Chinese stocks are on a roller coaster with no end in sight

The iShares MSCI China ETF (MCHI), which has big investments in top Chinese companies such as Tencent (TCEHY), Alibaba (BABA), China Construction Bank (CICHF), Baidu (BIDU) and Nio (NIO), is down 16% so far this year.

But the ETF surged 12% last week thanks to strong rallies Wednesday and Friday. So why are investors suddenly a little more optimistic about China? It appears the Chinese government realizes the damage created by tumbling stock prices is not ideal.

A committee chaired by Chinese Vice Premier Liu He said last week that the government should “actively roll out policies that benefit the markets.”

“China’s promise to ease the regulatory crackdown and support property and technology stocks could be a game, and a trend, changer,” Ipek Ozkardeskaya, senior analyst with Swissquote, said in a report, adding that “it appears that the latest selloff was so strong that it brought the Chinese government to pull out the white flag.”

Beijing also noted last week that US and Chinese regulators have made “positive progress” in talks about US listings for Chinese stocks.

That may allay some concerns that companies such as Alibaba and its top rival JD (JD) could be booted off US exchanges.

Chinese stocks likely to remain volatile

The uptick in Covid cases in China may also push Beijing regulators to shift policy, as they try to minimize some of the well-publicized supply chain woes that have hurt the Chinese economy and led to intensified inflation pressures in the US.

“China is seeing its largest Covid outbreak since the initial stages, challenging the ‘zero-Covid’ policy,” Mark Hackett, chief of investment research at Nationwide, said in a report last week.

Chinese president Xi Jinping recently said China’s goal is to aim “for maximum prevention while minimizing the impact on economic and social development.” Hackett noted this would include easing restrictions for factories in the tech hub of Shenzhen, potentially alleviating the supply chain impact.”

A change in tone from Beijing would be welcome news for some Western investors. But experts warn that Chinese stocks will remain extremely volatile, noting that some US investors appear to be actively betting against some Chinese companies.

“With China’s State Council trying to talk up Chinese stocks we have seen the shorting community returning and very active,” Dan Pipitone, CEO and co-founder of brokerage firm TradeZero, said in a report last week. Investors “short” a stock when they think it will go down in price.

Pipitone said TradeZero customers were shorting several notable Chinese firms, including Alibaba and JD, Nio, ridesharing firm Didi, real estate brokerage KE Holdings and cloud leader Kingsoft.

Clearly, plenty of worries about Chinese stocks remain. The country’s economy does continue to grow rapidly, despite recent challenges. But until the dust settles with the latest Covid outbreak and the Russia-Ukraine conflict, even top Chinese companies like Alibaba and Tencent may remain risky.

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