Chinese Stock Surge: Should You Invest After Stimulus Boost?

Key Points

• Chinese stocks have surged up to 50% following stimulus measures from the government, sparking renewed investor interest.
• The stimulus includes mortgage rate cuts and easing property restrictions, boosting equities like Alibaba and JD.com by 31% and 51%, respectively.
• While momentum is strong, technical indicators suggest a potential short-term pullback, with stocks like Alibaba and JD appearing overbought.

Chinese stocks have been on a tear recently, surging higher by as much as 50% in some cases, following the Chinese government's announcement of a series of measures to stimulate the slowing economy. The rally has sparked immense excitement among investors, who now wonder if the uptrend will continue or if it’s a temporary surge. 

Stimulus Injects Optimism in Chinese Stocks

For months, Chinese equities had been underperforming due to many factors, including a sluggish economy, high interest rates, and a slow property market. As a result, many Chinese stocks were trading at depressed levels. That narrative shifted last week when Beijing began rolling out stimulus measures to combat the broader economic slowdown. Adding to the optimism was a recent announcement from China’s central bank on Sunday, stating that it would instruct banks to lower mortgage rates for existing home loans by October 31. This move is part of a broader plan to support China’s struggling real estate market, which has significantly affected the economy.

In conjunction with the central bank’s move, Guangzhou, one of China’s largest cities, announced the removal of all restrictions on home purchases. Similarly, Shanghai and Shenzhen also eased their respective curbs on buying properties. These sweeping reforms have contributed to the positive momentum, with Chinese equities posting substantial gains. For instance, the iShares China Large-Cap ETF NYSE: FXI jumped over 20% last month, with heavyweight companies like Alibaba and JD.com rallying 31% and 51%, respectively.

With this backdrop, the question is whether investors should chase the rally or wait for a pullback. While the economic stimulus has driven significant gains, some technical indicators suggest the rally could run out of steam in the short term. Let’s dive into the technicals of two prominent dual-listed Chinese stocks, Alibaba and JD.com, to assess whether the risk-reward remains favorable for investors at these elevated levels.

Alibaba’s 38% YTD Gain Marks a Turnaround for Long-Term Investors

Alibaba Group Holding NYSE: BABA, China’s internet retail giant, has seen a remarkable 31% surge over the past month, which has turned its year-to-date (YTD) performance positive, now up 38%. After enduring a prolonged period of underperformance, where the stock hovered near its 52-week lows for more than a year, the recent breakout has been a welcome change for long-term investors. The rally allowed BABA to break through resistance and finally escape its downtrend.

From a valuation standpoint, Alibaba remains appealing with a forward P/E of 11.17, positioning it as a solid long-term investment opportunity. However, in the short term, caution may be warranted. The stock’s Relative Strength Index (RSI) has climbed to 79, suggesting it has entered overbought territory. On Monday, the stock gave back some gains after initially gapping up, signaling that it might be digesting its recent move and possibly pulling back.

For investors with a long-term outlook, BABA still offers compelling value. However, it might be wise to exercise patience in the short term. The stock could find more attractive support closer to the $100 level, where it may stabilize before resuming its upward trajectory.

JD.com’s Rapid Rally Signals Potential Pullback After RSI Hits 85

JD.com NASDAQ: JD, another consumer discretionary Chinese internet retail giant, has similarly exploded higher, with gains of 51% over the past month and 38% YTD. Like Alibaba, JD was trading near its 52-week lows before the recent surge, and the stock is now up 92% from those lows.

However, JD’s rapid ascent has pushed its RSI to 85.67, which indicates extreme overbought conditions. This suggests a short-term pullback is highly likely, as stocks rarely maintain high RSI levels for extended periods without some price consolidation. A potential support area for JD could be in the $36-$38 range, where previous resistance might now serve as a floor.

Despite the likelihood of a pullback, JD remains an attractive long-term play. The company trades at a P/E of 14.55 and a forward P/E of 9.61, placing it firmly in value territory. Analysts are also bullish on JD, with 10 rating the stock a “Buy” and four as a Hold, resulting in a consensus Moderate Buy rating.