Why Chinese stocks like XPeng and Dada Nexus caught fire today

There’s nothing like a large-scale stimulus plan to boost distressed financial asset prices. That was the dynamic behind a broad-based rally in Chinese stocks on Tuesday after the announcement of a package of measures to boost the massive economy.

Clearly, investors weren’t all that choosy about the shares they piled up to take advantage of this stimulus plan. Electric vehicle (EV) manufacturers. Xpeng (XPEV 11.93%) and Nope (NO 11.65%) both saw their American depositary receipts (ADRs) close the day nearly 12% higher, while delivery company Dada Nexushis (DAD 13.49%) American depositary shares (ADS) rose nearly 14%. Surpassing all three, he was a developer of job recruitment platforms Kanzhun (BZ 19.32%)with an increase of over 19%.

Measures from top to bottom

Although some top-down government initiatives have been launched in the US and other Western markets, they are relatively uncommon (and tend to be implemented only in crises). The Chinese government is heavier and more interventionist and is often willing to impose programs on the country to stimulate the economy.

In the latest such move, the People’s Bank of China (PBOC) — the central bank that is effectively an arm of the government, unlike the theoretically independent monetary policy makers in other countries — launched a set of stimulus on Tuesday. . Among the most important measures is the PBOC’s promise to cut key interest rates and reduce required reserve ratios (RRR) — the amount of cash that domestic banks must hold in reserve for their customers.

According to reports from Reuters, the latter measure alone should free up about 1 trillion yuan ($142 billion) for banks, which the government surely hopes will be used for new loans.

The country’s troubled housing market will hopefully improve with some initiatives designed specifically for that corner of the economy. A 50 basis point cut in average current mortgage interest rates will bring some relief to homeowners, while home seekers should see a 15% cut in the minimum home down payment required.

2 sectors that should shine

It’s too early to tell, of course, how these measures will filter into the underlying performance of individual companies. It’s a good bet that China’s critical EV sector will be quite the beneficiary, as vehicle production is capital-intensive even at the best of times, and even a slight drop in financing costs can have a huge impact. Also, look for companies either directly involved in finance or those that rely on it more than others to show significant improvement once the measures take effect.