China stocks rallied this week. That came after China's central bank initiated new stimulus packages and followed the U.S. Federal Reserve 50 basis point cut in interest rates last week. China's central bank didn't just act on interest rates.
It moved to bolster business and consumer activity by cutting interest rates on existing mortgages and the reserve requirement ratio for banks by 50 basis points. The latter will free up meaningful amounts of money for lending. Government leaders followed up on the bank moves, showing support for the economy and the stock market. That all led to the soaring of shares of China-based electric vehicle (EV) makers listed on U.S. exchanges.
That included XPeng(NYSE: XPEV) and Li Auto(NASDAQ: LI), which were higher for the week by 27.4% and 17%, respectively, as of Friday morning, according to data provided by S&P Global Market Intelligence. Investors also pushed shares of U.S.-based steelmaker Cleveland-Cliffs(NYSE: CLF) higher by 10.4%. While that might not seem related, it is and in an important way that U.S. investors should be aware of.
China still matters
When the world's second-largest economy unveiled a bigger-than-expected stimulus package, it mattered to global investors. Particularly after Chinese leaders followed the bank's actions with comments that it would work to boost fiscal and monetary policies to help Chinese citizens and achieve its 5% annual growth target.
That has ramifications beyond China. If China does reignite strong growth, it's great for EV makers like XPeng and Li Auto. Both are expanding vehicle lineups and growing sales. Year to date through August, XPeng delivered over 77,000 EVs, representing a 17% jump over the prior-year period. Last month, it initiated deliveries of its Tesla Model 3 rival, the Mona M03 sedan. That's one reason Citigroup analysts just boosted the firm's price target for XPeng stock and why it thinks vehicle sales can nearly double over the next two years.
Li Auto is also seeing a surge in growth and can benefit from a rebound in China's economy. Li delivered more than 20,000 vehicles in August, the third consecutive month exceeding that level. The company noted strong interest among young families for its L6 premium SUV. More stimulus will likely stoke even more buyers.
Impacts are global
Making those cars takes steel. But investors might wonder why an American steelmaker like Cleveland-Cliffs would be impacted by demand in China. It's because China is the world's largest producer of steel. And since many manufacturers are state-sponsored or controlled, those mills often produce even when there isn't demand locally. That steel is then exported, often at prices that undercut foreign supply.
Cleveland-Cliffs and other U.S. steelmakers have dealt with declining pricing this year partially for that reason. Improving domestic demand in China will lower its exports, and that will support global pricing.
Investors who are thinking one step ahead bought into names like Cliffs this week, anticipating better financial results in coming quarters. The top two global economies both look to be heading in the direction of growth, which boosted these stocks this week.
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Howard Smith has positions in Tesla and XPeng. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
