China stocks in US start Year of the Tiger on right foot

[NEW YORK] Chinese stocks listed in the US notched their biggest back-to-back weekly gains in about 5 months.

The Nasdaq Golden Dragon China Index - comprised of giants like Baidu and Alibaba Group Holding - gained about 2.5 per cent since last Friday (Feb 11). The gauge had its biggest back-to-back rally since early September, with a surge of about 11 per cent in the span.

Sentiment was buoyed by state-backed funds' purchases of local shares as the domestic market reopened for trading after being closed to celebrate the Year of the Tiger. The rally did take a hit Friday as the US warned Russia could take offensive military action against Ukraine as early as next week. Russia has repeatedly rejected charges it plans to invade Ukraine.

Investors are hoping that the nascent rally over the last 2 weeks is a precursor to a larger rebound for the group, with some of its heavyweights due to report earnings soon. For analysts, though, a major key to the longevity of the gains rests on whether tensions between Washington and Beijing continue to escalate over the next few months.

"It's hard to read too much into the price action at this point," said Adam Crisafulli, founder of Vital Knowledge. "China still has macro tailwinds in the form of policy easing, and there is some evidence the regulatory agenda is becoming a tiny bit less draconian, but the zero tolerance Covid policy remains an overhang."

The Nasdaq Golden Dragon China Index fell 3.1 per cent in New York on Friday, joining a broader market selloff.

Earlier this week, the US Department of Commerce added 33 Chinese entities to its unverified list, a move that may require those firms to acquire additional licences in order to buy products from American companies. Meanwhile, regulators in China ramped up their crackdown on the education sector, banning online tutoring firms from offering high-school curriculum classes over the current holiday break.

Still, there are early signs that some regulatory worries are waning, with a group of small Chinese firms preparing to list in the US after a 6-month gap in deals from the region. The back-to-back weekly gains by US-listed Chinese stocks have only reversed a small portion of the 43 per cent plunge in 2021, with the gauge largely underperforming global benchmarks.

One area of focus that could make or break the recent rally will be the upcoming deluge of earnings from large-cap Chinese firms. Tech giants including Alibaba, JD.com, Pinduoduo and NetEase are all expected to release quarterly results over the next few weeks. A strong set of outlooks from the group could help allay fears that China's slowing economy is stunting earnings growth.

"Ultimately we need catalysts as we are heading into the earnings season," said Brendan Ahern, chief investment officer at Krane Funds Advisors. "We have seen investors come back on the clues that the valuations of these companies are very inexpensive with their historical prices, particularly on a relative basis compared to US tech." BLOOMBERG