What happened
Chinese stocks continued to rally today after the Chinese government recently rolled out a large rescue plan for the country's struggling real estate industry. Another factor was President Joe Biden's meeting with China's President Xi Jinping.
Shares of the large Chinese e-commerce company Alibaba (BABA 0.09%) traded more than 10.5% higher as of 10:51 a.m. ET today. Shares of the online tutoring company TAL Education Group (TAL 0.26%) traded more than 11% higher, and shares of the video content company Bilibili (BILI 0.36%) were up close to 24%.
So what
The week got off to a great start for Chinese stocks after Beijing unveiled a 16-point plan to try to help struggling developers in the country and get the housing market back on track.
Image source: Getty Images.
After the Chinese government realized the property sector was too leveraged,it issued a policy called "three red lines," which set strict limits on which companies could add further leverage. But the damage had already been done, and China Evergrande Group, which is the country's second-largest property developer, would go on to default on debt payments in late 2021.
Furthermore, the restrictions hurt confidence in the housing market, leading to a decline in housing prices and more struggles for developers that couldn't finish projects they had already sold.
The new plan from the government doesn't end "three red lines," but it will allow banks to extend the duration of loans made to developers. Furthermore, it will make homebuying conditions much better by lowering down payments and mortgage rates. Because real estate is such a big contributor to economic growth in China, this could help boost all Chinese stocks.
Chinese investors also cheered the outcome of a highly anticipated meeting between Biden and Jinping at a summit in Indonesia. Both leaders seemed to agree that nuclear weapons should not be used by Russia on Ukraine, and indicated that they would restart discussions on climate change.
"If the result of this meeting is to put the relationship back on a more diplomatic plane, in which instead of beating each other up they can begin a dialogue on the kind of issues that need to be dealt with, I think this meeting could very well be pivotal," former White House Chief of Staff Leon Panetta told CNN.
Bank of America analyst Ajay Kapur said he's now "tactically constructive" on Chinese stocks for the first time in two years. "And with the pivot in reopening now in sight, credit growth could be buoyed as and when activity picks up," he said, referring to China easing some of its restrictive "zero-COVID" policies.
Now what
Things certainly seem to be looking up for Chinese stocks, although this sector can be very delicate, largely because of how influential the Chinese government can be. But Jinping for many months now has made moves that would suggest a more business-friendly approach aimed at economic growth.
I do think Alibaba is a good play after shares took such a hit this year. The company will report earnings later this week, with many hoping for a rebound in sales. Bilibili and TAL definitely have potential as well, but will be more volatile because they are smaller.
