Several prominent Chinese stocks listed on US stocks fell today along with broader markets, especially as China continues to grapple with concerns related to COVID-19.
Shares of the e-commerce giant alibaba (Slime -6.09%) trading down nearly 6% at 1:38 p.m. ET today, shares of electric vehicle maker child (LITTLE BOY -4.62%) traded about 5% lower, and shares of the private tutoring company New Eastern Technology and Education Group (EDU -5.94%) had fallen 6%.
Most stocks struggled after the Federal Reserve’s rate-setting committee yesterday raised its benchmark overnight lending rate, the fed funds rate, by 75 basis points (0.75%), while the Fed intensifies its efforts to control high inflation. Other central banks are now also moving to raise rates. Technology companies generally become less attractive as rates rise because higher rates reduce the present value of their future cash flows. Also, higher rates make safer assets like US Treasury bills yield more.
China is also still grappling with the fallout from recent COVID-induced lockdowns in major cities, which lasted for months and have hit the country’s economic growth. While the Chinese government has begun easing restrictions, there have also been new outbreaks, leading some to believe more lockdowns this year are not out of the question.
But despite the concerns, analysts are beginning to see Chinese stocks as a positive move after a very difficult year for the sector.
Sid Choraria, a portfolio manager at Gordian Capital, said he likes Alibaba at current levels and believes its current cash generation is why it’s a value play right now.
“I mean, the cloud computing division is … an $11 billion revenue business that I expect to be an $25 billion revenue three years from now,” Choraria said recently. CNBC. “Digitalization is not going to go away in China, and that is an important part of development.”
Analysts are also growing bullish on Nio, despite a recent poor earnings report, after the company announced earlier this week that it is planning a new product launch. german bank analyst Edison Yu recently wrote in a research note that the company has resumed normal production after the end of the shutdowns and other supply chain issues.
Yu said deliveries are picking up and could increase from 7,000 a month in May to 25,000 by the end of the year. Yu has assigned Nio a “Buy” rating and a $45 price target. The stock is currently trading below $19 per share.
While the Chinese government is taking COVID very seriously, it is now also very concerned about reaching year-end economic growth targets, which should provide it with an incentive to support businesses and the economy.
The Chinese government has also now voiced support for Chinese tech stocks, has begun working to end a decades-long audit dispute with US regulators, and is rumored to be considering ending investigations into several big Chinese tech companies, including DidiGlobal.
I agree with the analysts that Chinese stocks are starting to look attractive, but be aware that there could be more volatility ahead due to possible lockdowns.