What happened

Shares of Chinese technology firms Baozun (BZUN -1.26%), Kanzhun Limited (BZ 0.28%), and GDS Holdings (GDS 1.79%) were rallying today, up 2.1%, 7.8%, and 17.6%, respectively, as of 12:20 p.m. ET.

Baozun and Kanzhun each reported earnings yesterday, but the across-the-board rally in these Chinese names likely has to do with optimism that China will amend or end its zero-COVID policy amid widespread protests across the country and bad incoming economic data. Interestingly, it appeared the companies that reported results in recent days rallied the least. 

So what

The across-the-board rallies likely had to do with increasing investor confidence that China will throw in the towel and relax its highly restrictive zero-COVID policies sometime soon. Yesterday, Chinese authorities reported an increase in vaccination rates for the elderly and an increased vaccination push among that vulnerable population. Since that group has the highest risk of bad outcomes from COVID, it seemed to be a precursor to reopening. At the same time, a Chinese government official said that long-term and arbitrary lockdowns would be "wrongful," although more targeted policies would likely remain.

These steps all seem to signal that China is trying to amend or end its zero-COVID policies as soon as possible, despite just entering the winter months with large spikes in cases in the country. Authorities have seen widespread protests against restrictive lockdowns across the country, and the Chinese economy has suffered as a result.

On Wednesday, China's National Bureau of Statistics released economic data, with the manufacturing purchasing managers' index (PMI) dropping to 48, down from 49.2 in October, below the 50 mark that signals an economic contraction. Meanwhile, services PMI showed an even bigger contraction, to 46.7.

The data signals a "bad news is good news" scenario, in which weak economic data may spur Chinese officials toward a quicker reopening and further monetary easing.

Baozun, Kanzhun, and GDS are all economically sensitive stocks, so it makes sense that they rose along with most Chinese tech and consumer stocks today. Baozun is kind of like the Shopify of China, as its tech platforms allows brands to build their online stores and manage inventory and fulfillment. Kanzhun is an online employment and recruitment platform, which would obviously benefit from increased hiring that would come from a reopening and an economic recovery. And GDS Holdings operates data centers for a wide swath of the Chinese economy, from internet companies and cloud giants to telecommunications and financial services firms.

Interestingly, both Baozun and Kanzhun are up relatively less than GDS, which may be due to their earnings reports yesterday. Baozun beat on revenue expectations but missed on profit expectations, even though profit improved overall as revenue fell. For the third quarter, revenue declined 8.3%, but thanks to cost cuts, Baozun's operating loss margin narrowed from -8.2% in the year-ago quarter to -1.5%.

Meanwhile, Kanzhun beat revenue and profit expectations, even though it also showed a revenue decline of 2.7%. Encouragingly, Kanzhun was able to maintain positive profitability, as its adjusted (non-GAAP) earnings per ADS was $0.12, or $52.9 million, just a 2.2% decrease over the prior year. While monetization is down, Kanzhun did see its monthly active user base grow by 12.5%.

Now what

Chinese stocks have been highly volatile recently, both to the upside and the downside, as civil unrest and bad economic numbers are colliding with hopes for a change in government policy and beaten-down valuations. Many Chinese stocks are down 70% to 95% and are certainly looking quite cheap at the moment -- that is, as long as the Chinese economy eventually recovers and geopolitical relations with the U.S. don't get any worse.

Neither of those two things are sure bets right now; however, if they do come to pass, there could be a lot of upsides in these stocks. However, those betting on Chinese stocks need to be aware of the high risks that come from investing in the country, especially with the Communist Party able to make unpopular decisions for capitalistic enterprises.