What happened
Shares of Tencent Holdings (TCEHY -0.94%), Sea Limited (SE -0.69%), and Baidu (BIDU 0.72%) were soaring today, with each stock up either in the high single digits or double digits at their highs, before settling into a 9.1%, 1%, and 5.3% gains, respectively, as of 1:57 p.m. ET on Friday.
These and other Chinese tech names were trading higher today even as U.S. tech stocks sold off. The moves were entirely due to reports that China's regulatory authorities will meet with top tech executives next week amid a weak economy, signaling a potential relaxing of their regulatory assault.
Of note, Sea Limited is not actually a Chinese stock, as it's based in Singapore. However, Tencent has a large minority stake in the company, even after share sales earlier this year, and for some reason, Sea tends to trade in spirit with Chinese stocks. That may or may not be fair, but it's likely why it's higher today, too, albeit less so than its Chinese counterparts.
So what
According to The Wall Street Journal, the top Chinese internet regulator is going to meet with the country's top technology executives next week. While we don't know the full context of the meeting, it appears the regulator might pause or end the brutal regulatory campaign that has ravaged Chinese tech stocks over the past year and a half.
Of note, the government could lift bans and limits on app usage amid widespread lockdowns in Shanghai and now Beijing. That would certainly be music to the ears of Tencent, which has sold off amid more-stringent gaming restrictions this year.
Not only that, but earlier this week, President Xi Jinping said he wants China to invest in infrastructure this year, in order to stimulate the economy and reach the country's 5.5% growth goals for 2022.
That will be ambitious, since consumer spending declined in March, and is also likely to plummet in April amid widespread COVID-19 lockdowns. These lockdowns have come on top of the property-sector bubble bursting last summer, as well as recent mass layoffs by technology companies.
With their valuations down so much, Chinese or Chinese-affiliated tech stocks soared on the news. Of note, one of the infrastructure projects cited by officials was cloud-computing infrastructure, in addition to waterways and railways. Government stimulus in that area could benefit Tencent and Baidu, which are investing aggressively in cloud computing as a new growth business under their corporate umbrellas.
There wasn't any other news out of these companies today. As is the case with many tech stocks recently, macroeconomic concerns and events seem to dominate their stock moves outside of earnings.
Image source: Getty Images.
Now what
Today's move was a much-needed reprieve for investors in China and the Far East, but it's only one day, and the China situation is very fluid. The government has taken some strange actions over the past year and a half that have effectively led to the very bad economy it's now trying to fix.
One interesting wrinkle in the Journal article was a mention that the Chinese government might seek a direct 1% stake in certain top tech companies, aligning the government with these companies' success, while also giving regulators a more direct say in business decisions.
That could be both good and bad; on the one hand, it could help these top tech companies avoid regulatory pitfalls, and it would encourage government authorities to get their stock prices back up. On the other, it's not usually preferable to have the government looking over your shoulder and perhaps inhibiting profitable business ventures. And it's still unclear under what terms that 1% stake would be offered. Is it a giveaway? Would the government buy shares at market prices?
Even though Sea Limited is the unprofitable one of these three companies, this is why it could be interesting here. The stock appears to trade in tandem with Chinese stocks, but it has much more freedom to operate, as it's based in Singapore and operates in non-Chinese Asian markets. Down a stunning 77% from its highs, Sea looks pretty cheap these days. In addition, if Western countries begin to move their manufacturing out of China and into democratic countries in Southeast Asia because of China's draconian policies, Sea's end markets across Southeast Asia and Taiwan could benefit economically.
In any case, these companies are still far off their highs and look very cheap given their growth prospects, so investors have to weigh the potential rewards against the fluid geopolitical risks in the region.
