What happened

Several Chinese stocks trading on U.S. exchanges moved higher today after the Chinese government issued its most significant plan yet to aid its struggling real estate sector.

Shares of the large Chinese e-commerce company JD.com (JD -4.53%) traded more than 5% higher as of 1:32 p.m. ET today.

Meanwhile, shares of the online Chinese tutoring company TAL Education Group (TAL -4.37%) traded more than 9% higher, and shares of UP Fintech Holding (TIGR -2.16%) traded more than 12.5% higher.

Line moving up and right over three houses.

Image source: Getty Images.

So what

The Chinese government recently rolled out a 16-point plan in an effort to help its ailing housing sector, which has struggled due to excessive leverage followed by an intense crackdown by the Chinese government.

In 2020, the Chinese government introduced a policy called "three red lines," which only allowed developers from raising capital if their debt levels didn't exceed certain thresholds. This meant that in order for developers to add leverage, liabilities couldn't exceed 70% of assets, net debt couldn't be more than equity, and cash on hand has to be equivalent to short-term debt.

The government was right to be concerned about the real estate sector, because in late 2021 China Evergrande, China's second-largest property developer, defaulted on its debt. But the "three red lines" policy, which is still in place, hasn't fixed the housing market and has in some cases made things worse. Many projects are not yet finished, and housing prices are way down, which has also hurt developers.

The government's plan will enable Chinese banks to extend loans to developers and make conditions friendlier for buyers, including lower mortgage rates and down payments, as well as opening up some funding sources like the issuance of certain bonds.

"These property measures, on top of announcements of COVID loosening, are a clear indication that Beijing's efforts to support growth are intensifying," said Michael Hirson of the New York investment company 22V Research, according to The Wall Street Journal.

Chinese stocks have really been hammered this year, with Hong Kong's benchmark Hang Seng Index down more than 24%. Much of the concerns have been on economic growth, which has slowed dramatically due to restrictive COVID policies, as well as broader issues globally. Real estate is a big part of this, with the sector contributing about a quarter of economic growth. That's why other Chinese stocks are rallying on the news.

Now what

China's President Xi Jinping is clearly trying to get economic growth back on track, especially after recently securing an unprecedented third term as president of the country, breaking with the tradition of Chinese presidents only serving two terms. A better economy would certainly bolster support for Jinping.

Easing COVID restrictions would certainly help all Chinese stocks, but it's always tough to know how long certain policies will last because the Chinese government has been known to reverse course suddenly. This is what makes the sector riskier.

That's why, at these current levels, I prefer larger, more established Chinese stocks. JD.com certainly fits into this category and has also done a good job of staying out of the crosshairs of regulators. TAL and UP Fintech have good potential but will be much riskier.