Just days after Chinese stocks plunged across the board, the tides appear to be changing. Last week, a government crackdown sent the country’s tech sector into a downward spiral. Today, many of the names that started this week in the red are rising fast after some good news from the government. A committee of economic officials has been pushing for Chinese leaders to prioritize policies that will help stabilize financial markets, allaying fears felt by many investors.
What’s going on with Chinese stocks
According to a report this morning, China’s top financial policy committee met and agreed that the country should “actively introduce policies that benefit markets.”
So far, the markets are reacting very well to this news. Business Leader Ali Baba (NYSE:BABA) is up 17% for the morning and continues to rise. Tencent Music Entertainment Group (NYSE:TME) has seen its shares rise nearly 22% so far, while JD.com’s (NYSE:J.D.) gains exceeded 29%. bilibili (NASDAQ:BILI) is up 33% so far, while Pinduo-duo (NASDAQ:PDD) increased by more than 38%. As of this writing, the final winner has been Didi Global (NYSE:HAVE I GOT), which jumped more than 40% in the first two hours of trading.
why is it important
Many investors breathe a sigh of relief today as they see stocks rise steadily. It’s not hard to see why. At the start of the week, they had little reason to be optimistic. Between regulatory repression, major city shutdowns and the threat of companies being delisted from major US stock exchanges, Chinese stocks were facing a magnitude of stress. Businesses needed their government to step in and help them through their darkest hour.
That said, one has to wonder about the stability of these sudden growth spurts. When a company rises 40% in two hours after slipping by the same amount a few days earlier, investors should analyze it with caution. The reality is that if the Chinese government keeps its promises at the meeting, the markets will stabilize soon. If they do, gains will likely taper to lower numbers than today.
The Chinese government can certainly work to end the crackdown and support new investment in its financial sector. However, the other forces pushing the markets down are a bit more complicated. Until the country is able to bring its current Covid-19 outbreak under control, cities will likely remain at least partially in lockdown. Moreover, the sanctions against Russia continue to send shock waves through financial markets around the world. China’s allegiance to Russia has not helped its own markets, but the government is unlikely to be swayed.
What this means for Chinese stocks
Although it has been a good day for Chinese stocks so far, many remain uncertain about their long-term future. The Chinese government is prioritizing the right things to help businesses regain positive momentum. However, investors should be prepared for the impending stabilization. For stocks that have risen so strongly, this will likely mean a turnaround.
Also, investors should not lose sight of the big picture. Many of the forces that drove Chinese stocks lower are beyond the control of their government, at least in part. Covid-19 cases continue to rise and the US should not be expected to renege on its promise to delist Chinese stocks that fail to meet the hearing requirements.
At the date of publication, Samuel O’Brient held (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.