Why PDD Holdings, Li Auto, and JD.com Slipped Today

Chinese stocks pulled back broadly on Wednesday morning, failing to maintain the boost they got from stimulus measures and interest rate cut announcements yesterday, as the group tries to find momentum amid a struggling Chinese economy.

Shares of the e-commerce giants PDD Holdings (NASDAQ: PDD) and JD.com (NASDAQ: JD) had both fallen as much as roughly 3% and 5%, respectively, earlier this morning before paring some of those losses. Meanwhile, shares of Li Auto (NASDAQ: LI) also traded nearly 5% down this morning before recouping some of those losses.

Is stimulus enough?

After the Federal Reserve lowered the target range of its federal funds rate by a half point last week, the Chinese government yesterday rolled out stimulus measures. Those stimulus measures included lower reserve requirements for banks and efforts to stimulate the housing market, including lower mortgage rates and down payments. The People's Bank of China (PBOC) also said it would inject capital into Chinese funds, insurance companies, and banks that those companies could use to buy stocks and repurchase their own stock.

In addition, the Chinese government cut the country's seven-day reverse repo rate by 20 bps to 1.5%. It also announced future interest rate cuts, part of which it carried out today. The PBOC reduced the rate of medium-term loans to banks and lowered the interest rate on a one-year lending facility by 30 bps to 2%.

"The partial rollover did not come as a surprise especially with the planned reserve requirement ratio (RRR) cut," Frances Cheung of OCBC Bank said, according to Reuters, referring to the PBOC's announcement yesterday that it would decrease the amount of cash reserves banks must maintain. "Looking ahead, the window of opportunity is there for another RRR cut before year end, given heavy MLF maturities in Q4."

While the moves were welcome and requested by many investors, many are still uncertain whether it will be enough for the Chinese economy to overcome the many macro issues it faces, including a struggling housing market, weak consumer demand, deflationary pressure, and the potential to miss the Chinese government's 5% GDP growth target this year.

While I don't see a lot of company-specific news out there, analysts at Citigroup recently increased their price target on Li Auto by nearly $4 to $25.50 and maintained their neutral rating on the stock. Citigroup analyst Jeff Chung said in a research note that he sees tailwinds for the company after sectorwide electric vehicle sales came in better than expected in July and August. However, Chung also said he thinks the stock is at its fair value right now.

Watch the economy

PDD, JD, and Li Auto are all intriguing long-term stocks that have developed substantial scale and operate in an economy with great potential. They also don't trade at unreasonable price-to-earnings ratios given that they are all tech and growth stocks.

That said, as I've cautioned investors before, investing in Chinese stocks is not for the faint of heart. The economy is in a much different place from the U.S. economy and the regulatory landscape can be complex.

That can make these stocks quite volatile in both directions. If you don't have significant time to conduct due diligence, I recommend investing in an exchange-traded fund or mutual fund that invests in a basket of Chinese stocks. The Chinese economy will eventually recover but it likely won't happen overnight and still requires patience.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz has a position in Citigroup. The Motley Fool has positions in and recommends JD.com. The Motley Fool has a disclosure policy.