Why Baidu, Dingdong, and Pinduoduo Stocks Crashed on Monday

What happened

Chinese President Xi Jinping secured an unprecedented third term as leader of the People's Republic on Sunday -- and U.S.-listed Chinese tech stocks promptly fell off a cliff as a result.  

As of 11:05 a.m. ET, shares of internet search giant Baidu (BIDU 0.98%) are down 16.6%, while e-commerce platforms Dingdong (Cayman) Limited (DDL) and Pinduoduo (PDD -0.37%) have fallen 18.9% and 28.8%, respectively.

So what

What does a continuation -- not even a change -- in the leadership structure of the Chinese government have to do with the price of Chinese tech stocks, you ask? Well, basically, the thinking goes like this: If Xi was tough on Chinese tech stocks in the middle of his second term -- which according to tradition should have been his final term in office -- now that he's broken with tradition and taken a third term, there's really no reason to think he will need to moderate his views on the proper relationship between government and private enterprise going forward.

And Xi has been rather tough on Chinese tech companies so far, restricting the ability of some to list their shares outside China; imposing restrictions on how they collect, distribute, and use data on others; and forbidding still more (education companies in particular) from even engaging in certain activities. And unfortunately for China's tech stocks, according to United First Partners head of Asian research Justin Tang, "the market" is now worried that further restrictions on those businesses may be in the works.

Now what

Xi has also staked his reputation, to an extent, on his ability to maintain a "zero-COVID" policy in China, which has slowed the economy with effects far beyond just the tech sector.

As CNBC pointed out this morning, Xi's apparent choice to become the new premier of the government, current Communist Party Secretary for Shanghai Li Qiang, has personally overseen the implementation of the zero-COVID mandate in Shanghai. His elevation to premier would suggest that this policy, too, will continue.  

Thus, investors need to weigh the risk of both a continued throttling of the economy to contain COVID-19 combined with potential new restrictions on business activities in the tech sector as Xi enters his third presidential term. While it's tempting to think that things can't get much worse for Pinduoduo stock (down 41% over the past year), Baidu (down 48%), and Dingdong (down 87%!), the truth is that there's still a lot of risk in these stocks.

Even at valuations as low as just 10 and 15 times earnings (for Baidu and Pinduoduo, respectively), these stocks may not be as "cheap" as they appear.