What happened
Shares of most Chinese stocks trading on U.S. exchanges moved higher Wednesday after a sharp sell-off Monday following the end of the Chinese Communist Party's (CCP) National Congress over the weekend.
Near the conclusion of that event, President Xi Jinping secured his third term as party leader, breaking with a longstanding tradition of Chinese leaders only serving two terms, and further consolidating his power and position as the head of the country for at least the next five years.
Shares of electric vehicle maker Nio (NIO 7.87%) rose about 2% Wednesday, while shares of vaping company RLX Technology (RLX 0.52%) rocketed more than 45% higher and shares of fintech Lufax (LU 2.07%) ripped more than 14% higher.
So what
Hong Kong's benchmark Hang Seng Index fell 6.4% on Monday -- the index's worst single-day performance since the Great Recession.
In Xi's third term, it now seems clear that he will have even more influence over the country's economy than he already had, which threatens the free market concept in China. More frequent intervention by his government will make its market more volatile, and investors may demand higher returns in exchange for taking on the higher risk of investing there.
Image source: Getty Images.
On the other hand, this week, Beijing reported that China's economy grew by a better-than-expected 3.9% in the third quarter after what has been a difficult year. Gross domestic product growth for the year is now expected to come up well short of the figure that was projected heading into 2022.
In response to Monday's sell-off, Chinese financial regulators made comments aimed at boosting investor sentiment. The People's Bank of China on Tuesday said it would continue to embrace the healthy development of financial markets, while the China Securities Regulatory Commission issued a statement saying it would quicken its development of "regulated, transparent, open, robust and resilient" capital markets.
Additionally, investors seem to be thinking that the U.S. Federal Reserve may soon ease back on its aggressive interest rate hikes, which have played a big role in driving the broader U.S. market sell-off this year. That bear market has been especially hard on tech stocks, a category many of the biggest U.S.-listed Chinese stocks fall under. Also, Chinese stocks have been sold off significantly this year, so perhaps investors are seeing this as a good moment to buy the dip.
Now what
Chinese stocks present an interesting opportunity because these companies operate in a huge market that is also the fastest-growing consumer market in the world. Many are innovative companies and significant disruptors.
For instance, Mizuho analyst Vijay Rakesh recently said in a research note that electric vehicle sales could make up 25% to 30% of all auto sales in China in Q3 -- a far higher percentage than in the U.S. As one of the most well-known Chinese electric vehicle makers, Nio would certainly benefit from this.
But the threats of more intrusive regulation and restrictive orders from Xi's government are likely to keep the Chinese stocks volatile and should drive some investors to the sidelines. I do see strong potential in the stocks of Chinese companies that are more established and are better positioned to avoid costly regulatory issues, but it's going to be a bumpy ride.
