Why PDD Holdings, Li Auto and JD.com fell today

Chinese shares retreated broadly on Wednesday morning, failing to sustain the boost they got from yesterday’s stimulus measures and interest rate cut announcements, as the group tries to find momentum amid a sluggish Chinese economy in difficulty.

Shares of e-commerce giants PDD Holdings (PDD -1.26%) and JD.com (JD -2.26%) both were down about 3% and 5%, respectively, earlier this morning before paring some of those losses. Meanwhile, actions of Li Auto (LI -3.23%) it also traded nearly 5% lower this morning before recovering some of those losses.

Is the incentive enough?

After the Federal Reserve lowered its target range for the federal funds rate by half a point last week, the Chinese government launched stimulus measures yesterday. These stimulus measures included lower reserve requirements for banks and efforts to stimulate the housing market, including lower mortgage rates and down payments. The People’s Bank of China (PBOC) also said it would inject capital into Chinese funds, insurance companies and banks that those companies could use to buy shares and buy back their own shares.

In addition, the Chinese government cut the country’s seven-day reverse repo rate by 20 bps to 1.5%. It also announced future interest rate cuts, some of which it carried out today. The PBOC cut the medium-term lending rate to banks and cut the interest rate on a one-year lending facility by 30bps to 2%.

“The underreporting was not a surprise, especially with the planned reduction in the required reserve ratio (RRR),” Frances Cheung of OCBC Bank said, according to Reuters, referring to the PBOC’s announcement yesterday that it would reduce the amount of reserves cash of the banks. must maintain. “Looking ahead, the window of opportunity is there for a further RRR cut before the end of the year given the high maturities of FLM in Q4.”

While the moves have been welcomed and called for by many investors, many are still unsure whether it will be enough for the Chinese economy to overcome the many macro issues it faces, including a struggling housing market, weak consumer demand, deflationary pressure and the potential for miss the Chinese government’s 5% GDP growth target this year.

While I don’t see much company-specific news out there, analysts at City Group recently raised their price target on Li Auto by nearly $4 to $25.50 and maintained their neutral rating on the stock. Citigroup analyst Jeff Chung said in a research note that he sees tailwinds for the company after sector-wide EV sales came in better than expected in July and August. However, Chung also said he believes the stock is at fair value right now.

Watch the economy

PDD, JD and Li Auto are all interesting long-term stocks that have developed substantial scale and operate in a high-potential economy. They also don’t trade at unreasonable price-to-earnings ratios, given that they’re all technology and growth stocks.

That said, as we’ve warned investors before, investing in Chinese stocks is not for the faint of heart. The economy is in a much different place than the US economy and the regulatory landscape can be complex.

This can make these stocks quite volatile in both directions. If you don’t have significant time to do due diligence, I recommend investing in an exchange-traded fund or a mutual fund that invests in a basket of Chinese stocks. The Chinese economy will eventually recover, but it probably won’t happen overnight, and it still requires patience.