Shares of Chinese consumer tech-oriented names Tencent Holdings (OTC: TCEHY), Baidu (NASDAQ: BIDU), and Futu Holdings (NASDAQ: FUTU) rocketed higher on Monday, up 5.5%, 10.1%, and 21.9% as of noon ET.
There was an across-the-board rally in Chinese stocks today, with the smaller, more economically sensitive stocks in the country rallying the most. This came after the country’s Politburo met and made a dovish statement for more forceful and imminent stimulus.
On Monday, China’s 24-member Politburo released a statement, declaring the government will have a more forceful fiscal response to the country’s economic woes, and that the central bank will use a “moderately loose” monetary policy into next year.
While that couched language might not scream “huge stimulus money,” China’s Politburo hasn’t used that official language since 2008, during the Great Financial Crisis. Not only that, but the statement also came with other language vowing to be more “active” in responding to economic downturns and boosting consumer demand while stabilizing the housing market.
China’s downturn has been the result of the long “zero-COVID” lockdowns, the clampdown on the country’s biggest tech companies, difficulties with foreign capital to get money in and out of the country, and perhaps most importantly, a big housing downturn that has decimated consumer confidence. Chinese consumers have a lot of their wealth tied up in their homes, so this has been a huge headwind to consumer demand.
While Beijing had responded to the downturn somewhat this summer, most measures to date had been in the form of interest rate cuts and indirect actions, which might not have a big effect if consumers aren’t willing to borrow. Some critics have decried a lack of more forceful direct fiscal responses and getting cash into the hands of consumers, while giving them the confidence to restart spending. This has been due to the government’s unwillingness to take on larger deficits.
However, the language in today’s statement seems to suggest Beijing is now open to taking on those larger deficits to jolt the economy out of its slumber.
Image source: Getty Images.
Better consumer spending and household wealth would benefit all three of these stocks.
Tencent has a portfolio of products that span both consumer and enterprise customers, but its biggest segments are still consumer-oriented in free-to-play video games, the giant social media platform WeChat, and its digital financial payments platform Tenpay. Baidu, meanwhile, is the largest search platform in China, and is therefore dependent on the economically sensitive advertising market, while the company is also advancing AI and self-driving car technology. And Futu is an online financial brokerage that facilitates trading for stocks, derivatives, and other assets. A healthier Chinese consumer would theoretically invest and trade more.
While today’s news was certainly encouraging, investors should still take care to be cautious of Chinese stocks. While all three stocks are still well below their 2021 highs, they have all had quite a run this year, as these names surged a huge amount following this summer’s initial statements promising more aggressive stimulus. However, after the summer’s surge, some investors had been disappointed in the actual follow-through since then, and there’s still uncertainty as to how the government will follow through on today’s statements.
While today’s announcements do indicate an incremental promise for a more forceful government response, China’s lagging property sector, aging population, and likely higher tariffs on goods destined for the U.S. under the incoming Trump administration will be difficult to tackle all at once.
However, for those willing to take on the significant geopolitical and policy risks, China’s big tech and consumer companies still remain cheaper than their U.S. counterparts — though that gap has narrowed quite a bit over the past few months.
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Billy Duberstein and/or his clients has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Baidu and Tencent. The Motley Fool has a disclosure policy.
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