Why Tencent, Tencent Music Entertainment and iQiyi went up today

Shares of China’s consumer technology stocks Tencent (TCEHY 6.54%), Tencent Music Entertainment (TME 15.96%)and iQiyi (IQ 12.85%) were up 6.5%, 15.7% and 11.7%, respectively, as of 1:15 PM ET on Tuesday.

On Tuesday, the Chinese government and central bank unveiled the country’s biggest stimulus measures since the pandemic. Chinese shares traded cheaply as the country has been dealing with economic weakness for some time, and these consumer-focused stocks were among those that rose in response to Beijing’s latest plan to address that weakness.

China is lowering interest rates and reducing barriers to home buying

The People’s Bank of China announced a series of stimulus measures. These include lowering a variety of interest rates, such as the medium-term lending rate, prime rates, deposit rates and the reverse repo rate, which is what banks get for parking funds at the central bank. In addition, China has reduced the amount of reserves its banks must keep on their balance sheets, freeing up more funds for lending.

China’s housing market is particularly troubled, so the government has slashed mortgage rates and cut the standard down payment on homes to 15 percent from 25 percent previously. China’s housing crisis is one of the main reasons for the broader economic slowdown, as 70% of China’s household savings are invested in real estate. So the housing crisis has caused Chinese consumers to pull back on spending, with deflationary forces and job losses.

There is an ongoing debate as to whether these measures will be sufficient. While they may entice some consumers to buy homes and banks to lend more, if consumers are still hesitant and don’t take on more debt to buy things, these measures won’t have as much of an effect. Detractors are calling for additional fiscal stimulus that would either directly fund jobs or put money directly into the hands of consumers.

However, the measures were actually more than analysts expected, given China’s muted response to its multi-year economic crisis. They thus boosted hopes that more economic stimulus could be coming as the government made it clear that it understood the need for more stimulus.

Meanwhile, Chinese stocks had become so cheap compared to their American counterparts that the news unsurprisingly caused a rally. Tencent, China’s most dominant and high-quality tech giant, trades at just 14 times forward earnings estimates. Tencent Music, a subsidiary of Tencent, in which Tencent holds a 52.5% stake, trades at 13 times forward earnings, despite having a huge amount of cash on its balance sheet and no debt. And video streaming giant iQiyi, which is 46% owned by the search giant Baiduit trades at just 6.7 times forward earnings estimates as its revenue is falling.

Chinese stocks have high growth potential, but high risks

With their stock valuations so low and the government in Beijing taking more steps to stabilize the economy, Chinese tech and consumer companies like these three have huge upside potential, even after Tuesday’s moves.

However, investors should be aware of very real risks. These include a Chinese government engaged in skirmishes over a potential war with Taiwan, which has cracked down on the country’s top tech companies and which has implemented a restrictive and expansive “zero-COVID” policy instead to buy the USA. made vaccines — a policy that stalled its economy for a long time long after other advanced countries had largely emerged from pandemic restrictions.

With all of this in mind, there are certainly reasons for many investors to view these companies as uninvestable at this time. However, if China reverts to more pro-capitalist policies, implements more stimulus and backs off its Taiwan rhetoric while courting foreign companies, cheap Chinese stocks could easily outperform.

However, these are all pretty big “ifs” today, even after Tuesday’s positive news.