Why the Chinese stock market rally stalled today

The explosive rally in Chinese stocks over the past month finally lost steam today after a press conference by Chinese officials failed to sustain investor exuberance over previously announced stimulus measures.

Electric car manufacturer actions Li Auto (LI -7.58%) traded nearly 7.5% lower since midday, while shares of the search giant and artificial intelligence company Baidu (BIDU -6.94%) decreased by 6.3%. Fast food company shares Yum China Holdings (YUMC -5.39%) they decreased by 5.6%.

Will Chinese officials keep their promise?

The Hang Seng index, which tracks large stocks in Hong Kong and mainland China, fell 9.4 percent today after the National Development and Reform Commission (NDRC) held a press conference that gave minimal details on future stimulus.

NDRC Chairman Zheng Shanjie told media that officials are “fully confident” in the ability to meet the Chinese government’s 2024 economic agenda, including a 5 percent increase in gross domestic product. He also said the NDRC will allocate 200 billion yuan from the 2025 budget to invest in local projects. But this was below investors’ expectations and investors disappeared from the sector following the press conference.

What I found interesting in recent weeks is that the move seems to have been more dependent on the sentiment of China’s government and central bank than the actual stimulus measures announced so far. The first spark of the rally came after China’s central bank announced it would cut select interest rates, lower bank reserve requirements, cut advances and mortgage rates and inject capital into the country’s financial companies and banks that could be used to buy back shares. and buy other stocks.

Chinese shares rose, but many investors doubted the measures would be enough to lift an economy that has been battered by deflationary pressures, a housing slump and high unemployment. What really sparked the rally was a surprise Politburo meeting convened by the country’s top officials and chaired by Chinese President Xi Jinping, which ended with the committee’s statement saying: “We should increase the intensity of the countercyclical adjustment of fiscal and monetary policies”.

In company-specific news, Baidu announced a change to its leadership suite. The company said CFO Rong Luo will leave the role to lead the company’s mobile unit, which includes the Baidu app, video platform Haokan and social media platform Baidu Post. Meanwhile, Junjie He, head of the mobile unit, will become acting CFO.

Volatility is part of investing in Chinese stocks

Volatility is part of investing in Chinese stocks. The group often does not trade based on fundamentals and can be heavily influenced by the Chinese government’s sentiment as well as its actions.

Also, with the Hang Seng up 34% in the last month before today, I think we were probably in a situation where the margin for error was pretty thin. The Chinese economy has not fared well, and economists have warned that more needs to be done to revive consumer demand.

I still think you can invest in Chinese stocks as a long-term investor. Many of these companies have built powerful products and services using cutting-edge technology. The opportunity in the world’s second largest economy remains massive. However, investors must be prepared for volatility and understand the role that government and regulation play in the market. I maintain that the most appropriate way for retail investors to gain exposure to this sector is through an exchange-traded fund.