Why Chinese Stocks Reached 20-Month Highs This Week

After getting a shot of adrenaline last week, Chinese stocks continued their march higher, hitting highs this week not seen since the very beginning of 2023. The Hang Seng index including the largest companies on the Hong Kong Stock Exchange is up more than 14.5% over the last five days.

Shares of fast-food chain Yum China Holdings (NYSE: YUMC) had risen nearly 9% as of this writing. Meanwhile, shares of e-commerce companies PDD Holdings (NASDAQ: PDD) and JD.com (NASDAQ: JD) traded nearly 14% and 12% higher, respectively.

Stimulus ignites a rush

Following the U.S. Federal Reserve's 50-basis-point cut and numerous investors and economists suggesting that the Chinese economy would be in trouble barring some form of intervention, the market got its wish. China's central bank lowered interest rates and announced stimulus measures ranging from lowering bank reserve requirements to dropping mortgage rates and down payment requirements to injecting capital into Chinese banks and other financial firms.

However, even after these announcements, the market still appeared to have doubts. But those ended after an unexpected Politburo meeting held by the country's top officials including President Xi Jinping. Chinese officials after the meeting signaled they would take "necessary" actions to help China's economy achieve the government's desired 5% gross domestic product growth goal.

The meeting suggested a sense of urgency and backing from the Chinese government, and investors were sold. Billionaire investor David Tepper went on CNBC last week and told investors to buy "everything" in China from futures to exchange-traded funds. Hedge fund purchases of Chinese equities reached the highest level seen since 2016, according to Goldman Sachs.

"I am bullish on Chinese equities; this time is different," Scott Rubner of Goldman Sachs wrote in a research note, according to CNBC. "I have never seen this much daily demand for Chinese equities..."

The stimulus announcements and interest rate cuts led analysts to raise their price targets and outlook for Yum China Holdings, PDD Holdings, and JD.com. Analysts at Citigroup raised their price target on PDD from $120 to $143 and kept a neutral rating on the stock, saying that stimulus would increase consumer demand for electronics such as smartphones, a tailwind for all e-commerce companies.

Citigroup also lifted its price target on JD.com by $9 to $51 and kept a buy rating on the stock. The analysts cited stimulus and also pointed out that earnings expectations for JD.com have been "muted," paving the way for upward revisions. Finally, Citigroup maintained its buy rating on Yum China Holdings and adjusted its price target modestly higher.

Navigating the Chinese market

There's no doubt that stimulus will benefit all three of these consumer-facing companies if the Chinese government and central bank can get the economy back on solid footing. But it could take some time, because the Chinese economy has been dealing with a housing downturn, high unemployment, and weak consumer demand.

These three companies have strong growth potential, given what they've already built and the massive market opportunity in front of them. But Chinese stocks are quite different than U.S. stocks because there is more regulatory risk in China and the economy is influenced by different factors. These stocks may not always trade on the same fundamentals as in the U.S., so if you aren't prepared to do significant due diligence but still want exposure to China, I would suggest investing in an exchange-traded fund holding a basket of Chinese stocks instead.

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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 Goldman Sachs Group and JD.com. The Motley Fool has a disclosure policy.