Electric vehicle (EV) companies Nio (NYSE:NIO), XPeng (NYSE:XPEV) and Li Auto (NASDAQ:LI) led a rally in Chinese EV stocks over the weekend. Since Nov. 28, NIO stock is up from $10 to nearly $13, XPEV has risen from $7 to more than $11 per share and LI stock is up from $17 to $22.
XPEV stock, which had been the weakest of the group, is up the most but still down 77% on the year. NIO stock is down 62%, while Li shares have fallen 25%.
The rally is happening because investors now believe China’s Covid-19 lockdowns are easing, perhaps permanently. Morgan Stanley has upgraded Chinese stocks to overweight.
The rally in Chinese EV stocks is reflected in the currency. The Yuan has recovered three months of losses in just a week, going from 7.14 to the dollar to 6.96. This increases the value of Chinese sales and earnings.
While the relief rally is good news for China bulls, those who have been long for months are still hurting. Alibaba (NYSE:BABA), now trading just above $90, was worth more than $300 at its height. JD.Com (NASDAQ:JD), now at $59, was once at $106, and Pinduoduo (NASDAQ:PDD), now at $88, once traded at $195.
There could still be trouble for the Chinese EV makers, as investors like Canada’s pension fund pull back on the sector. Tesla (NASDAQ:TSLA), which is bigger than its three Chinese competitors together, is up just 10% from its Nov. 21 low. Other U.S. stocks also opened lower on Dec. 5, meaning the rally is confined to China.
What Happens Next for Chinese EV Stocks?
Chinese EV makers must now justify their valuations with growth. While Nio had record deliveries in November, bears warn the current rally may be an overreaction. A market cap of $22 billion on its most-recent sales will not be sustainable unless the Yuan continues to rally and sales increase dramatically.
On the date of publication, Dana Blankenhorn held a long position in BABA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.