Why Chinese Stocks Continued to Zoom Higher on Wednesday

To the detriment of many publicly traded companies headquartered in the U.S., the hot action on the equity markets Wednesday continued to be in Chinese stocks. That’s what a massive government stimulus program will do; the one announced by government officials in the giant Asian country in late September is providing some powerful rally fuel. Many top Chinese stocks kept climbing higher, successfully surmounting Hump Day. And, as in previous sessions, investors didn’t seem to discriminate by industry.

Electric vehicle (EV) maker Li Auto (LI 4.54%), which has an additional tailwind of excellent delivery numbers released quite recently, rose by nearly 5% on the day. In a completely different sector, Tencent Music Entertainment Group (TME 7.69%) increased at an almost 8% clip. Even the controversial real estate company KE Holdings (BEKE 5.09%) posted a 5% gain.

Highly stimulated stocks

This isn’t the Chinese authorities’ first time at the stimulus rodeo, so by now they have quite a good idea how to spread their support throughout the economy.

To name but one measure, promised central bank interest rate cuts can ultimately benefit many types of businesses. That especially applies to rate-sensitive financial companies like banks and real estate service providers such as KE Holdings (which also stands to benefit from relaxed new financial rules covering that real estate market).

Li Auto and its carmaking peers also get a gift — auto production is a capital-draining activity, so comparatively inexpensive financing is sure to benefit players in the sector.

Another factor in the continued rise of Chinese equities is increased tensions elsewhere in the world, namely the Middle East. We live in a globalized world, of course, yet China is not considered to be as involved politically or economically in the region as, say, the U.S. On that basis, its companies look to be more insulated against the negative effects of that worsening situation.

A large but volatile asset class

Investors should keep in mind, however, that there are solid reasons for launching a stimulus program.

China’s once-hot gross domestic product (GDP) growth has cooled, and at times has come in under economists’ projections. While China is still posting numbers that would be the envy of other economies, expectations were fairly high, and the subsequent disappointment helped push the share prices of many companies lower. Recent struggles and controversies shaking certain industries — chiefly real estate and for-profit education — didn’t help the situation.

So while this current rally feels like it could run a bit longer, we should bear firmly in mind that Chinese stocks can be volatile. We also don’t know how the stimulus measures will ultimately affect those companies and the broader economy; it isn’t wise to assume all will see permanent improvement. (Potential) buyer, beware.