Why Chinese Tech Stocks Continue to Rally

Shares of Chinese tech leaders Tencent (TCEHY 4.91%), JD.com (JD 3.04%)and Bilibili (BILI 7.95%) rallied again today, up 4%, 3%, and 9.3%, respectively, as of 12:04 pm ET.

Chinese stocks have been on a tear ever since last week’s big stimulus announcements. But China stocks continued to rally this week, as each new day seemingly brings news of more stimulus measures, and Chinese stocks remain much cheaper than other markets around the world.

Still cheap compared with the US

Chinese tech stocks have rallied ever since the Chinese central bank lowered a slew of interest rate benchmarks, lowered capital requirements for banks, and lowered down payment requirements for Chinese homebuyers early last week. Then later in the week, Chinese Politburo officials indicated more fiscal stimulus would be coming directly to struggling households.

Over the weekend, even more measures were taken, as China announced Sunday it would allow homeowners to refinance their mortgages. While normal in the US, China’s homeowners had previously been unable to take advantage of lower rates if they had an existing mortgage. Housing measures are especially key, as China’s consumers have the bulk of their savings tied up in real estate.

To get a sense of how desperate Chinese officials are about revitalizing growth and China’s capital markets, the government even set aside $114 billion for companies to repurchase their own stock, and to incentivize local insurance companies to buy Chinese stocks as well.

Meanwhile, equity analysts continue to grow more optimistic on Chinese stocks. This is likely due to their lower much valuation than US stocks, even after this recent rally. Two days ago, company research Morningstar declared Chinese stocks were “still undervalued” even despite the recent rally. After all, China’s CSI 300 index still remains 30% below its 2021 highs.

Tencent, JD, and Bilibili all play heavily into the Chinese consumer economy, with Tencent being the country’s largest video game publisher and social media company, JD.com being one of the country’s largest e-commerce stocks, and Bilibili a comics- and gaming -oriented media site.

While each company has seen slowing growth or even negative growth recently, the prospects of an economic turnaround for Chinese consumers would benefit each handsomely. As you can see, even with the recent rally, Tencent, JD, and Bilibili remain 44%, 63%, and 85% below their all-time highs, respectively.

TCEHY Percent Off All-Time High data by YCharts

What is this?

Some feel the Chinese rally has much more to go, while other investors think that the structural problems that led to the downturn in China’s markets in the first place aren’t going away.

It should be noted that some very smart investors with incredible long-term track records are divided on this. For instance, David Tepper of Appaloosa is very bullish on Chinese stocks, while Stan Druckenmiller of Duquesne Asset Management says he has no interest in Chinese stocks as long as Xi Jinping is still running the country.

The difference of opinion could very well be one of time frames. It’s pretty clear that Chinese stocks are still relatively cheap, and that the government has finally begun to take drastic measures to boost growth. So, the short term looks very good.

However, China also has structural concerns, including a heavy-handed government, aging population, and an economy that is struggling to go from one centered on manufacturing and exports to domestic consumption. Taking the example of the government subsidizing buybacks, while this may give a short-term boost to stocks, it doesn’t seem like a very healthy measure on which to rely. Buying stocks should be voluntary, not heavily subsidized by an indebted government.

Therefore, if you’d like to invest in high-quality Chinese stocks, that could work out well this year. But over the long term, things may get difficult, especially if new tensions between the US and China arise after the upcoming election.