Why Chinese tech stocks keep rising

Shares of Chinese tech leaders Tencent (TCEHY 4.95%), JD.com (JD 3.34%)and Bilibili (BILLS 7.89%) rose again today, up 4%, 3% and 9.3%, respectively, as of 12:04 PM ET.

Chinese stocks have been on a tear since last week’s big stimulus announcements. But Chinese stocks have continued to rise this week as each new day seems to bring news of more stimulus, and Chinese stocks remain much cheaper than other markets around the world.

Still cheap compared to the US

China’s tech stocks have rallied since China’s central bank cut a number of interest rate benchmarks, cut capital requirements for banks and eased down payment requirements for Chinese home buyers earlier last week. Then, later in the week, Chinese Politburo officials indicated that more fiscal stimulus would come directly to struggling households.

More measures were taken over the weekend as China announced on Sunday that it would allow homeowners to refinance their mortgages. While common in the US, Chinese homeowners were previously unable to take advantage of lower rates if they had an existing mortgage. Housing measures are particularly critical, as Chinese consumers hold the bulk of their real estate savings.

To show how desperate Chinese officials are to revive China’s economic growth and capital markets, the government has even allocated $114 billion for companies to buy back their own shares and to encourage local insurance companies to buy and Chinese stocks.

Meanwhile, equity analysts continue to grow more bullish on Chinese stocks. This is likely due to their much lower valuation than US stocks, even after this recent rally. Two days ago, a research firm Morningstar said Chinese stocks are “still undervalued” even despite the recent rally. After all, China’s CSI 300 still remains 30% below its 2021 highs.

Tencent, JD and Bilibili play big in the Chinese consumer economy, with Tencent being the country’s largest video game publisher and social media company, JD.com being one of the country’s largest e-commerce stocks, and Bilibili, a comic book and game maker. – media oriented site.

While each company has recently experienced slowing or even negative growth, the prospects for an economic recovery for Chinese consumers would benefit them tremendously. As you can see, even with the recent rally, Tencent, JD, and Bilibili remain 44%, 63%, and 85% below their all-time highs, respectively.

TCEHY Percentage discount to YCharts all-time high data

What to do?

Some believe that China’s rally still has a long way to go, while other investors believe that the structural problems that drove China’s markets lower in the first place will not go away.

It should be noted that some very smart investors with incredible long-term results are split on this. For example, David Tepper of Appaloosa is very bullish on Chinese stocks, while Stan Druckenmiller of Duquesne Asset Management says he has no interest in Chinese stocks as long as Xi Jinping leads the country.

The difference of opinion could very well be one of time frames. It is quite clear that Chinese stocks are still relatively cheap and that the government has finally started to take drastic measures to stimulate growth. So the short term looks very good.

However, China also has structural concerns, including a heavy-handed government, an aging population and an economy struggling to shift from one focused on manufacturing and exports to domestic consumption. Taking the example of government subsidizing buybacks, while this may provide a short-term boost to stocks, it doesn’t seem like a very healthy measure to rely on. Buying shares should be voluntary, not heavily subsidized by an indebted government.

Therefore, if you want to invest in high-quality Chinese stocks, this could work well this year. But in the long term, things may get tricky, especially if new tensions between the US and China arise after the upcoming elections.