What happened
After a particularly difficult session for Chinese stocks trading on U.S. exchanges Monday, several of them rebounded Tuesday following Beijing's release of new economic data.
As of 12:21 p.m. ET, shares of e-commerce giant JD.Com(NASDAQ: JD) were trading roughly 2.4% higher, shares of vaping leader RLX Technology(NYSE: RLX) were up by nearly 13%, and shares of private education company New Oriental Education & Technology Group (NYSE: EDU) were up by nearly 9.7%.
So what
Monday was one of the roughest days of trading for Chinese stocks since the Great Recession. Hong Kong's Hang Seng Index fell by about 6.4%.
Image source: Getty Images.
China's President Xi Jinping granted himself a third five-year term as head of that nation's ruling Communist party, breaking with a tradition that had limited party chiefs to a maximum of two terms. Xi has strongly consolidated power during his tenure, and at his behest, Chinese lawmakers in 2018 removed a constitutional restriction enacted in 1982 that limited presidents to two terms. That move set the stage for him to extend his rule at China's Communist Party Congress this month, and he's essentially certain to be reappointed to a third term as president in March 2023.
Xi's policies have not always been so well received by the investing community. His zero-COVID strategy for China has crimped that country's economic activity this year, and Xi has at times promoted restrictive regulation of China's major tech companies.
On Tuesday, however, some Chinese stocks bounced back after Beijing reported that China's gross domestic product (GDP) grew by 3.9% in the third quarter, which beat expectations. The manufacturing sector aided the cause, as industrial output increased by 6.3% year over year in September. That result, too, was well above expectations.
But many investors are still worried about China's overall economic growth. Chinese leaders had forecast 5.5% GDP growth this year, but many analysts expect the country to come up well short of that.
"There is no prospect of China lifting its zero-COVID policy in the near future, and we don't expect any meaningful relaxation before 2024," said Julian Evans-Pritchard of Capital Economics, according to Reuters. "Recurring virus disruptions will therefore continue to weigh on in-person activity and further large-scale lockdowns can't be ruled out."
While Xi has used regulators to crack down on the big players in China's tech and real estate sectors, he has indicated this year that he intends to ease up on the pressure. He has been more supportive of the tech sector through his comments and fiscal stimulus. In addition, Chinese officials have been working with U.S. financial regulators to resolve a long-standing auditing dispute that threatened to result in the delisting of hundreds of Chinese companies from U.S. stock exchanges.
Now what
Chinese stocks are down significantly this year, and some present good opportunities for investors given that China is such a massive market, and also the fastest-growing consumer market in the world.
But those companies undoubtedly face a number of geopolitical headwinds -- among them, the rising tensions between the U.S. and China and the fact that foreign investors may be less prone to invest in the sector given their concerns about Xi.
I think there's potential for Chinese stocks, but given the likelihood of more volatility ahead, I'd prefer to stick with more established names such as JD.Com, which has thus far done a better job than its peers at not arousing the ire of regulators.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JD.com. The Motley Fool recommends New Oriental Education & Technology Group. The Motley Fool has a disclosure policy.
