What happened
U.S.-listed Chinese stocks Trip.com (TCOM 0.19%), Vipshop Holdings (VIPS -0.25%), and RLX Technology (RLX 0.79%) were rallying today, up 8.4%, 5.7%, and 11.3%, respectively, as of 11:20 a.m. EDT.
Chinese stocks were up broadly today, especially those related to Chinese consumer products and services. Given the across-the-board rallies, today's action likely had to do with rumors circulating on social media that China might relax the "zero-COVID" posture it has implemented since March.
So what
Beginning in March, when the omicron variant began to find its way to China, the government stuck with the "zero-COVID" policy that had worked to keep Chinese COVID death rates much lower than those of other developed countries throughout the pandemic.
However, omicron proved much more contagious, and China did not use the superior U.S.-made RNA vaccines but instead relied on its own homemade vaccines, which were less effective. So using lockdowns to contain the virus in areas of outbreaks and conducting testing on a large scale proved difficult, if not impossible.
Still, the government has not wavered in its strict zero-COVID posture, choosing to lock down major cities on a regular basis this year, which disrupted commerce and led to lower consumer confidence. Despite the economic costs to China, the Xi Jinping administration has stuck with the policy thus far, even accelerating it last week.
Yet on Tuesday, a rumor began circulating on social media that Politburo Standing Member Wang Huning was forming a "reopening committee" that would study how to reopen China's economy, beginning in March of 2023. The rumor was then reposted by economist Hao Hong.
A reopening would certainly be a breath of fresh air for a company like Trip.com, which is the leading Chinese online travel agent. Needless to say, harsh COVID restrictions aren't very good for travel, nor is a flagging economy with low consumer confidence. In the first half of this year, while most economies were experiencing their first year of reopening and a travel boom, Trip.com was actually logging year-over-year revenue declines thanks to the renewed China lockdowns.
Discount clothing platform Vipshop faces a similar dilemma: If the economy is in a self-induced recession and people aren't going out, it probably doesn't make sense for them to buy any new clothes, either. Vipshop's revenue and gross merchandise volume declined in the second quarter as a result.
Finally, RLX is an e-vaping company that could also benefit from relaxed regulations. RLX might not be quite as dependent on reopening as Trip.com and Vipshop, but it has felt the sting of strict regulations, since new measures on e-cigarette manufacturing were imposed by the government earlier this year.
Now what
Chinese stocks have been subject to wild downturns and upturns this year as Xi Jinping has solidified power and stuck with policies viewed by many as harming the Chinese economy. That has caused Chinese stocks to sell off to extremely cheap valuations this year -- at least, cheap relative to where earnings were prior to the technology crackdown and the zero-COVID stance of the past two years.
Therefore, any potential break from this strict policy stance is likely to be greeted with lots of buying, as we saw today.
However, Chinese stocks remain risky. After all, today's rally came on the heels of nothing more than a rumor, and a Chinese foreign minister said he was unaware of such a committee being formed. Given the unpredictability of the current regime, which, at times, seems unpragmatic, it's hard to put much faith in this rally.
While Chinese stocks remain cheap, their success relies heavily on business-friendly policies and warmer relations with the international community. Those factors might improve now that October's National Congress is behind us, but it's far from certain. Chinese stocks remain appropriate only for highly risk-tolerant investors.
