Why Bilibili, Baidu, and New Oriental Education Stocks Rallied This Week

What happened

Stocks of some of China's most popular companies continued to rally on Thursday, continuing several days of gains.

A number of China-specific issues have weighed on that nation's stocks in recent months, among them crackdowns by regulators, its ongoing "zero-COVID" policy for fighting the pandemic, and the economic headwinds that have resulted from it. In light of all that, investors have been ready to latch onto any positive developments as a reason to buy shares in some of China's most beaten-down companies. A double-dose of good news this week provided the catalyst some of those investors were looking for.

Shares of Bilibili (BILI -2.63%) climbed by as much as 20.6% this week, Baidu (BIDU 0.22%) gained as much as 17.2%, and New Oriental Education and Technology (EDU 4.04%) surged by as much as 16.2%, according to data provided by S&P Global Market Intelligence. As of 2:12 p.m. ET Thursday, the trio were still trading up by 20.5%, 17%, and 16%, respectively.

So what

While there wasn't any company-specific news driving these stocks higher, a couple of big-picture developments sent shares into rally mode.

The Chinese government announced late on Tuesday a major increase to its economic stimulus plan, pledging to spend another 1 trillion yuan (roughly $146 billion) to boost the country's battered economy. Much of that package is earmarked for infrastructure. China's State Council provided a 19-point policy package to implement the plan. 

It includes 300 billion yuan ($43.8 billion) for infrastructure spending, doubling the amount the government announced back in June. In addition, 500 billion yuan ($73 billion) is being allocated to local governments for projects, while 200 billion yuan ($29 billion) will be used to support energy generation plans. 

There was more good news for Chinese stocks. Officials in Beijing and Washington, D.C., are close to finalizing a deal that would allow U.S. securities regulators to inspect the audit records for Chinese companies listed in the U.S., according to a report in The Wall Street Journal.  

The U.S. Public Company Accounting Oversight Board (PCAOB) would be granted permission to send representatives to Hong Kong, where they would be able to perform on-site inspections of accounting records and audit files. A final agreement will depend on U.S. regulators confirming they have been granted full access to the required records.

An ongoing disagreement between U.S. and Chinese officials over these audits has simmered for years, but the Holding Foreign Companies Accountable Act (HFCAA) of 2020 -- which took effect in 2021 -- demands them. As a result, the Securities and Exchange Commission (SEC) threatened to delist more than 150 Chinese stocks from U.S. exchanges if U.S. regulators weren't granted access to their audit records by spring of 2024. 

Chinese officials retaliated by announcing that five state-owned companies, which had already been flagged by the SEC for failing to comply with U.S. audit requirements, had applied for "voluntary delisting." 

Now what

The stimulus plan announced by China is designed to shore up an economy that has been reeling for months. The government's zero-COVID policy has resulted in wide-ranging shutdowns in a number of China's largest cities, further stifling its economic growth. 

Furthermore, an agreement between U.S. and Chinese securities regulators would be a boon to numerous Chinese companies, allowing them to comply with the HFCAA. It would be difficult to quantify the economic impact of a wide-scale delisting of Chinese securities from U.S. exchanges. However, if those stocks were only tradable by smaller pools of investors, that would significantly reduce their liquidity, making them less desirable to own.

There's no guarantee that these measures to buoy the Chinese economy and prevent stock delistings will ultimately bear fruit. That said, the online entertainment provided by Bilibili, the search and cloud computing services supplied by Baidu, and the private education services offered by New Oriental Education would all likely be more in demand in a more robust economy, so investors are viewing these developments as steps in the right direction, which helps explain why they are snapping up these beaten-down stocks.