What happened
Chinese stocks made some big moves on Thursday as the country moves closer to opening up its economy. There were minor official changes, like eliminating COVID-19 testing for access to some public places and a push to increase more of the elderly population to get vaccinated, but it will likely take most of next year to pull back from the "zero-COVID" strategy.
GDS Holdings (GDS 7.78%) jumped as much as 18.9%, Tuya (TUYA 8.07%) popped 20.5%, and Kingsoft Cloud Holdings (KC 10.11%) jumped 18.1%. It may not seem that data center and cloud companies GDS and Kingsoft or an artificial intelligence company like Tuya are impacted by restrictions, but when the overall economy slows, even digital products are impacted.
So what
There have been major market swings in Chinese stocks as investors went from fearing the future in China to hoping that the economy will return to more normal levels. Three years of COVID restrictions have taken a toll on both the people of China and the Chinese economy.
Protests in the last few weeks -- including in the capital city of Beijing -- have brought the people's frustration to the forefront. The government, and as a result businesses, risked increased conflict if the strict zero-COVID policy continued. That's caused stocks to fall in recent weeks since it was unclear how the government would respond. It seems the answer is that it's going to start loosening zero-COVID restrictions in the country.
This won't be a fast or easy process for China. Early reports estimate the economy won't open fully until mid-2023 at the earliest, primarily to allow time to vaccinate millions of elderly people who aren't vaccinated yet. And given the experience of the rest of the world, it'll be a tumultuous experience opening businesses and going to social gatherings.
Now what
The market is forward-looking, so even though it'll take many months for the Chinese economy to open, this is seen as a good sign for stocks. You can see below that the growth rate for all three companies has slowed so an economic boost would be welcome news.
GDS Revenue (Quarterly YoY Growth) data by YCharts.
But keep in mind that China has a history of controlling its economy, though, and this may be a case where investors are getting ahead of themselves. China could slow down or reverse course if infections get bad. Even when the economy does open up, a policy change could destroy the value of U.S. traded stocks, as we've seen with Chinese education stocks.
It's important for investors to understand that investing in China comes with major risks that we don't often think about in the U.S. The government controls much of the economy and society, so a change in sentiment can crush investments. Investors also don't own direct assets in China. They own variable-interest entities, which are entitled to the profits of the Chinese company. This is another risk of investing in China.
As a result of all of this, I'm staying out of Chinese stocks right now and looking for less-risky investments. The economy in China may indeed open up, but that doesn't mean every Chinese stock is a great buy today.
