Why Alibaba, Pinduoduo, and TAL Education Group Soared Today

What happened

Shares of U.S.-listed Chinese stocks Alibaba Group Holding (BABA 0.28%), Pinduoduo (PDD -0.18%), and TAL Education Group (TAL -1.89%) were all rallying higher today, up 7.8%, 11.2%, and 15.5%, respectively, as of 11:37 a.m. ET.

All three of these stocks plunged on Monday, following the Communist Party's 20th National Congress held this past weekend. However, it appears bargain hunters are now stepping in to take advantage of Chinese stocks' highly discounted valuations.

Yesterday, China's central bank regulators met with the State Administration of Foreign Exchange, and released a statement saying they would coordinate to stabilize markets. That could be another reason for the rebound in Chinese stocks today.

In addition, it appears investors may be looking through the current period and are anticipating the end of large interest rate hikes in the U.S. If that happens, it has the potential to stop the dollar from rising against other currencies such as the yuan. 

So what

Late Tuesday, the People's Bank of China (PBOC) met with the State Administration of Foreign Exchange (SAFE) and released a statement saying the two regulatory bodies would "Strengthen departmental cooperation to maintain the healthy development of the stock market, bond market and property market." The two agencies also said they would maintain "reasonable growth" in the amount of credit and increase support for targeted areas such as scientific innovation.

These statements were apparently reassuring enough to some investors that China isn't totally throwing its private enterprise under the bus. Still, China's central bank has a difficult task, because the more it stimulates its lagging economy through lower rates, the more the Yuan will be pressured against other currencies, especially the dollar, which could cause capital to continue leaving the country.

That's why the movement in U.S. interest rates may be important here as well. The 10-year Treasury Bond yield was falling for the second straight day today, with long-term rates falling roughly 10 basis points to 4%. That's a big drop from recent highs around 4.33%, and part of what has been lifting U.S. tech stocks, in spite of lackluster earnings.

If an economic slowdown causes a deceleration or pause in the Fed's interest rate hikes, that could help arrest the rise of the dollar against foreign currencies. That would give the Chinese Central Bank more room to stimulate its economy, which is facing multiple headwinds, including a property downturn, ongoing COVID-19-related lockdowns, and the ongoing regulations on its tech sector.

Alibaba, Pinduoduo, and TAL have each been hit especially hard amid Beijing's technology crackdown over the past two years. The tech crackdown really started with Alibaba, when founder Jack Ma got in trouble for challenging the financial innovation, or lack thereof, of China's state banks. That subsequently led to some anti-monopoly actions taken against Alibaba's e-commerce wing and the breaking up of its partially owned Ant Financial subsidiary. Pinduoduo also felt regulators' ire for pricing items below cost in order to drive user growth. And TAL saw a tremendous drop in its price when regulators effectively banned expensive private tutoring, which was a large part of TAL's online education business.

Yet with Alibaba and Pinduoduo down about 80% from all-time highs and TAL down 96%, it appears bargain hunters are stepping in.

Now what

While shares of leading Chinese tech companies are undoubtedly cheap, there are obviously high risks to owning them, especially for U.S. investors. Despite yesterday's positive commentary from Chinese financial regulators, President Xi Jinping cemented his grip on power this past weekend, installing loyalists in every position of leadership.

That raises the risk of more anti-capitalist actions under his administration, which has shown itself to be unpredictable and at times outright hostile to private enterprise over the past couple of years. Then there is heightened geopolitical risk, should something occur between the U.S. and China over Taiwan. This could lead to difficulty trading U.S.-listed China stocks in a worst-case scenario.

Chinese stocks are therefore only appropriate for the very high-risk portion of most investors' portfolios, or those who have lots of insight into Chinese politics. With so many U.S. stocks down as well this year, there are cheap alternatives to Chinese stocks, even with these names looking like mouth-watering bargains now.