What happened
Shares of Chinese internet giants Baidu (BIDU 0.98%), Tencent Holdings (TCEHY 3.23%) and Pinduoduo (PDD -0.37%) were rocketing skyward on Wednesday, up 25.9%, 25.8%, and -- wait for it -- 43.6%, respectively, as of 1:16 p.m. ET.
Those are some nice one-day gains. Of course, they also come after an unprecedented losing streak for Chinese stocks over the past week. Here's what turned their fortunes around.
So what
Chinese stocks have been wrecked by a combination of factors. The Chinese economy is slowing after the government burst the bubble in its huge property sector last summer. Additionally, regulatory authorities have been dropping the hammer on the country's tech sector, continuing to roll out more regulations, fines, and rules on leading internet companies even more than a year after the regulatory crackdown started. Finally, tensions between Russia and Ukraine have investors fleeing Chinese stocks, given the uncertain alliance between China and Russia. The Securities and Exchange Commission (SEC) also flagged several Chinese companies for non-compliance with the Holding Foreign Companies Accountable Act, or HFCAA, in recent days. That only added to the spate of worries.
But when a sector or country is so beaten-down, it's a setup for big-time gains should anything change. On Wednesday, the finance committee of the China's State Council said it would take actions to stabilize its markets. While there weren't many specifics, the committee said it would rely on easing monetary policy as well as new loans to stimulate growth. Additionally, authorities hinted that the year-plus-long regulatory assault on tech companies could end soon, without giving specifics.
Chinese authorities also reported having "good conversations" with U.S. regulators on the potential audits of Chinese companies. The State Council reportedly mentioned it supported foreign listings of Chinese stocks, so if China works out a plan with U.S. regulators to maintain compliance with SEC accounting rules, U.S.-listed Chinese stocks could maintain their status on U.S. exchanges. The blind selling that has taken hold of U.S. investors in U.S.-listed Chinese stocks could reverse if that happens.
Image source: Getty Images.
Now what
Investing in international stocks can lead to tremendous riches, as some overseas markets are in an earlier stage of growth and development versus the U.S. However, as we've seen, they also come with more risk. These risks include currency risk, as well as local governance, the strength of local judicial systems, and varying degrees of capitalist or anti-capitalist sentiment from the government.
International stocks can therefore give investors nice diversification and potential upside, but they do require more work. Investors need to really understand not only the business, but also the politics of the country in question. China has incredible growth potential, as its middle class is projected to increase from 410 million to 650 million between 2020 and 2025. Yet as we've seen in China, that mouth-watering growth potential has clashed with the government's tenuous relationship with market capitalism as well as the United States, making for a highly volatile period.
Wednesday, however, gave lots of reasons for optimism that Beijing may be swinging back toward Western-style market capitalism... at least for one day.
