Alibaba and JD.com Stocks Fall Back After Historic Gains. What Comes Next?

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Investors in Chinese stocks, long-accustomed to pain, have just seen an astonishing turnaround. What comes next?

Shares in Chinese tech giants

Alibaba

(ticker: BABA) and

JD.com

(JD) both notched eye-watering gains on Wednesday, climbing 37% and 39%, respectively. It was, by far, the most those two stocks have ever risen in one day, trouncing relatively paltry previous records of less-than 15% daily jumps.

The rally was felt more broadly, with the

Invesco Golden Dragon China ETF
(PGJ) surging 33%, beating its prior daily record rise of 17%. Hong Kong’s

Hang Seng Index
rose 9.1% on Wednesday and carried the momentum into Thursday with a 7% increase—the best two-day performance for the index since 1998.

While the gains were momentous, the rally was essentially a reversal of recent losses. A slow and ugly selloff in Chinese stocks over the past year recently picked up pace, with the

Hang Seng

seeing its biggest three-day decline since 2008 before it bounced back midweek. The index is still down almost 8% this year, with shares in

Alibaba

and

JD.com

similarly deep in the red in 2022.

To thank for the turnaround on Wednesday was news out of China that the government would work to boost economic growth and support the stock market, as well as clear up a punishing regulatory environment, including concerns around U.S. delistings. 

The last point is particularly helpful for the country’s embattled tech sector, which has come under intense scrutiny from Beijing and Washington alike and saw one of its largest companies, Alibaba, lose almost 50% of its market value last year.

Some jubilance had already faded on Thursday. Alibaba stock was down 7% with JD.com 5% lower. Already, the debate has started over what the policy change in China means for specific stocks like Alibaba, as well as the sector at large.

Alibaba continues to face a troubling future. As Barron’s has previously reported, at least two key factors are required for a rebound in the stock price: A marked improvement of the regulatory environment and a turnaround in the fundamentals of the Chinese economy and consumer spending.

While the Wednesday news includes an optimistic read-through on the regulatory front, the rally does very little to undo the extensive destruction of market value seen across the Chinese tech sector in the last year. Words will have to be backed up with actions, but Bo Pei, an analyst at broker U.S. Tiger Securities, told Barron’s that he believes we have seen “an inflection point” in the regulatory concerns.

The picture is much more complex on the issue of the Chinese economy and consumer spending, which is critical for profit at e-commerce companies like Alibaba. Calling off a wolf pack of tough regulators in Beijing is one thing; steering the world’s second-largest economy to growth at a time of global economic uncertainty is another thing altogether.

“Fundamental-wise, while it won’t see immediate impacts, the supportive policies should give investors confidence that an inflection point is also coming later this year,” Pei said.

One insider in the Chinese financial system is adopting a wait-and-see attitude. Danny Law, an analyst at Guotai Junan Securities, one of China’s biggest investment banks, told Barron’s that it was difficult to comment on market sentiment, because it is unclear how China’s State Council will achieve its pledges.

Others are far more optimistic.

“When China’s government says it’s going to do something, it does. Yesterday’s comments were high on headline impact, and light on detail, but it doesn’t matter,” said Jeffrey Halley, an Asia Pacific analyst at broker Oanda, in a Thursday note.

However, Andrew Batson, an analyst at Chinese research group Gavekal Dragonomics, wrote in a note Thursday that “the odds are … that this is a change in short-term tactics, not long-term strategy.”

“The basic political structures that were ultimately responsible for the recent loss of market confidence have not changed.” 

This week’s rally marks a much-welcome reprieve for beaten-down stocks. But the fact that it was even possible for a company like Alibaba—which has a market capitalization in the hundreds of billions of dollars—to rally upward of 30% in one day is deeply troubling for investors focused on fundamentals.

“The fact that the share prices of China’s largest companies are moving by double digit percentages in single trading sessions, based purely on political speculation and signals, only reinforces how much their fortunes now depend on government direction,” Batson said.

Write to Jack Denton at [email protected]