Why Chinese Internet Stocks Were Soaring Today

What happened

Chinese stocks were skyrocketing across the board Wednesday on news that Beijing may be reversing course on its regulatory crackdown after China’s economy grew by just 4% in the fourth quarter and stock prices there have plunged. The crackdown was part of China’s “common prosperity” campaign, which is intended to boost both social equality and central government control, sometimes at the expense of the nation’s most successful companies.

However, with more than $1 trillion in value having been sapped from Chinese stocks and Hong Kong’s Hang Seng Index at a six-year low, and with geopolitical tensions simmering due to Russia’s invasion of Ukraine, Beijing now seems ready to pivot. Vice Premier Liu He said the government would support the economy and keep markets stable — welcome reassurance to investors who have seen their portfolios shrink as regulators have levied a series of fines and restrictions on some of China’s best-known tech companies. Liu said the government should “actively introduce policies that will benefit markets.”

In other words, investors seem to believe that Beijing has decided to switch roles, transforming from an impediment to stock market growth into a supporter of it. That view sent Chinese stocks soaring, especially in the beaten-down internet sector.

At the same time, a Chinese securities regulator said Wednesday that it was in communication with its U.S. counterparts with the goal of reaching an agreement on auditing supervision rules that could defuse the threat of a wave of stock delistings.

Among the winners Wednesday were 51Job ( JOBS 10.04% ), which was up 11.8% as of 12:44 p.m. ET; iQIYI ( IQ 55.69% ), which had gained 42.9%; Baozun ( BZUN 24.62% ), which rose 19.1%; Hello Group ( MOMO 50.62% ), which jumped 45.8%, and Bilibili ( BILI 45.17% ), which climbed 39.6%. At the same, the Kraneshares CSI China Internet ETF ( KWEB 38.01% ), which counts tech giants like Alibaba and Tencent and JD.com as its biggest holdings, soared by 29.5%, reflecting the boom across the sector. 

A scene on a Beijing street.

Image source: Getty Images.

So what

There was no news out on any of these companies specifically on Wednesday, but China’s regulatory crackdown has been taking a steep toll on their stock prices. Even though they haven’t faced direct effects from the intensified regulatory environment that has prevailed in China recently in the ways that larger companies like Alibaba have, those tighter regulations have impacted that nation’s economic growth and the performance of these businesses.

For example, in its fourth-quarter earnings report last week, e-commerce services provider Baozun reported a decline in revenue despite an increase in gross merchandise volume, which the company blamed in part on larger economic issues in China such as “weaker consumption sentiment” and a “weaker macro environment.”

Hello Group, which operates internet dating sites Momo and Tantan, said revenue was essentially flat year over year in its most recently reported quarter, though the pandemic may be the biggest challenge facing that company. Bilibili, an online video entertainment platform, has seen its growth rate slow, but it’s still expanding briskly with revenue up 51% to $907.1 million, making the stock a good candidate for recovery as it’s still down 80% from its all-time high.

51job, which operates a job recruiting site, said its revenue growth clocked in at 19% in its most recent quarter, though it noted headwinds from the pandemic and related restrictions. Chinese video streaming service iQIYI also reported flat revenue in its latest quarter, and cited a challenging macroeconomic environment for its 10% decline in advertising sales, though the company’s problems predate the regulatory crackdown in China.

Now what

Wednesday’s announcement from the Chinese government is a significant step, and should help alleviate what has been the biggest burden on China’s tech sector over the past year. However, these stocks are still facing other challenges. Those include the delisting threat in the U.S., which gained new urgency after the SEC cited five specific Chinese stocks at risk of removal from U.S. exchanges by the end of the month; the pandemic, a fresh outbreak of which recently led the Chinese government to impose lockdowns in Jilin province and the city of Shenzhen — a massive tech manufacturing hub — for at least a week; and the broader slowdown of the Chinese economy, which may take more than government action to reignite.

Still, many of these stocks are undervalued compared to their historical levels, and with the Chinese government seemingly prepared to be friendly to its domestic companies, strong performers like Bilibili could soar again.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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