Over the past week, China’s stock market has experienced a nearly 25% increase, and projections suggest it could gain an additional 10% within the next three months.
This rally has extended into its second week, with shares of PDD Holdings, the owner of Temu, rising 6% by 10:10 a.m. ET on Wednesday. This was followed by a 3.9% increase in the shares of Baidu, an internet search giant, and a 3.6% gain for Yum China Holdings, the operator of Pizza Hut and KFC.
The continued upturn in Chinese stocks is primarily attributed to a series of subsidies and stimulus measures announced by the Chinese government the previous week. In response to an economic contraction and the likelihood of missing its 5% growth target for 2024, the People’s Bank of China (PBOC) introduced several interest rate cuts to lower borrowing costs and encourage spending. Interest rates are expected to decrease by 20 to 30 basis points, with home mortgage down payments capped at 15%.
Additionally, the PBOC announced that over $110 billion would be allocated to subsidize institutional investors buying Chinese stocks and for Chinese companies to repurchase their own shares.
The interest rate cuts aim to boost consumer spending, which is expected to benefit PDD (an internet retailer), Baidu (which sells ads), and Yum China (a restaurateur). However, the significant stimulus for stock purchases may be the primary driver behind the recent surge in stock prices.
Despite these measures being in place last week, stocks continue to rise in the second week of the rally, which has raised China’s stock market value by nearly 25%. According to the South China Morning Post (SCMP), Wall Street initially did not anticipate the PBOC’s stimulus, resulting in a “short squeeze” where China bears were compelled to cover their short positions by buying back stock.
Investment banks have optimistic forecasts, with UBS predicting a further 7% rise in China’s stock market by the end of 2024, Morgan Stanley expecting a 10% increase, and Nomura similarly forecasting a gain of just over 10%.
However, the validity of these forecasts may be questioned if they rely on continued short squeezing. According to Yahoo! Finance data, only a small percentage of shares in PDD Holdings, Baidu, and Yum China are currently sold short.
From a valuation perspective, the forecasts may hold some merit. While Yum China’s stock trades at nearly 23 times trailing earnings, both Baidu and PDD have relatively lower price-to-earnings (P/E) ratios of 14 and 15, respectively.
Ultimately, the decision to invest in these stocks hinges on whether investors believe the stimulus measures are sufficient to rejuvenate the Chinese economy. Positive sentiment towards China’s economic prospects could make Baidu and PDD attractive investments; otherwise, caution may be warranted.
Rich Smith, the author of this analysis, holds no positions in the mentioned stocks. The Motley Fool has positions in and recommends Baidu and maintains a disclosure policy.
