Why the Chinese Stock Rally Stalled Today

The explosive Chinese stock rally over the last month finally lost steam today after a press conference by Chinese officials failed to sustain investor exuberance over previously announced stimulus measures.

Shares of the electric carmaker Li Auto (NASDAQ: LI) traded nearly 7.5% lower as of midday, while shares of the search giant and artificial intelligence company Baidu (NASDAQ: BIDU) fell 6.3%. Shares of the fast-food company Yum China Holdings (NYSE: YUMC) were down 5.6%.

Will Chinese officials make good on their promise?

The Hang Seng Index, which tracks large stocks in Hong Kong and mainland China, fell 9.4% today after China's National Development and Reform Commission (NDRC) held a press conference that provided minimal details on future stimulus.

NDRC Chair Zheng Shanjie told the press that officials are "fully confident" in the ability to achieve the Chinese government's 2024 economic agenda, including 5% growth in gross domestic product. He also said the NDRC would allocate 200 billion yuan from the 2025 budget to invest in local projects. But that fell short of investor expectations and investors faded from the sector following the press conference.

What I've found interesting in recent weeks is that the rally appears to have been more dependent on sentiment from the government and China's central bank than on the actual stimulus measures announced thus far. The first spark of the rally came after China's central bank announced it would lower select interest rates, drop bank reserve requirements, lower down payments and rates on mortgages, and inject capital into financial companies and banks in the country that could be used to repurchase stock and buy other stocks.

Chinese stocks rose, but many investors doubted the measures would be enough to lift an economy that has been crushed by deflationary pressures, a housing downturn, and high unemployment. What really ignited the rally was a surprise Politburo meeting convened by the country's top officials and led by Chinese President Xi Jinping that concluded with a statement from the committee that said, "We should increase the intensity of countercyclical adjustment of fiscal and monetary policies."

In company-specific news, Baidu announced a shuffle of its C-suite. The company said CFO Rong Luo would leave the role to lead the company's mobile unit, which includes the Baidu app, the video platform Haokan, and the social media platform Baidu Post. Meanwhile, Junjie He, the head of the mobile unit, will become interim CFO.

Volatility is part of investing in Chinese stocks

Volatility is part of investing in Chinese stocks. The group often doesn't trade on fundamentals and can be heavily influenced by sentiment from the Chinese government as well as its actions.

Also, given that the Hang Seng Index had risen 34% over the last month before today, I think we were probably in a situation where the margin for error was pretty slim. The Chinese economy has not fared well, and economists have warned that a lot has to be done to awaken consumer demand.

I still think you can invest in Chinese stocks as a long-term investor. A lot of these companies have built strong products and services using cutting-edge technology. The opportunity in the world's second-largest economy remains massive. However, investors need to be ready for volatility and understand the role that government and regulation play in the market. I maintain the view that the most appropriate way for retail investors to gain exposure to the sector is through an exchange-traded fund.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Baidu. The Motley Fool has a disclosure policy.