What happened
Chinese tech stocks were rallying across the board today with small-cap players Huya (HUYA 1.80%), Baozun (BZUN 1.70%), and Hello Group (MOMO 3.26%) among the winners.
The major news driving the sector higher was that political leaders once again said they would take steps to end the crackdown on the tech sector, and to support the economy after tightening regulation had dragged down Chinese stocks and slowed economic growth.
As of 12:19 p.m. ET, Huya was up 9%, Baozun had jumped 13.1%, and Hello Group had gained 17.3%.
Image source: Getty Images.
So what
This morning the Communist Party's political bureau said it would unveil new policies to support healthy and sustainable economic growth.
According to the South China Morning Post, political leaders have scheduled a symposium with big tech firms after the May 1 Labor Day holiday in a meeting expected to mark the end of the regulatory crackdown on big tech firms.
While shares of companies like Alibaba Group Holding and Tencent Holdings soared on the news, it's also a positive sign for small-cap tech stocks like Huya, Baozun, and Hello, even though they weren't directly threatened by Beijing in the same way.
Separately, Beijing is also discussing ways of allowing audit inspections of Chinese companies traded in the U.S. in order to prevent them from being delisted, which the Securities and Exchange Commission (SEC) has threatened to do if they don't comply with auditing rules.
Like nearly all Chinese tech stocks, Huya, Baozun, and Hello have fallen sharply over the last year with Huya and Baozun both down more than 75%, while Hello Group has fallen 65%. There's more than just government policy impacting these stocks, though, as China's slowing economy is also weighing on their performance.
For example, at Huya, a live streaming gaming platform, revenue rose just 4% last year to $1.78 billion as the company cited macro headwinds, including China's strict COVID-19-related lockdown and its slowing economic growth.
Baozun has also seen its growth rate shrink as revenue increased just 6% last year as the e-commerce service provider seems to be struggling to attract more business from multinational companies. Baozun management also pointed to "macro challenges," and larger e-commerce companies like Alibaba have also experienced slowing growth.
Finally, Hello Group, which is China's largest online dating company, saw revenue decline 3% last year. The Chinese government had previously suspended Hello's apps from app stores briefly in 2019 after the company had allowed illegal content on the site, but last year's challenges seemed to have more to do with economic headwinds than a specific regulatory issue.
Now what
Chinese stock movements have essentially been dictated by policy out of Beijing over the last year or so, but there are reasons to be encouraged by signs of a thaw in the regulatory framework. Ultimately, it's in Beijing's interest to have a successful tech sector, and its willingness to negotiate with the U.S. to ensure Chinese stocks remain on U.S. exchanges is also a positive sign.
With signs of a recession afoot in the U.S. after first-quarter GDP growth was negative, investors may also look to China stocks if the political situation gets resolved.
Companies like Huya, Baozun, and Hello Group will also have to return to strong revenue growth to win investors back, but the first step is the regulatory framework. Keep your eye on next week's meeting for signs of progress.
