The explosive Chinese stock rally over the last month finally lost steam today after a press conference by Chinese officials failed to sustain investor exuberance over previously announced stimulus measures.

Shares of the electric carmaker Li Auto traded nearly 7.5% lower as of midday, while shares of the search giant and artificial intelligence company Baidu fell 6.3%. Shares of the fast-food company Yum China Holdings were down 5.6%.

Will Chinese officials make good on their promise?

The Hang Seng Index, which tracks large stocks in Hong Kong and mainland China, fell 9.4% today after China's National Development and Reform Commission (NDRC) held a press conference that provided minimal details on future stimulus.

NDRC Chair Zheng Shanjie told the press that officials are "fully confident" in the ability to achieve the Chinese government's 2024 economic agenda, including 5% growth in gross domestic product. He also said the NDRC would allocate 200 billion yuan from the 2025 budget to invest in local projects. But that fell short of investor expectations and investors faded from the sector following the press conference.

What I've found interesting in recent weeks is that the rally appears to have been more dependent on sentiment from the government and China's central bank than on the actual stimulus measures announced thus far. The first spark of the rally came after China's central bank announced it would lower select interest rates, drop bank reserve requirements, lower down payments and rates on mortgages, and inject capital into financial companies and banks in the country that could be used to repurchase stock and buy other stocks.

Chinese stocks rose, but many investors doubted the measures would be enough to lift an economy that has been crushed by deflationary pressures, a housing downturn, and high unemployment. What really ignited the rally was a surprise Politburo meeting convened by the country's top officials and led by Chinese President Xi Jinping that concluded with a statement from the committee that said, "We should increase the intensity of countercyclical adjustment of fiscal and monetary policies."

In company-specific news, Baidu announced a shuffle of its C-suite. The company said CFO Rong Luo would leave the role to lead the company's mobile unit, which includes the Baidu app, the video platform Haokan, and the social media platform Baidu Post. Meanwhile, Junjie He, the head of the mobile unit, will become interim CFO.

Volatility is part of investing in Chinese stocks

Volatility is part of investing in Chinese stocks. The group often doesn't trade on fundamentals and can be heavily influenced by sentiment from the Chinese government as well as its actions.

Also, given that the Hang Seng Index had risen 34% over the last month before today, I think we were probably in a situation where the margin for error was pretty slim. The Chinese economy has not fared well, and economists have warned that a lot has to be done to awaken consumer demand.

I still think you can invest in Chinese stocks as a long-term investor. A lot of these companies have built strong products and services using cutting-edge technology. The opportunity in the world's second-largest economy remains massive. However, investors need to be ready for volatility and understand the role that government and regulation play in the market. I maintain the view that the most appropriate way for retail investors to gain exposure to the sector is through an exchange-traded fund.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why the Chinese stock rally just stalled appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Another day and more news about Chinese stocks. The group ripped higher after Chinese leaders pledged further support for the Chinese economy following an unexpected meeting Thursday.

Shares of the fast food company Yum China (NYSE: YUMC) surged as much as 20% this morning before giving away some of those gains. Meanwhile, shares of the e-commerce company PDD Holdings (NASDAQ: PDD) and the search engine and artificial intelligence company Baidu (NASDAQ: BIDU) rose as much as roughly 15% and 12%, respectively, this morning before giving back some of the gains.

Backing up the support

Starting on Tuesday, China's central bank rolled out a slew of stimulus measures and interest rate cuts to try to lift China's struggling economy and hopefully revive the government's 5% gross domestic product target growth rate this year, which analysts are now concerned about. Those measures include lowering reserve requirements at banks, so they have more capacity to lend, dropping interest rates and down payment requirements on mortgages, and injecting capital into financial companies in China so they could do more investing whether in stocks or even repurchasing their own stock.

While the measures certainly sparked optimism, the rally stalled yesterday on concerns that interest rate cuts and stimulus may not be enough to get China out of its slump. The economy is dealing with a housing crisis, deflationary concerns, high unemployment, and weak consumer demand.

In an unexpected Politburo meeting today, the committee, which is led by President Xi Jinping, reportedly said, "We should increase the intensity of countercyclical adjustment of fiscal and monetary policies." The Politburo also reportedly said it is planning to issue government bonds to support "the driving role of government investment."

The Politburo is considered the principal policymaking committee composed of high-ranking officials and charged with driving the country's political, economic, and social priorities. What made this specific meeting interesting, according to analysts at Morgan Stanley, is that the Politburo typically does not meet in September, suggesting "an increased sense of urgency."

Investors seem to be coming around on China after a tough year so far for the group. According to Goldman Sachs, Chinese stocks on Tuesday saw the most daily net inflows in roughly 3.5 years and the second most over the past decade.

The group got another shot of confidence this morning from one of the world's best investors. Billionaire investor David Tepper told CNBC that he would recommend buying "everything" in China, from exchange-traded funds (ETFs) to futures. He said he's been growing more bullish from when the Federal Reserve cut interest rates last week to China's first stimulus announcement and rate cut to this most recent news about the Politburo.

Understanding the landscape

As I've said over the last few days, Chinese stocks operate in a much different landscape than U.S. stocks. The government has more influence and the economy doesn't always move in the same direction as other global economies. As you can see today, the sector is almost benefiting more from pledged support from China's government than the actual stimulus measures announced earlier this week.

Stocks like Yum, PDD, and Baidu should see a nice lift if China can get the economy going, as consumers will have more money to spend eating out, benefitting companies like Yum, and more money to buy consumer products, benefitting companies like PDD. It's also worth noting that all three of these companies trade at much more reasonable multiples than similar companies in the U.S. generating similar levels of growth.

But if you don't have time to conduct significant due diligence on each of these companies and how China's economic pressure and regulatory landscape might impact them, and still want some exposure to China, I would recommend investing in an ETF holding a basket of Chinese stocks.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why Chinese stocks are ripping higher appeared first on The Motley Fool Australia.