A rate cut by the Federal Reserve has made investors think that China’s central bank will soon follow suit.
Chinese stocks moved higher today after the Federal Reserve’s jumbo 50-basis-point interest rate cut prompted investors to bet that China’s central bank may follow suit.
Shares of the Chinese tech conglomerate Tencent Holdings (TCEHY 3.55%) traded roughly 3.3% higher, as of nearly 1 p.m. ET, while shares of the Chinese online retailer PDD Holdings (PDD 2.48%) traded nearly 2% higher. Meanwhile, shares of the Chinese brokerage and wealth manager Futu Holdings (FUTU 13.75%) had jumped nearly 15%.
The need for government and monetary stimulus
Chinese stocks have been on a very different path than U.S. stocks this year, with the Shanghai Composite Index down close to 8% year to date. China’s economy has really struggled this year, a trend that continued in August with retail sales, industrial production, and urban investment growing at a slower pace than expected in August.
China has been dealing with high unemployment and a significant housing downturn. China’s central bank cut rates in July and the government has launched some stimulus efforts as well to try to get things moving, but some investors believe more is needed.
“In the absence of meaningful fiscal and monetary stimulus, we think it will be difficult for Chinese equities to outperform for the rest of the year,” said Aaron Costello, head of Asia at Cambridge Associates. “To have a sustained rally in Chinese equities, China’s economy needs to accelerate, and deflationary pressures need to ease to allow company earnings to recover. As of now, there are few signs this is happening.”
Still, many believe a recovery in the Chinese economy will come. Some of the most well-known investors in the world such as David Tepper and Michael Burry recently showed in filings that they are not deterred by China’s economic woes and continue to hold Chinese stocks as some of their top positions.
Following the Fed’s cut, a new Reuters poll showed that investors think Chinese central bankers will follow the U.S. and lower benchmark interest rates when it wraps up its meeting this week.
For all of the struggles in Chinese equities, Tencent and Futu have had strong years, while PDD has struggled in a more outsize way. Tencent has repurchased nearly $7.7 billion of its shares since May, while Futu has done a good job of growing its client base, benefiting from its reach beyond China. PDD’s stock, on the other hand, has struggled like other e-commerce retailers, as management warned earlier this year of changes in consumer demand.
FUTU data by YCharts
How to play it
For what it’s worth, I think all three of these stocks have potential, given the growth they have been able to show in one of the largest economies in the world. They also all grew their earnings in the second quarter of 2024. However, Chinese stocks can be tricky because government intervention can seemingly come out of nowhere and severely impact individual companies.
We’ll see what China’s central bank does tomorrow, but the country can certainly achieve an economic rebound over time. The easier way for investors to play the Chinese trade is to buy a basket of Chinese equities through an exchange-traded fund or mutual fund. That provides more diversity and removes some of the regulatory risk.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tencent. The Motley Fool has a disclosure policy.