What happened

Shares of several Chinese stocks that trade on U.S. exchanges rose this week after the Chinese government implemented more favorable economic policies and some companies delivered upbeat earnings news.

For the week, shares of Chinese e-commerce giant JD.Com (JD -5.93%) were trading roughly 18.6% higher as of 3:16 p.m. ET Thursday, according to data provided by S&P Global Market Intelligence. Shares of online tutoring company TAL Education Group (TAL -4.18%) were up by nearly 21%, and shares of agricultural tech company Pinduoduo (PDD -4.65%) were up by close to 31%.

So what

Chinese tech stocks have been climbing this week in the wake of news that the Chinese government would implement more accommodating policies to prop up the economy. The Chinese government had hoped for gross domestic product (GDP) growth of 5.5% this year, but several major lockdowns it instituted earlier this year to maintain its "zero-COVID" policy put a damper on its economy. Economists at Goldman Sachs now forecast that China's GDP will grow by just 3% this year.

Red line with arrow moving higher.

Image source: Getty Images.

Earlier this week, China's central bank once again cut its key benchmark interest rates, which will eventually make the cost of doing business cheaper and increase the earnings power of most Chinese tech stocks. Furthermore, China's State Council released a 19-point policy plan Wednesday that includes more than 1 trillion yuan in stimulus spending, most of which will go to local governments and state banks to be invested in infrastructure projects.

Chinese financial regulators also seem to be making progress with U.S. regulators in forging a compromise on a long-standing auditing dispute that -- if not resolved -- would lead to the delisting of hundreds of Chinese companies from U.S. exchanges. That would cut those businesses off from a key source of liquidity.

U.S. securities law states that if foreign companies listed on U.S. exchanges fail to have their working financial statements audited by U.S. financial regulators for three consecutive years, they must be delisted. But China's government has not allowed many of its burgeoning tech companies to be audited, citing privacy and data concerns. The Securities and Exchange Commission has named hundreds of Chinese companies this year that are at risk of facing delisting.

On Thursday, Bloomberg, citing anonymous sources, said that Chinese regulators have told Chinese accounting firms to prepare to bring documents for Chinese companies trading on U.S. exchanges to the U.S. Public Company Accounting Oversight Board (PCAOB) for review. The PCAOB is a nonprofit corporation established by the U.S. government to audit public companies.

"Whether or not the rumor on an audit deal is true, Hong Kong shorts have pressed their bets in a light summer tape," said Brendan Ahern of Krane Fund Advisors, according to Bloomberg. "We have been setting up for an epic short squeeze that is contributing to today's move."

In other more company-specific news, JD.Com reported second-quarter earnings earlier this week that beat analysts' estimates, despite slowing revenue growth. Analysts are also growing increasingly bullish about the company's prospects in a post-pandemic China. Several analysts reiterated their bullish calls following the earnings report.

Additionally, Pinduoduo, the large Chinese e-commerce marketplace for groceries and fresh produce, is reported to be gearing up to launch operations in the U.S.

Now what 

With all of this good news, it's hard not to be bullish about Chinese stocks. Hong Kong's Hang Seng Index jumped more than 3.6% Thursday.

While there are still macroeconomic concerns, a potential end to the auditing dispute would be huge. It would remove a key risk currently clouding the thesis for Chinese stocks. While nothing is set in stone yet, there has been a lot of news about progress toward a deal in recent months, so it seems like an agreement could be close.

The Chinese tech sector was sold off heavily, and now, I think there is a good chance for it to bounce back. Of this specific group, I see a lot of long-term potential in JD.Com and Pinduoduo.