Chinese stocks continue to see whipsaw volatility.
Shares of Chinese tech and consumer stocks PDD Holdings (PDD 2.90%), GDS Holdings (GDS 0.77%), and Full Truck Alliance (YMM 4.06%) rallied 3.5%, 2.9%, and 6.8% on Tuesday, respectively, as of 12:26 p.m. ET. However, PDD and GDS were much higher in the earlier part of the day.
The day was light on company-specific news, but Chinese consumer and tech names broadly rallied on renewed hopes for more stimulus after Beijing’s latest measures announced over the past few days. While some had come to doubt China’s willingness to follow through on more stimulus measures, the past few days’ news got optimism going again.
A bounce after a pullback
Chinese stocks rallied hard from mid-September to early October on the back of interest rate cuts and hopes for more fiscal stimulus, although that rally faded a bit as details around stimulus remained vague.
But a couple of new data points seem to have arrested the recent pullback in Chinese stocks and gotten them going higher again. Last Friday, China’s third-quarter GDP growth came in at 4.6%, which was the lowest growth since January 2023. However, the figure was a touch above expectations of 4.5%. So, the growth was ahead of expectations, but still low enough to welcome more stimulus, as it was still below the country’s 5% growth target.
More stimulus then came on Monday, when the People’s Bank of China cut both the one-year and five-year loan prime rates by 25 basis points each, in the bank’s first rate cuts since July.
Yesterday, The Financial Times also noted Chinese company buybacks were at a record high in 2024, with $33 billion in repurchases already more than doubling the 2023 buyback figures for Chinese companies. Although already at a high through the year, Chinese company buybacks seem set to increase through the rest of 2024 after authorities announced a 300 billion yuan lending facility for companies to use on share repurchases.
These recent signals clearly demonstrate the Chinese government is looking to boost its economy and stock market, which remains very cheap and still at levels far below its early 2021 highs, even after the September-October rally.
PDD Holdings is the fastest-growing e-commerce platform in China. GDS Holdings is a data center operator, whose growth is predicated on compute usage by businesses and end consumers alike. And Full Truck Alliance is a digital freight platform that connects shippers with third-party trucking companies. Therefore, each of these companies is highly levered to consumer spending and economic growth in China. So it’s no surprise each stock is rising on the recent economic and stimulus news.
Will these measures be enough?
There is a considerable divide among investors about the current China rally. After all, this is the same government that imposed onerous “zero-COVID” lockdowns well into 2022, clamped down on China’s largest tech companies, burst the country’s property bubble it let fester for years, and alienated its key U.S. trading partner.
However, this summer’s measures — announced, as well as anticipated — suggest the government is now worried about flagging growth and is willing to do much more to help than it has over the past couple of years. Combine that with rock-bottom valuations, and Chinese stocks have rallied over the past month.
Color this investor somewhat skeptical. The measures announced thus far mainly include interest rate cuts, lowering bank reserve ratio requirements, and plugging holes in regional government budgets and state-owned banks. In addition, the government appears to be trying to manipulate Chinese stocks by offering low-rate loans to fund stock purchases and to companies to buy back their own stock. That may work in the short term, but it seems like a gimmick that isn’t sustainable.
The announced measures seem to lack direct fiscal stimulus to households, which would boost consumer demand. And without increased consumer demand, the economy won’t grow and consumers and businesses won’t take on loans, even if those loans are now at lower rates.
Last month, the government had hinted that fiscal stimulus to low- and middle-income households would be forthcoming. But despite the recent rate cuts and stock market oriented measures, there hasn’t been much news on the direct fiscal front. Therefore, investors shouldn’t necessarily change their outlook on China stocks because of the recent rate cuts and buyback measures. That goes for whether or not you were a bull or a bear prior to the last few days.
Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
