Just a few days after Chinese stocks plunged across the board, the tides appear to be changing. Last week, government crackdowns sent the country’s tech sector into a downward spiral. Today, many names that began this week in the red are rising rapidly after some good news from the government. A committee of economic officials have pushed for China’s leadership to prioritize policies that will help stabilize financial markets, easing the fears felt by many investors.
What’s Happening With Chinese Stocks
According to a report this morning, China’s top financial policy committee has met and agreed that the country must “actively introduce policies that benefit markets.”
As of now, markets are reacting very well to this news. Sector leader Alibaba (NYSE:BABA) is up 17% for the morning and is still rising. Tencent Music Entertainment Group (NYSE:TME) has seen shares rise by almost 22% so far, while JD.com’s (NYSE:JD) gains have passed 29%. Bilibili (NASDAQ:BILI) is up 33% so far, while Pinduoduo (NASDAQ:PDD) has spiked by more than 38%. As of this writing, the ultimate winner has been Didi Global (NYSE:DIDI), which has surged by more than 40% within the first two hours of trading.
Why It Matters
Many investors are breathing a sigh of relief today as they watch shares rise steadily. It’s not hard to see why. When the week began, they had little cause for optimism. Between the regulatory crackdowns, the shutting down of major cities and threat of companies being delisted from major U.S. exchanges, Chinese stocks were facing a magnitude of stress. Companies needed their government to step in and provide assistance during their darkest hour.
That said, the question should be raised as to the stability of these sudden growth spurts. When a company rises 40% in two hours after slipping by the same amount just a few days prior, investors should analyze it with caution. The reality is that if China’s government follows through on its promises from the meeting, markets will soon stabilize. If they do, gains will likely mellow out at lower numbers than they are at today.
The Chinese government can certainly work to end the crackdowns and support further investment in its financial sector. However, the other forces pushing markets down are a bit more complicated. Until the country is able to rein in its current Covid-19 outbreak, cities will likely remain in at least partial lockdown. Additionally, sanctions against Russia continue to send shockwaves through financial markets across the globe. China’s allegiance to Russia hasn’t helped its own markets, but the government isn’t likely to be swayed.
What It Means for Chinese Stocks
While this has been a good day for Chinese stocks so far, much remains uncertain as to their long-term future. China’s government is prioritizing the right things to help companies regain positive momentum. However, investors should be prepared for the impending stabilization. For stocks that have risen so sharply, this will likely mean a turnaround.
Additionally, investors shouldn’t lose sight of the bigger picture. Many forces that have pushed down Chinese stocks are beyond their government’s control, at least partially. Covid-19 cases are still rising, and the U.S. shouldn’t be expected to go back on its promise to delist Chinese stocks that don’t comply with auditory requirements.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.