Here’s why Chinese tech stocks made big gains today

What happened

Chinese tech stocks made big gains in trading today. The giants of e-commerce Ali Baba (NYSE: BABA) and JD.com (NASDAQ: JD) jumped 6.9% and 14.5%, respectively, according to data from S&P Global Market Intelligence. And they weren’t the only big Chinese tech names showing impressive momentum.

BILI data by YCharts

After a series of massive sales driven by regulatory concerns over the past month, investors are suddenly showing an increased appetite for battered Chinese tech names. bilibili 9:30 a.m. NASDAQ: BILI, Complete Truck Alliance (NYSE: AMM), KE Holdings (NYSE: BEKE), 360 DigiTech (NASDAQ: QFIN), Tencent Musical Entertainment Group, and Vipshop Holdings all of them managed to post double-digit stock rallies in Tuesday’s trading.

So what

After falling 3.4% in trading last week, the Invesco China Technology ETF rose about 5.6% during Tuesday’s daily session. The recent rally may have been helped by strong second quarter earnings released by JD.com on August 23 and news that Cathie Wood’s Ark Invest firm had taken a substantial new position in the stock. However, a general reassessment of regulatory risks affecting Chinese equities appears to be the main overall driver of the rebound.

Now what

Even for risk-tolerant, growth-oriented investors, Chinese tech stocks can be a conundrum. The country represents a huge market with a population of around 1.4 billion people, and it has the added benefit of rapidly increasing per capita income and discretionary purchasing power. However, the country’s regulatory climate means that investors need to be cautious and view traditional valuation metrics and financial performance from a different perspective.

Many Chinese companies appear very cheap based on traditional valuation metrics such as price-to-earnings and price-to-sell ratios, but investors should assess the possibility of the country’s government introducing new standards that affect business operations. or stock trading. listed on the American stock exchanges. It is also possible that US regulators will take a tougher stance on Chinese companies listed on major stock exchanges such as the Nasdaq and the New York Stock Exchange.

Some Chinese tech stocks will pay big dividends, but investors should understand that investing in the space currently has the makings of a high-risk, high-reward game.