Chinese Stocks on the Rise After Government Promises

Chinese stocks experienced significant price jumps this morning after the Chinese leadership pledged comprehensive support for the country's struggling economy. These developments followed an unexpected meeting of leading Chinese politicians on Thursday. Shares of the fast-food company Yum China surged by up to 20% at times before giving back some of the gains. The stocks of the e-commerce company PDD Holdings and the search engine and AI firm Baidu climbed by approximately 15% and 12%, respectively, before also experiencing pullbacks. Since Tuesday, the Chinese central bank has announced a series of economic measures and interest rate cuts to stimulate economic growth and achieve the government’s target of 5% GDP for this year. These measures include lowering reserve requirements for banks, reducing interest rates and equity requirements for mortgages, and injecting capital into financial companies to promote investments. While these measures initially sparked optimism, the rally faltered yesterday due to concerns about whether the interest rate cuts and economic programs would be sufficient to pull China out of its economic slump. Current worries include a real estate crisis, deflationary fears, high unemployment, and weak consumer demand. At today’s unexpected meeting of the Politburo, chaired by President Xi Jinping, it was reported: "We should increase the intensity of counter-cyclical adjustments in fiscal and monetary policy." Additionally, the Politburo plans to issue government bonds to support government investments. The Politburo, as the highest political decision-making body, typically does not meet in September, which analysts at Morgan Stanley interpret as a sign of increased urgency. After a difficult year for Chinese stocks, there now seems to be a turning point. According to Goldman Sachs, Chinese stocks saw the highest daily net inflows on Tuesday in about 3.5 years, and the second highest in the last decade. Further confidence was instilled in the markets by statements from billionaire David Tepper in an interview with CNBC. Tepper recommended buying "everything" in China, from ETFs to futures. He stated that since the Fed’s interest rate decision last week and the subsequent announcements by the Chinese government, he has become increasingly optimistic. However, the landscape of Chinese stocks is significantly different from that of the U.S. The government has more influence, and the economy does not always move in parallel with other global economies. Today, the sector benefits more from the government’s commitments than from the actual stimulus measures announced. Stocks like Yum, PDD, and Baidu should benefit from a successful economic recovery in China, as consumers will have more money to spend. These companies are also trading at much more attractive valuation multiples compared to their U.S. counterparts. For investors who do not have the time to delve deeply into the specific economic and regulatory challenges in China, buying an ETF that holds a basket of Chinese stocks could be a suitable alternative.