Chinese Stocks in US Rally, Erasing Most of Record Selloff

(Bloomberg) — Chinese stocks in the US are extending their rally after a record selloff on Monday, as Beijing’s pledge to support its financial markets lifted investor confidence and retail traders bought the dip.

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The Nasdaq Golden Dragon China Index rose 7.2% on Wednesday, bringing its two-day gain to 12%, the most since April. The index has erased most of its losses from Monday, when it sank 14%. Among the top performers, Alibaba Group Holding Ltd., JD.com Inc. and Pinduoduo Inc. jumped more than 8%, while Lufax Holding Ltd. rallied 13%.

Some investors saw a glimmer of hope after China’s central bank and foreign-exchange regulator vowed to ensure the healthy development of financial markets and reiterated that the yuan would be “basically stable.” The comments followed President Xi Jinping’s tightening of control over the government, which spurred fears among foreign investors that his strategy will stifle the nation’s economy and private enterprise.

The offshore yuan surged by a record, joining a broad rally against the dollar as investors bet that the Federal Reserve will moderate the pace of its rate hikes. The strength of the move caught out traders, who also reported seeing Chinese banks selling the greenback to help drive the currency’s rebound from an all-time low.

“While sentiment is likely to stay depressed and markets could remain volatile until concrete policy actions emerge, pro-growth announcements could lead to sharp rallies, as happened in May or June,” UBS Global Wealth Management Chief Investment Officer Mark Haefele wrote in a note Wednesday.

The risks and upsides for China equities are balanced, and investors should consider sticking to benchmark allocations for Chinese stocks rather than going underweight, according to Haefele. “Those with a lower allocation could consider buying on dips, and we continue to recommend positioning in sectors with resilient earnings given the prevailing headwinds,” he wrote.

That’s exactly what some traders did during Monday’s epic selloff. The American depositary receipts of Chinese companies were among the most heavily purchased stocks this week as retail investors sought to “buy the dip,” Vanda Research analysts including Marco Iachini wrote in a note on Wednesday.

Retail investors’ purchase of the top Chinese ADRs Monday surpassed levels last seen during the Shanghai lockdowns in March, with more than $157 million of net flows, according to Vanda. Alibaba, Nio and Pinduoduo were the biggest beneficiaries with $92 million, $32 million and $12 million of net inflows, respectively, the report said, noting that Alibaba attracted close to 60% of the inflows on that day.

Still, China’s equity markets remain fragile and are at risk of being bogged down by the nation’s Covid-zero policy. Reports of a lockdown in one of Wuhan city’s central districts dealt a blow to indexes in China and Hong Kong early Wednesday.

–With assistance from Matt Turner.

(Adds paragraph on yuan.)