Stocks of some of China's most widely held companies were firmly in rally mode Tuesday as the country's policymakers were considering moves to shore up its faltering stock market. Reports have emerged that the government may embark on a spending spree, scooping up stocks to buoy the market.
Several of China's biggest technology stocks far outpaced gains by the broader market Tuesday. Shares of Alibaba Group (BABA 0.59%) surged 6.9%, Baidu (BIDU 0.62%) jumped 6.7%, and JD.com (JD 6.12%) climbed as much as 6.2% as of 11:56 a.m. ET.
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Restoring investor confidence
The Chinese stock market has been in free fall over the past year, with no end in sight. The country's CSI 300 Index, which represents the top 300 stocks on the Shanghai and Shenzhen Stock Exchanges, has tumbled more than 20% over the preceding 12 months, plunging to a nearly five-year low and marking its third successive year of declines. Other mainland China indexes have suffered similar drops.
China represents the world's second-largest economy and has been inundated by numerous macroeconomic headwinds. These include a record-setting plunge in real estate values, mounting debt, and deflation, among others.
In a meeting with the state council, Chinese Premier Li Qiang said the country plans to take steps to restore investor confidence. "We must take more powerful and effective measures to stabilize the market and confidence," Li said, according to a report by CNBC. Qiang went further, saying, "It is necessary to enhance the consistency of macro policy orientations, strengthen innovation and coordination of policy tools, consolidate and enhance the positive economic recovery, and promote the stable and healthy development of the capital market."
In an effort to jump-start these efforts, the country is planning to assemble 2 trillion yuan (roughly $278 billion) held in the accounts of state-controlled companies and use it to invest in Chinese stocks, according to a report that first appeared in Bloomberg. It also includes plans to allocate another 300 billion yuan ($42 billion) from local sources for additional investment.
China's economy has been mired in a slump and has failed to rebound since the pandemic.
In other, more company-specific news, there are reports that Jack Ma has been scooping up shares of Alibaba, the company he co-founded, according to a report by The New York Times' DealBook. It further suggests that other high-profile company executives and business associates of Ma, including chairman and Ma's longtime friend Joe Tsai, have also been buying shares. Over the past three months, Ma has purchased roughly $50 million of Alibaba stock on the open market, while Tsai has purchased $151 million, according to the report. This suggests Ma and company believe the stock is undervalued.
Will investors follow the government's lead?
Investors cheered the news that China is taking steps to shore up the stock market, but it remains to be seen if the move will ultimately have any long-term impact.
Each of the companies highlighted above is highly dependent on consumer spending and a robust economy:
- Alibaba and JD.com are among China's largest digital retailers.
- Baidu is the country's search leader and makes the lion's share of its profits from digital advertising (and its business model bears a striking resemblance to Alphabet's Google).
In the face of economic headwinds and high unemployment, consumer spending in China has faltered, further weighing on the situation and reducing the potential for a broader economic recovery. As such, the future is unclear, particularly for companies that depend on robust consumer spending for their livelihoods.
To be clear, I'm not saying that investors should completely avoid these stocks. Indeed, they're currently trading at compelling valuations. Baidu, Alibaba, and JD are each selling for a price-to-sales ratio of 2 or less -- the standard for underpriced stocks. Furthermore, any economic improvement in China will likely boost consumer spending, benefiting each of these companies.
For investors with a long-term outlook and the stomach for volatility, these stocks represent an opportunity. That said, investing in China carries additional risk and any investment should be sized appropriately and part of a well-diversified portfolio.
