China comeback: shares of Alibaba, Baidu, Tencent & Co. soar

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There are things that happen once every few years on the capital markets – or perhaps only once a decade. One such singular, highly unusual event has been taking place in China for a good week now. The Chinese stock markets – and with them the former flagship companies Alibaba, Baidu, Tencent & Co. – are booming as if it were 2020 again.

Within one week alone, the superstars of the Chinese internet and tech industry all posted double-digit gains. The relevant CSI 300 Index gained more than 20% in the five trading days up to Monday. Thanks to the enormous price surge, Chinese shares have even moved ahead of their Wall Street counterparts in terms of performance in recent days.

As at September 30, the leading index on the Hong Kong Hangseng stock exchange was already 25% higher than at the start of the year, even outperforming the leading American indices, the Nasdaq Composite and S&P 500, which are primarily driven by the "Magnificent 7" stocks. Since the beginning of the year, the most valuable internet and technology companies from China have gained as follows (as at: closing prices as at 30.9.): Meituan: +116 percent, JDcom +52 percent, Tencent: +50 percent, Alibaba: +47 percent, Xiaomi: 45 percent.

By way of comparison: on Wall Street, only Nvidia (+152%) and Meta (+65%) have recorded similarly spectacular price gains since the start of the year.

"Whatever it takes" moment from the Chinese government triggers price fireworks

How can the sudden upswing be explained after years of leaden underperformance? In the short term, with a 180-degree turnaround by the Chinese government, which initially put together a considerable stimulus package of USD 140 billion at the beginning of last week to support the real estate sector, which had been flagging for years. Just two days later, the People's Bank of China followed suit with an interest rate cut. The message seems clear: "Whatever it takes" - whatever it takes to boost the economy of the world's second most populous country after India is likely to be done by the government in Beijing to ensure sustainable growth.

After all, this has helped China to catch up in a way that is unique in economic history. After the empire had also been committed to communist leadership and doctrine for much of the 20th century, the gradual opening up to capitalism began in the late 1970s, while maintaining strict state control. Under this special path of state capitalism under communist leadership, China succeeded in creating "the world's most powerful growth story", as Manager Magazin – called it in the late 1990s and 2000s –, which has undoubtedly changed the global economy significantly, but has largely bypassed the domestic stock market.

However, in the BRIC era, other – countries such as commodity exporters, which experienced a boom of the century in the emerging markets, also often benefited on the stock market. And, of course, the West, which opened up new sales markets that brought hyper-growth to technology superstars such as Apple and Tesla.

However, China emerged from the 2009 financial crisis as a different nation. The economic miracle in its original form did not seem to be repeating itself. Significant growth yes, but the magic of the earlier years was lost. India one day became the new China – and growth moved on.

Chinese tech stocks were strictly avoided for a long time

The fact that China seemed to have been completely written off as a notorious underperformer in the investment world could be seen almost daily in the ever greater valuation discounts of local tech companies compared to the darlings of Wall Street. How long can such a disparity last? Michael Burry, a globally renowned hedge fund manager with a contrarian approach since the bestseller and Hollywood film adaptation of "The Big Short", had already placed his anti-bet in the second quarter. He has allocated almost half of his portfolio to Chinese internet stocks – Alibaba, Baidu, JD.com and others.

The bet has paid off impressively – especially as other Wall Street giants are now also betting big on the Asian giant. The American hedge fund manager David Tepper, for example, is extremely optimistic. He told CNBC at the end of last week that he was buying pretty much "everything" in the China tech context, shares, EWTFs, "everything". "We've bought more China stocks," Tepper said on Friday.

How sustainable is the China upswing?

And the latest performance proves the Wall Street icons right. But is the comeback really real and sustainable? If the investment research service Gavekal Dragonomics is to be believed , the massive rally of the past few trading days could be the start of a larger upward movement.

"In the last two decades, there have been five major equity rallies in China, three of which were fueled by economic stimulus. We could be at the start of a fourth economic rally, with gains of 50-100% expected," calculates China-based analyst Thomas Gatley. Chinese investors are known for their "all or nothing" mentality: China's stock markets are known to be a "feast or famine" stock market, explains Gatley, referring to five mega rallies that have occurred since 2005. Four of these occurred within a period of eight to 13 months.

Accordingly, investors are hopeful that the price gains in Chinese tech and internet stocks will continue. "The combination of monetary, fiscal and direct market support, if it is actually implemented, is mostly a guarantee that the rise in shares will continue," the analyst told the financial portal Marketwatch. The coming months will show.

(dmk)