What happened

Stocks of some of China's most popular companies rallied out of the gate on Tuesday. The Chinese government has long instituted strict measures and government regulatory crackdowns to slow the spread of the pandemic, which has weighed on the country's already fragile economy. However, recent developments suggest the worst may be over, which could result in the lifting of government restrictions, thus providing a boost to China's battered stock market.

With that as a backdrop, shares of e-commerce platform Alibaba (BABA 0.75%) gained 7.7%, digital retailer JD.com (JD 5.25%) climbed 8.7%, and search giant Baidu (BIDU 0.74%) surged 7.9% this morning. As of 12:44 p.m. ET, the trio were still trading higher, up 5.2%, 3.1%, and 5.4%, respectively.

So what

Reports on Chinese social media emerged overnight suggesting that a government committee had been formed to develop plans to fully reopen China by March of 2023. This would represent a major step forward in lifting a broad array of pandemic-related restrictions imposed to slow the spread of COVID-19. Many cities in China have faced government-mandated lockdowns as a result of the country's "zero COVID" policy.

The rumors were fairly specific, providing a list of items that would need to be addressed in order to achieve this lofty goal. These conditions include raising the vaccination rate of elderly residents, increasing the ability of hospitals to handle a potential influx of cases, and boosting stockpiles of drugs used to treat COVID. 

A significant increase in the number of COVID cases earlier this year led to swift and decisive action by the Chinese government, resulting in lockdowns, mandatory social distancing, and the shuttering of many businesses to contain the spread. This has ground China's once-buoyant economy to a near halt.

Further boosting China's e-commerce stocks this week was Alibaba's 14th annual Global Shopping Festival, better known as Singles Day or 11.11, which kicked off on Monday, Oct. 31, and runs through Thursday, Nov. 3. Many other online and physical retailers -- including JD.com -- have climbed on the bandwagon since the sale was established in 2009, sparking a phenomenon similar to Black Friday in the U.S. 

Now what

It's important to note that government officials have yet to confirm these reports, with some even downplaying the rumors. "I'm not aware of the situation you mentioned," foreign ministry spokesman Zhao Lijian said at a press conference when questioned about any significant loosening of the country's COVID-related restrictions. 

Still, even the potential of a broad-based reopening was enough to ignite a rally in some of China's most widely recognized stocks. The Shanghai Composite index rose 2.6%, while the Shenzen Component added 3.2%. The Hang Seng index in Hong Kong saw the biggest gains, up 5.2%, while the Hang Seng Tech index surged 7.8%. These gains followed a brutal 14% loss in October, driving stocks to their lowest level in 13 years. 

Investors have chosen to view the glass as half full, using the rumors as an excuse to load up on beaten-down Chinese tech stocks. Given the potential for a bounce in one of the world's largest economies, investors are trying to get ahead of the curve, on the off chance that the worst has passed. Any acceleration in consumer spending would be a boon to the country's e-commerce companies, such as Alibaba and JD.com, as well as the merchants that advertise on Baidu's online search platform.

Furthermore, these stocks are selling at or near their cheapest valuations ever, with Baidu, Alibaba, and JD selling for 1.5, 1.4, and 0.5 times sales, respectively, when a reasonable price-to-sales ratio is between 1 and 2. 

That said, investing in these -- or any -- of China's burgeoning companies comes with inherent risks and should be an appropriately sized portion of a balanced portfolio.