamper spending.
Also weighing on Chinese stocks are the ongoing diplomatic issues and saber-rattling between Beijing and Washington, D.C. Earlier this month U.S. officials announced a diplomatic boycott of the Winter Olympics in Beijing in 2022. Officials from Canada, Great Britain, and Australia quickly followed suit. In making the decision, U.S. government officials cited "genocide and crimes against humanity" in a crackdown by China against ethnic minorities in Xinjiang, a region in northwest China.
Image source: Getty Images.
Now what
This combination of political and pandemic-related factors has conspired to drag down Chinese stocks in recent months. It has also resulted in some attractive valuations for bargain hunters.
UBS Global analyst Kelvin Tay thinks there are opportunities to be had. "I think China is cheap," Tay said. "If you look at the performance of China this year, on a relative basis, it has actually underperformed by about 40% against both the European indices as well as the American indices."
The CSI 300 index, which tracks the largest listings on the Chinese mainland, has fallen roughly 5% so far this year (through Tuesday), while Hong Kong's Hang Seng index -- which boasts many of China's largest tech stocks -- has slumped 14%. During the same period, the S&P 500 has gained 27% -- hitting a new all-time high -- while the European Stoxx 600 index is up 22%.
Given the uncertainties that have weighed on Chinese stocks, it's little wonder that the vow of government intervention and a lower tax burden has lifted the country's consumer-facing stocks today.
That said, investors should exercise caution before diving into Chinese equities. Tay noted a "distinct lack of catalysts" and the economic uncertainty that remains.
