What happened
In a stampede of trading, investors returned to buy beaten-up China stock names on Tuesday.
In late morning trading, industrial automation company Hollysys Automation Technologies (HOLI -0.37%), cloud computing company Kingsoft Cloud Holdings (KC -1.03%), and tutoring powerhouse New Oriental Education & Technology Group (EDU 3.32%) saw their shares notch double-digit gains. As of 11:05 a.m. ET, Hollysys stock is up 17.1%, Kingsoft is up 19%, and New Oriental Education is acing today's test with a 21.5% gain.
Image source: Getty Images.
So what
Why all the excitement about Chinese stocks today? In large part, this is a comedown from investors' absolute terror over owning Chinese names yesterday, when J.P. Morgan called the Chinese tech sector "uninvestable," and predicted that investors in China could only look forward to a six- to 12-month span of "unpredictable" share prices and an "unattractive" outlook.
That prediction spooked investors into selling Chinese stocks en masse -- not least because, according to the South China Morning Post, J.P. Morgan was universal in its negativity, and "downgraded all 28 Chinese internet stocks under its coverage to neutral or underweight in a sweeping move."
It makes sense, therefore, that today we'd see short sales being closed and also a bit of bottom-fishing, combining to drive prices back up.
Now what
That being said, it's important that investors keep in mind the primary catalyst that started this sell-off in the first place: The threat that, unless China's government relents on its blanket prohibition disallowing foreign auditors (and the U.S. Public Company Accounting Oversight Board in particular) from gaining full access to Chinese companies' financial reports as required by the U.S. Holding Foreign Companies Accountable Act (HFCAA), Chinese companies could be delisted from U.S. stock exchanges.
Under the HFCAA, each of Hollysys, Kingsoft, and New Oriental face the prospect of having their shares delisted from U.S. stock exchanges if they don't comply with requirements. Worse, because they're essentially forbidden from complying by their own government, this is a situation largely outside their control.
And on top of this threat, China itself is contending with a new wave of coronavirus infections. As The Wall Street Journal reports this morning, new cases reported in China have surged past 3,000 a day -- for the first time in two years. Quoting Nomura Holdings economists, the Journal warns that "the Covid situation in China has deteriorated at an alarming pace over the past week," and now, "China's economy could be severely hit."
Clearly, that wouldn't be good news for Chinese stocks -- whether they get delisted or not. Investors who have decided that now is the time to dive back into the Chinese stock market may be making exactly the wrong call.
