What happened

Stocks of some of China's most popular companies were roaring higher on Friday on speculation that a long-running dispute with U.S. regulators could soon be nearing an end and that the country could soon lift pandemic-related restrictions that have stifled growth.

With that as a backdrop, shares of steaming video platform Bilibili (BILI -1.45%) soared as much as 17.5%, e-commerce platform Dada Nexus (DADA 1.09%) surged as much as 13.6%, search giant Baidu (BIDU -0.56%) jumped as much as 11.4%, and digital retailer Pinduoduo (PDD -0.18%) climbed as much as 9.5%. As of 10:59 a.m. ET, the four were still trading higher, up 14.9%, 13.2%, 8.7%, and 8.7%, respectively.

There wasn't any company-specific news driving the gains, but rather broader economic and regulatory developments that moved the stocks higher.

So what

News broke overnight that regulators from the U.S. Public Company Accounting Oversight Board (PCAOB) completed work early on their first on-site inspection of audit papers for U.S.-listed Chinese companies, according to a report by Bloomberg. 

The U.S. and China recently came to terms that, if successful, would settle a long-running dispute between the two countries. The PCAOB traveled to Hong Kong and was granted permission to review accounting records and audit papers for a number of companies. In the past, Beijing has steadfastly denied U.S. regulators access to these records.

As a result, the U.S. passed the Holding Foreign Companies Accountable Act (HFCAA) of 2020 -- which took effect last year -- which required access to the records. The U.S. Securities and Exchange Commission (SEC) planned to delist more than 150 Chinese stocks from U.S. exchanges if the PCAOB wasn't allowed to inspect the necessary documents by spring of 2024. 

Furthermore, Chinese stocks continued to rally this week on unconfirmed reports that the government was planning to end its strict zero-COVID policy, which resulted in lockdowns in some of the country's largest cities and stifled economic growth. A Chinese official reportedly said in a privately held conference that restrictions would be lifted over the coming five to six months, according to a report by Reuters. 

Now what

It's important to note that in both cases, government officials have yet to confirm the rumors. The reports regarding U.S. audit inspection cited "people familiar with the matter," while the rumors regarding a loosening of pandemic-related restrictions were spread on social media.

Yet even the possibility of a settlement with U.S. securities regulators and a broader reopening of its economy was enough spark a rally of China's most widely owned stocks today, building on gains from earlier this week. The Shanghai Composite index has surged 5% so far this week, while Hong Kong's Hang Seng index soared more than 8%. These gains followed massive losses in October, which drove stocks to 13-year lows. 

Investors are viewing the glass as half full, using any positive news as a reason to stock up on beaten-down Chinese tech stocks. Given the potential for reprieve from the uncertainty and stifling restrictions that have weighed on one of the world's largest economies, investors are trying to anticipate the bounce and buy the dip in advance of an expected recovery.

Any acceleration to the floundering economy would no doubt boost consumer spending, benefiting e-commerce platforms including Pinduoduo and Dada Nexus, as well as merchants that advertise on Baidu's online search platform, and streaming video platforms including Bilibili.

Furthermore, these stocks are selling at their cheapest valuations in years, with Pinduoduo, Baidu, Bilibili, and Dada Nexus selling for 3.8, 1.5, 1.1, and 0.5 times sales, when a reasonable price-to-sales ratio is between 1 and 2. 

While these seem like bargains, investors should also educate themselves about the inherent risks of investing in Chinese stocks, making them an appropriately sized portion of a balanced portfolio.