Shares in most Chinese stocks traded on U.S. exchanges rose on Wednesday after a sharp sell-off on Monday after the end of the Chinese Communist Party (CCP) National Congress over the weekend.
Towards the end of this event, President Xi Jinping secured his third term as party leader, breaking with a long-standing tradition of Chinese leaders serving only two terms and consolidating his power and position as head of state for at least the next five years.
Shares in an electric vehicle manufacturer no (NOK 1.69%) rose about 2% on Wednesday, while shares in Vaping Company RLX technology (RLX 42.98%) up more than 45% and fintech stocks Airfax (LU 13.33%) tore more than 14% higher.
Hong Kong’s benchmark index, the Hang Seng Index, fell 6.4% on Monday – the index’s worst one-day performance since the Great Recession.
In Xi’s third term, it now seems clear that he will have even more influence over the country’s economy than he already had, threatening the concept of free enterprise in China. More frequent interventions by its government will make its market more volatile, and investors can demand higher returns given the higher risk of investing there.
On the other hand, Beijing reported this week that China’s economy grew a better-than-expected 3.9% in the third quarter after a difficult year. Gross domestic product growth for the year is now expected to be well below what was forecast for 2022.
In response to Monday’s sell-off, Chinese financial regulators made comments aimed at boosting investor sentiment. The People’s Bank of China on Tuesday said it will continue to welcome the healthy development of financial markets, while the China Securities Regulatory Commission issued a statement saying it will upgrade its development from “regulated, transparent, open, robust and resilient.” accelerate capital markets.
In addition, investors seem to be thinking that the US Federal Reserve may soon ease its aggressive rate hikes, which played a big part in the US market’s sell-off this year. This bear market has been particularly tough for technology stocks, a category that many of the largest US-listed Chinese stocks fall into. Also, Chinese stocks have sold off significantly this year, so investors may see this as a good moment to buy the decline.
Chinese stocks present an interesting opportunity as these companies operate in a huge market that is also the fastest growing consumer market in the world. Many of these are innovative companies and major disruptors.
For example, Mizuho Analyst Vijay Rakesh said in a recent research note that electric vehicle sales could account for 25% to 30% of all auto sales in China in the third quarter — a far higher percentage than in the U.S. As one of the well-known Chinese electric vehicle manufacturers, Nio would certainly benefit from it.
But threats of more intrusive regulation and restrictive orders from Xi’s government are likely to keep Chinese stocks volatile and marginalize some investors. I see great potential in the stocks of Chinese companies that are more established and better positioned to avoid costly regulatory issues, but it’s going to be a bumpy road.
Bram Berkowitz does not hold any of the shares mentioned. The Motley Fool has a position in and recommends Nio Inc. The Motley Fool has a disclosure policy.