What happened
Shares of several Chinese stocks fell today after COVID-19 cases once again rose in the country, renewing lockdowns that have plagued the economy in recent months.
Shares of the large e-commerce company JD.com (JD 2.00%) traded nearly 5.5% lower as of 10:46 a.m. ET today. Shares of the online recruitment platform Kanzhun Limited (BZ 1.28%) traded nearly 9% lower and shares of the real estate platform KE Holdings (BEKE -0.40%) were down more than 9%.
So what
The Chinese government partially locked down the city Xi'an on Wednesday after the country discovered the first new cases of the omicron subvariant, which is highly contagious and has become the dominant form of COVID-19 in the U.S. and Europe. Xi'an is home to 13 million people. Xi'an found 18 cases of the new Omicron subvariant between Saturday and Monday.
Image source: Getty Images.
As a result, the Chinese government is now testing citizens in Beijing and Shanghai to search for new cases of the subvariant. The Chinese government has also for the first time ever rolled out a vaccine mandate in Beijing. Investors may be worried that more lockdowns are coming, which could hamper economic activity in the country and hurt a lot of Chinese companies.
Despite the concerns, analysts still seem to be optimistic on Chinese stocks. Hu Yifan, the Greater China chief investment officer at UBS Wealth Management in Hong Kong, said in a recent report that the MSCI China Index could end the year up 7% to 10% compared to 2021. The MSCI China Index is down roughly 13.6% this year.
"We are particularly optimistic about the China market in the second half, mostly because the recovery of the economy would be a certain event," the analyst said at a briefing yesterday, according to the South China Morning Post. "We estimate that profits of [Chinese] companies for the whole year could go up by 10 percent."
After lockdowns earlier this year and a regulatory crackdown in 2021, the Chinese government has seemingly taken a much friendlier approach to Chinese tech companies in recent months. Chinese regulators began working with U.S. regulators to end a long-standing auditing dispute that could lead to many Chinese stocks listed on U.S. exchanges being delisted. Although no formal agreement has been made, the two sides seemed to be making good progress.
News reports also came out about a month ago that said Chinese regulators were preparing to end cybersecurity investigations into several prominent Chinese companies including DiDi Global, Full Truck Alliance, and Kanzhun. The end of the investigations would also restore all of their apps on domestic Chinese app stores, allowing these companies to resume growth.
Now what
While a fresh round of COVID-related lockdowns would not be good for the Chinese economy or Chinese stocks, I am not sure how long the Chinese government could really do them because it is already behind on hitting its desired economic targets. Chinese citizens have also not been happy with the lockdowns.
The bigger story in all of this is that the government is easing off the regulatory crackdown that really hammered Chinese stocks in 2021 and the beginning of this year.
While the government can be unpredictable at times, its recent actions suggest it is interested in supporting Chinese tech stocks, so with most tech stocks beaten down, I am cautiously optimistic about the sector.
