What happened

Shares of small- and mid-cap Chinese stocks including Tuya (TUYA -0.57%), EHang (EH 3.42%), and Lufax (LU -2.11%) were moving higher today after China again took another step away from its zero-COVID policy, boosting investor confidence that the economy would fully reopen in the coming months.

Over the weekend, Beijing and Shenzhen announced that they would lift requirements that commuters show negative COVID tests before travel. That news comes even as COVID cases are rising in China, a sign authorities are moving away from the zero-COVID policy, which aimed to eliminate all COVID-19 cases in China.

The news seemed to give a boost to smaller Chinese stocks especially, which have been hit hard by COVID restrictions that have significantly impacted the Chinese economy. Chinese stocks soared through November on signs of reopening and look poised to continue to rally, though gains in large-cap Chinese stocks faded today.

As of 10:46 a.m. ET, Tuya was up 17%, EHang had gained 24.3%, and Lufax was 4.3% higher after trading up as much as 19.9% earlier in the session.

So what

Tuya, which operates an Internet-of-Things cloud platform for smart devices, has been particularly sensitive to price movements. The company received a letter from the New York Stock Exchange (NYSE) on Nov. 3 threatening delisting because the stock had an average closing price below $1 over a 30-day period.

The good news for Tuya investors is that the stock may already be back in compliance with NYSE standards after rebounding in November and closing the month at $1 a share. If the recent gains hold, the company will be safely in compliance by the end of December.

Tuya's recent result show why investors are eager for a reopening in China. Revenue fell 47.4% in the third quarter to $45 million, and the company continues to be significantly unprofitable with a net loss under generally accepted accounting principles (GAAP) in the quarter of $32.6 million. Tuya announced a $50 million share repurchase program at the same time, a sign that it believes its stock is undervalued, but an odd move for a company that still has wide losses.

The rally in EHang stock comes after the autonomous drone maker reported third-quarter earnings last week. 

Like Tuya, EHang has also been struggling with the lockdowns. Revenue fell 44% to $1.2 million, and as a development-stage company, EHang still has minimal revenue. The company is in its final phase of getting EH216-S Type certification, which would come after its EH216 autonomous aerial vehicle has taken more than 30,000 trial flights in a wide range of conditions. The EHang 216 is large enough to hold passengers and will be used for applications like transportation, sightseeing, and medical evacuations.

Finally, Lufax, a fintech in China that offers consumer loans and wealth management products, has fared better than Tuya or EHang, but the business is still feeling pressure from zero-COVID. Revenue in its most recent quarter fell 17.2% to $1.86 million, and its net income fell by 67% to $190 million. New loans were down 28% in the quarter, a sign of a weakening economy, and its delinquency rate was up modestly from the quarter a year ago. Financials are among the most cyclical industries so Lufax is likely to respond well to the economic reopening. 

Now what

All three of these stocks are down sharply over the last year, but have all rebounded since their recent lows.

TUYA Chart

TUYA data by YCharts

Like most of their Chinese stock peers, Tuya, EHang, and Lufax are likely to be sensitive to news about zero-COVID or the economy reopening, but eventually these companies will have to show improving fundamentals if the stocks are going to return to their previous heights. Either way, expect the volatility to continue.