Chinese Stocks Cool Off: Time to Buy the Dip in These 2 Stocks?

Key Points

• Chinese stocks surged on government stimulus and mortgage rate cuts but have recently pulled back, raising questions about buying opportunities.
• Despite its recent 31% surge, Alibaba (NYSE: BABA) still trades at an attractive forward P/E of 11.17
• The iShares China Large-Cap ETF (NYSE: FXI) offers diversified exposure and appears well-positioned after a measured 15% pullback from recent highs.

Following the government's announcement of significant economic stimulus measures, Chinese stocks recently experienced a major rally, with some soaring as much as 100% from their 52-week lows. However, the surge has since cooled, with a pullback emerging over the past two weeks, raising the question: Is this dip a great buying opportunity, or should investors remain cautious? While the rally has ignited optimism, investors must now assess whether the market still offers value or if further volatility and potential downside lie ahead.

Stimulus Fuels Optimism

For months and, in some cases, years, Chinese equities had underperformed due to weak economic growth, elevated interest rates, and a sluggish property market. However, the narrative shifted when Beijing introduced policies to stimulate the economy, including mortgage rate cuts and easing property purchase restrictions in major cities like Guangzhou, Shanghai, and Shenzhen. These measures were designed to breathe life into China’s struggling real estate market, a key component of its economic engine.

Adding to the bullish sentiment, the People’s Bank of China announced that banks would lower mortgage rates for existing home loans by the end of October. Recent economic data has also contributed to the optimism, with China's Q3 GDP expanding by 4.9% year-over-year, surpassing analyst expectations and signaling that the government's interventions are beginning to bear fruit.

As a result, Chinese stocks rallied sharply, with the iShares China Large-Cap ETF NYSE: FXI gaining over 24% so far this quarter, while Alibaba NYSE: BABA and JD.com NASDAQ: JD posted gains of 32% and 56%, respectively. However, with a pullback now underway, investors are weighing whether this correction provides an attractive entry point or if it’s a warning of further downside.

Two Chinese Stocks Worth Buying on the Dip

Alibaba Group Holding

Alibaba NYSE: BABA has emerged as a standout performer, surging 31% in the past month and turning its year-to-date (YTD) performance positive with a 38% gain. After a prolonged period of underperformance, Alibaba’s recent breakout has seen it reclaim critical resistance levels, offering long-term investors renewed optimism.

From a valuation perspective, despite its recent surge, Alibaba remains attractive with a forward P/E ratio of 11.17, reflecting both value and growth potential. Its recent pullback of almost 15% from its 52-week high offers an appealing dip buy opportunity. If the stock can continue to find support near the all-important $100 mark, a higher low and continuation to the upside might shape up.

Alibaba’s Q2 results showed revenue growth of 4%, with adjusted earnings per share (EPS) at $2.26, beating expectations. The company also declared a two-part dividend, including a $1 annual payout per American Depository Share (ADS) and a one-time dividend of $0.66 per ADS, costing $4 billion. Its next earnings report is scheduled for November 21, which could provide additional insight into its trajectory.

iShares China Large-Cap ETF

For investors seeking diversified exposure to Chinese equities, the iShares China Large-Cap ETF (NYSE; FXI) offers a broad portfolio of leading Chinese companies across financials, technology, and consumer goods sectors. FXI’s top holdings include significant players such as Alibaba, JD.com, Tencent, and Baidu, which provide exposure to various industries that drive China’s economy.

Technically, FXI remains in a bullish trend, having broken out from its 52-week lows in September. The ETF has pulled back approximately 15% from recent highs, but this measured correction, retracing about half of its breakout move, could present a strategic buying opportunity. With the ETF finding support in the low $30s and continuing to attract strong inflows, FXI appears well-positioned for investors seeking broad exposure to China’s recovery.