What happened
Shares of several Chinese stocks that trade on U.S. exchanges cautiously rose today as investors digested a slew of news out of the country about the economy, ongoing COVID-19 lockdowns in major cities, and policy promises from the Chinese government.
Shares of Alibaba (BABA 2.59%) were trading roughly 1.5% higher at 11:15 a.m. ET after being up more than 6% earlier this morning. Shares of JD.Com (JD 2.08%) were trading nearly 7% higher, and shares of Zhihu (ZH 5.17%) were trading nearly 2% higher after being up more than 10% earlier this morning.
So what
A number of things are affecting Chinese stocks today. Recently, China's President Xi Jinping publicly promised to increase construction on infrastructure in an effort to help the economy rebound. The Hang Seng Tech Index finished Tuesday 2.9% higher as investors cheered the news. Ongoing lockdowns due to rising COVID cases have put investors on edge.
"President Xi Jinping's pledge to increase infrastructure construction is the latest sign more stimulus is on the way. China has the firepower. Trouble is, lockdowns and other virus curbs on activity are hindering policy support and depressing sentiment. A significant confidence boost is required. A clear road map for exiting Covid Zero is what's needed to turn the economy around," Bloomberg economists Chang Shu and David Qu said in a statement.
Image source: Getty Images.
Xi's statements come several weeks after Chinese officials voiced support for Chinese stocks trading on foreign exchanges. For years, U.S. financial regulators have not been able to view the working financial statements of Chinese companies trading on U.S. exchanges, as China bars these companies from sharing them due to national security concerns. The decades-long dispute has come to a boiling point in recent years, with the Securities and Exchange Commission threatening to delist potentially hundreds of Chinese companies that aren't fully in compliance with U.S. securities laws. Regulators from both countries are currently working toward a compromise.
But not everyone is buying the new attitude from Beijing and Chinese regulators, and some believe that current challenges may prove hard to overcome. Several investment banks have recently trimmed gross domestic product (GDP) growth estimates for 2022. According to CNBC, which is tracking various forecasts, the new median projection from nine firms is 4.5% GDP growth, which is below China's 5.5% growth target.
"A revelation has hit traders that Chinese policymakers are facing an impossible trinity of goals here: they're not going to hit the 5.5% growth target and limit the amount of leverage in their system and also have a zero COVID tolerance policy," Eli Lee of the Bank of Singapore said recently on Bloomberg Television. "And this means, at the margin, the thesis for the Chinese renminbi and equities is weaker."
Furthermore, Steven Leung, the executive director at UOB Kay Hian, said he thinks the recent rally in Chinese stocks is more of a technical rebound due to the fact that these stocks have been heavily sold off.
Now what
It's certainly good news to see a pattern over the last few months in which the Chinese government and regulators are actively promoting economically friendly policies with their support for foreign-listed stocks and boosting of infrastructure.
But investors will likely want to see further action before they jump on a sustained rally, as issues with COVID in the country have really dampened positive sentiment.
I think there could be more volatility in the near term. Investors will really want to make sure that Beijing's support of Chinese stocks and policy is here for the long term before getting back in the game.
