Why NIO, RLX Technology, and Lufax shares rose today

what happened

Most Chinese stocks traded on U.S. exchanges were higher on Wednesday after a sharp sell-off on Monday following the weekend of the Chinese Communist Party National Congress.

Towards the end of that event, President Xi Jinping completed his third term as party leader, breaking with a long tradition of Chinese leaders serving only two consecutive terms and further cementing his power and position as head of state, at least for a while. the next five years.

Electric car maker stocks Do not (NIO 1.69%) Shares of e-cigarette companies rose about 2% on Wednesday RLX Technology (RLX 42.98%) Soaring more than 45%, fintech stocks Lufax (Lu 13.33%) up more than 14%.

so what

Hong Kong’s benchmark Hang Seng Index fell 6.4 percent on Monday, its worst one-day performance since the Great Recession.

In Xi Jinping’s third term, it now appears that he will have more influence over the country’s economy than he already has, threatening China’s notion of free markets. More frequent intervention by his government will make its markets more volatile, and investors may demand higher returns in exchange for the higher risk of investing there.

A person looking at a positive stock chart on a computer.

Image credit: Getty Images.

On the other hand, Beijing reported this week that China’s economy grew by a better-than-expected 3.9% in the third quarter after a tough year. Gross domestic product growth this year is now expected to be much lower than the figure projected for 2022.

In response to Monday’s sell-off, China’s financial regulator issued comments aimed at boosting investor sentiment. The People’s Bank of China said on Tuesday that it would continue to embrace the healthy development of financial markets, while the China Securities Regulatory Commission issued a statement saying it would accelerate the development of a “regulated, transparent, open, robust and resilient” capital market.

Also, investors appear to be betting that the Federal Reserve may soon ease its aggressive pace of rate hikes, which has played a major role in fueling a broad sell-off in U.S. markets this year. The bear market has hit tech stocks particularly hard, and many large U.S.-listed Chinese stocks fall into this category. Also, Chinese stocks have sold off sharply this year, so investors may see this as a good time to buy the dip.

How to do

Chinese stocks present an interesting opportunity as these companies operate in a huge market that is also the fastest growing consumer market in the world. Many are innovative companies and significant disruptors.

E.g, Mizuho Analyst Vijay Rakesh said in a recent research note that electric vehicle sales could account for 25% to 30% of all vehicle sales in China in the third quarter — a much higher percentage than the U.S. makes as one of the best-known EVs in China. business, NIO will definitely benefit from it.

But the threat of more intrusive regulation and restrictive orders from Xi Jinping’s government is likely to keep Chinese stocks volatile and should prompt some investors to take a wait-and-see approach. I do see more potential in stocks of Chinese companies that are more mature and better able to avoid costly regulatory issues, but it will be a bumpy ride.

Bram Berkowitz has no positions in any of the stocks listed above. The Motley Fool has a position at Nio Inc. and recommends Nio Inc. The Motley Fool has a disclosure policy.

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