What happened
Shares of many Chinese stocks trading on U.S. stock exchanges moved higher today as investors become more optimistic that the Chinese government may ease up on some of its restrictive COVID-19 policies.
Shares of the large e-commerce company Alibaba (BABA 2.10%) were trading roughly 4.6% higher at 9:52 a.m. ET today. Shares of another large e-commerce player, JD.Com (JD 2.49%), were trading roughly 6.5% higher, and shares of the Chinese electric vehicle maker Li Auto (LI -2.18%) were up close to 12%.
So what
The Chinese government has implemented restrictive "zero-COVID" policies in order to prevent the spread of COVID-19 in the country, which has resulted in sweeping lockdowns in major Chinese cities, cutting into economic growth this year.
Heading into this year, the Chinese government had projected 5.5% gross domestic product growth in the country, but many economists now expect growth to come up short of this forecast. Less economic growth has also, naturally, hurt many Chinese stocks.
Image source: Getty Images.
Recently, though, investors seem to be thinking the Chinese government may ease up on some of these zero-COVID policies, although no government official has publicly confirmed these suspicions.
"Any indication that some rules could be relaxed would be an immediate dose of grease in the jarring cogs of China's economy," said Sophie Lund-Yates of the asset management firm Hargreaves Lansdown, according to Reuters.
Furthermore, Bloomberg reported today that auditing by U.S. financial regulators appears to be progressing. The Securities and Exchange Commission earlier this year threatened to delist hundreds of Chinese companies, due to the fact that they haven't been properly audited.
Under the Holding Foreign Companies Accountable Act (HFCAA), foreign companies that are not properly audited for three consecutive years cannot trade on U.S. exchanges. The problem over the years is that the Chinese government has not allowed Chinese companies to undergo these audits due to privacy and data concerns.
But earlier this year, Chinese and U.S. financial regulators seemed to strike a preliminary agreement. The agreement would allow auditors from the Public Company Accounting Oversight Board (PCAOB), a nonprofit organization created by Congress in order to audit public companies, to conduct joint audits of Chinese companies in Hong Kong.
Bloomberg reported earlier today that PCAOB auditors are leaving Hong Kong earlier than expected and that the work has largely moved forward. Now, it's still a bit early to know if the auditors were pleased with what they saw, but the market seemed to take this development as good news.
Now what
Obviously, the zero-COVID policies have weighed heavily on Chinese stocks, with Hong Kong's benchmark Hang Seng Index down more than 30% this year.
But given that government officials have not made any formal statements that would indicate they are ready to ease restrictions, I'm not reading too much into the market's movement. However, after recently securing an unprecedented third term as China's leader, President Xi Jinping might ease COVID restrictions to curry some favor after drawing scrutiny from international investors.
Still, I'm more interested right now in the PCAOB news and am curious to hear how the audits went. If they went well, there is likely less risk of many Chinese tech stocks being delisted from U.S. exchanges.
Ultimately, I think Alibaba, JD.Com, and Li Auto all have strong potential. Alibaba and JD have developed some serious scale in China's rapidly growing consumer market. Li is also well positioned because Chinese consumers are adopting electric vehicles much faster than people in the U.S. But expect this sector to remain volatile for the foreseeable future.
