Why Chinese stocks hit 20-month highs this week

After getting an adrenaline rush last week, Chinese stocks continued their upward march, hitting highs this week not seen since early 2023. Hang Seng the index that includes the largest companies on the Hong Kong Stock Exchange has risen more than 14.5% in the past five days.

Fast food chain shares Yum China Holdings (YUMC -3.47%) it is up nearly 9% at the time of writing. Meanwhile, the shares of e-commerce companies PDD Holdings (PDD -0.06%) and JD.com (JD -0.45%) traded nearly 14% and 12% higher, respectively.

The stimulus ignites a rush

Following the US Federal Reserve’s 50 basis point rate cut and many investors and economists suggesting the Chinese economy would be in trouble unless it can intervene, the market got its wish. China’s central bank has cut interest rates and announced stimulus measures, from reducing bank reserve requirements to lowering mortgage rates and down payment requirements to injecting capital into Chinese banks and other financial firms.

However, even after these announcements, the market still seemed to have doubts. But they ended after an unexpected Politburo meeting backed by the country’s top officials, including President Xi Jinping. Chinese officials, after the meeting, signaled they would take “necessary” steps to help China’s economy reach the government’s desired 5 percent gross domestic product growth target.

The meeting suggested a sense of urgency and support from the Chinese government, and investors were sold. Billionaire investor David Tepper went on CNBC last week and told investors to buy “everything” in China, from futures to exchange-traded funds. Hedge fund purchases of Chinese stocks hit the highest level since 2016, according to the report Goldman Sachs.

“I am bullish on Chinese stocks; this time it’s different,” Goldman Sachs’ Scott Rubner wrote in a research note, according to CNBC. “I’ve never seen so much daily demand for Chinese stocks…”

The stimulus announcements and interest rate cuts prompted analysts to raise their price targets and outlooks for Yum China Holdings, PDD Holdings and JD.com. Analysts at City Group raised their price target on PDD from $120 to $143 and kept a neutral rating on the stock, saying the stimulus would boost consumer demand for electronics such as smartphones, a tailwind for all e-commerce companies.

Citigroup also raised its price target on JD.com by $9 to $51 and maintained a buy rating on the stock. Analysts cited incentives and also pointed out that earnings expectations for JD.com had been “off”, paving the way for upward revisions. Finally, Citigroup maintained its buy rating on Yum China Holdings and adjusted its price target modestly higher.

Navigating the Chinese market

There’s little doubt that the stimulus will benefit all three of these consumer-facing companies if the Chinese government and central bank get the economy back on solid footing. But it could take some time as the Chinese economy has dealt with a housing slump, high unemployment and weak consumer demand.

These three companies have strong growth potential given what they’ve already built and the massive market opportunity in front of them. But Chinese stocks are quite different from US stocks because there is more regulatory risk in China and the economy is influenced by different factors. These stocks may not always trade on the same fundamentals as in the US, so if you’re not prepared to do significant due diligence but still want exposure to China, I’d suggest investing in a fund traded on stock exchange that holds a basket of Chinese stocks. instead.