Why Chinese stocks continued to surge higher on Wednesday

To the detriment of many US-based listed companies, the hot action in the equity markets on Wednesday continued to be in Chinese shares. That’s what a massive government stimulus program will do; the one announced by government officials in the giant Asian country in late September provides strong fuel for the rally. Many top Chinese stocks continued to climb higher, successfully overcoming the Hump Day. And as in previous sessions, investors didn’t seem to discriminate by industry.

Manufacturer of electric vehicles (EV). Li Auto (LI 4.54%)which has an additional tailwind of excellent delivery numbers released fairly recently, rose nearly 5% on the day. In a completely different sector, Tencent Music Entertainment Group (TME 7.69%) increased by almost 8%. Even the controversial real estate company KE Holdings (BEKE 5.09%) posted a 5% gain.

Highly stimulated stocks

This is not the first time the Chinese authorities have participated in the stimulus rodeo, so they have a pretty good idea how to spread their support throughout the economy.

To name just one measure, the central bank’s promised interest rate cuts may ultimately benefit many types of businesses. This applies particularly to rate-sensitive financial companies such as banks and real estate providers such as KE Holdings (which could also benefit from relaxed new financial rules covering the real estate market).

Li Auto and its fellow car makers also get a gift — car manufacturing is a capital-intensive business, so relatively cheap financing is sure to benefit players in the sector.

Another factor in the continued rise in Chinese stocks is rising tensions elsewhere in the world, namely the Middle East. We live in a globalized world, of course, but China is not considered to be as politically or economically involved in the region as, say, the US. On this basis, his companies appear to be more insulated from the negative effects of this worsening situation. .

A large but volatile asset class

Investors should keep in mind, however, that there are good reasons for launching a stimulus program.

China’s once-hot growth in gross domestic product (GDP) has cooled and at times has fallen short of economists’ forecasts. While China is still posting numbers that would be the envy of other economies, expectations were quite high, and the subsequent disappointment has contributed to the decline in share prices of many companies. The recent struggles and controversies that have rocked certain industries — mainly real estate and for-profit education — haven’t helped matters.

So while this current rally looks like it could last a bit longer, we should keep in mind that Chinese stocks can be volatile. We also don’t know how the stimulus measures will ultimately affect those companies and the wider economy; it is unwise to assume that all will see permanent improvement. (Potential) buyer, beware.