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

That iShares MSCI China ETF (MFI)which has large investments in leading Chinese companies such as tencent (CEGI), Alibaba (WOMAN), China Construction Bank (CICF), Baidu (BIDU) as well as Nio (NIO)down 16% this year.

But the ETF is up 12% last week thanks to a strong rally on Wednesday and Friday. So why are investors suddenly more optimistic about China? The Chinese government seems to realize that the damage caused by falling stock prices is not perfect.

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

“China’s pledge to loosen regulations and support real estate and tech stocks could be a game and a tipping point,” Ipek Ozkardeskaya, senior analyst at Swissquote, said in a report, adding that “it looks like the latest sell-off was so strong that it forced the Chinese government to raise the white flag.”

Beijing also noted last week that US and Chinese regulators have made “positive progress” in talks to list Chinese stocks in the US.

This may allay some fears that companies such as Alibaba and its main competitor JD (JD) can be downloaded from US exchanges.

Chinese stocks likely to remain volatile

An increase in Covid cases in China may also prompt Beijing regulators to change policy as they try to minimize some of the much publicized supply chain problems that have hurt China’s economy and led to increased inflationary pressures in the US.

“China is experiencing the largest Covid outbreak since its early stages, challenging the Zero Covid policy,” Mark Hackett, head of investment research at Nationwide, said in a report last week.

Chinese President Xi Jinping recently stated that China’s goal is to “prevent the spread of the virus as much as possible while minimizing the impact on economic and social development.” Hackett noted that this would include easing restrictions on factories in the Shenzhen technology hub, which could mitigate the impact on the supply chain.”

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

“As the State Council of China attempts to lift Chinese equities, we are seeing the shorting community come back and become very active,” Dan Pipitone, CEO and co-founder of brokerage firm TradeZero, said in a report last week. Investors “short” stocks when they think they will fall in value.

Pipitone said TradeZero’s clients have shorted several well-known Chinese firms, including Alibaba and JD, Nio, a vehicle-sharing firm. Didireal estate brokerage KE Holdings and cloud leader Kingsoft.

Clearly, there remains a lot of concern about Chinese stocks. The country’s economy continues to grow rapidly despite recent problems. But until the dust settles over the latest Covid outbreak and the Russian-Ukrainian conflict, even top Chinese companies like Alibaba and Tencent may remain risky.

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