Chinese stocks are struggling to find direction today as investors try to decipher comments from a government press conference over the weekend regarding the degrees of stimulus the Chinese government might implement. Chinese stocks were on a rip-roaring run over the last month until the rally fizzled last week.
Shares of the search engine giant and artificial intelligence company Baidu(NASDAQ: BIDU) and the e-commerce company PDD Holdings(NASDAQ: PDD) had fallen about 4% and 5.7%, respectively, at 12:30 p.m. ET. Meanwhile, shares of the data center company GDS Holdings(NASDAQ: GDS) were trading 4.5% higher.
Balancing stimulus and the economy
Investors had been gearing up for a Saturday press conference from China's Finance Ministry that would help clarify what stimulus measures the government would put in place and when. Several weeks ago, the Chinese government and the country's central bank issued their initial stimulus efforts, including lowering mortgage down payments and mortgage rates, reducing bank cash reserve requirements, and pledging to inject capital into Chinese financial firms.
However, investors questioned whether that would be enough to awaken consumer demand in China and reverse a housing downturn. Investors got really excited after a surprise Politburo meeting of China's top officials ended with their promising to help achieve economic goals such as 5% gross domestic product growth this year.
Since then, however, other meetings and press briefings have failed to sustain what's been a huge move in the sector. Lan Fo'an, China's minister of finance, indicated that the government may issue more debt and still has a "rather large" amount of room to keep spending and increase the deficit.
Sentiment from the government fueled the early part of the rally, but not all activity has been positive. China's CSI 300 climbed nearly 2% today, while the Hong Kong-based Hang Seng Index fell by 75 basis points. New economic data on exports and imports and Chinese bank loan issuance recently fell short of expectations.
"Market opinions clearly diverged after the Ministry of Finance briefing," said Zhang Qi, an analyst with Haitong Securities, according to the Financial Times.
In other news, analysts at RBC Capital this morning raised their price target on GDS Holdings by $12 to $26 and kept an outperform rating on shares. In their note, analysts pointed to the company's "strong" second-quarter earnings results and the company's expansion efforts in the island of Batam and Singapore.
An economic rebound could take time
Despite concerns about the economy and what kind of stimulus will materialize, Chinese stocks have been on a great run. Even after last week's pullback, the Hang Seng Index is up 21% over the past month.
Many large Chinese stocks offer compelling investment theses, given what they do, their scale, and the market opportunity in front of them. I could certainly see Chinese stocks being a good long-term investment. But it's going to take some time for China's economy to rebound, so I would expect the sector to remain volatile in the near term, especially with the U.S. presidential election right around the corner.
Those who want some exposure to Chinese stocks should consider starting with a small position in an exchange-traded fund.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Baidu. The Motley Fool has a disclosure policy.
