What happened
Shares of Alibaba (BABA 2.55%), JD.com (JD 1.40%), and Bilibili (BILI -3.02%) rose strongly Tuesday, up 6.6%, 6.6%, and 9.3%, respectively, as of 1:51 p.m. ET, during a relatively flat session for U.S. markets.
Like other risk assets, Chinese stocks sold off hard over the past few days. However, they have generally been faring better than U.S. tech stocks as of late. This is largely because they had already crashed last year amid Beijing's regulatory crackdown. However, with Chinese authorities signaling the end of that crackdown, investor optimism about the reopening of major Chinese cities from their latest pandemic-driven lockdowns, and an easier fiscal environment, Chinese stocks were back on the upswing Tuesday.
So what
On Friday, a worse-than-anticipated rise in the U.S. Consumer Price Index stoked investors' fears that the Federal Reserve may hike interest rates faster and harder than was previously expected. This was followed up Tuesday by a Producer Price Index report that showed a 10.8% year-over-year rise in May. Although that was one-tenth of a percentage point lower than April's increase, it's still a very high number, indicating that inflation may not moderate any time soon.
Yet while the U.S. may be in for more rate increases, in China, the government is loosening financial conditions, not tightening them, as growth there has slowed and companies have cut their workforces in the aftermath of the tech crackdown and the COVID lockdowns. In May, the country reduced a key interest rate in an effort to lower mortgage rates. After China's property bubble popped last summer, authorities and its central bank are reversing course and working to promote economic growth.
Since investors everywhere appear to be focusing on the actions of central banks right now, it's perhaps no surprise that money managers who can invest abroad are selling stocks in developed markets, and "buying the dip" in the beaten-down Chinese tech sector.
Additionally, each of these technology companies, while not reporting great numbers on an absolute basis relative to their history, did all beat expectations for first-quarter revenue growth. While Bilibili missed on its bottom-line expectations, Alibaba and JD.com beat those expectations as well.
Now what
No doubt, Chinese tech stocks look cheap, especially if the country's middle class continues to grow and consumer spending increases in what has traditionally been a manufacturing-based economy. However, investors shouldn't necessarily expect a huge rebound to pre-crackdown growth levels or profits.
The Chinese government's new regulations should remain in place, limiting market leaders' ability to behave in anti-competitive ways (for example, the forced exclusivity policy that Alibaba imposed on its third-party merchants). Meanwhile, there is talk that the Chinese government may acquire 1% positions in several leading companies and take a more proactive role in their business decisions. While that could keep those tech companies from running afoul of the government's agenda (and therefore help them avoid further fines), it could also limit their innovation and growth prospects.
I wouldn't be surprised if Chinese stocks see a further bounce and outperform U.S. stocks in the near term. However, over the long term, investors may have to contend with the Chinese government's unpredictable regulatory actions, as well as the prospects of increased geopolitical tensions between the U.S. and China. The value in Chinese stocks may be such that it is worth it to allocate a portion of one's portfolio to them. However, they belong in your "high risk" basket, especially compared with more defensive U.S. tech giants.
