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Navigating the Dip: Is Now the Right Moment to Invest in Chinese Stocks?

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China’s Stimulus Package Sends Stock Markets Soaring

Government Boost Propels Markets Following Stimulus Announcement

On the night of September 23rd, the Chinese government unveiled an expansive stimulus package that exceeded market expectations. This package included monetary measures that lowered mortgage rates to invigorate China’s struggling real estate sector. The result was a massive rally in Chinese equities, driven by depressed sentiment, low stock valuations, and significant short interest. Stocks of Chinese ADRs like JD.com (JD) and Futu Holdings (FUTU) soared over 50% in just one month, while UP Fintech Holding (TIGR) experienced an astounding 240% increase before pulling back on Tuesday.

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Image Source: Zacks Investment Research

Chinese Stocks Experience Major Correction

After an intense rally, Chinese stocks took a significant pause. The iShares China ETF (FXI) rose sharply from $25 to $37 in recent weeks, achieving gains in 11 of 13 trading sessions. However, on Tuesday, it fell approximately 9%. This sudden drop marked the steepest decline for Chinese stocks since the depths of the Global Financial Crisis, when Lehman Brothers collapsed.

Should Investors Seize the Opportunity?

For those who invested during the bull run, the recent decline may be disheartening. However, such fluctuations are typical after a major short squeeze. A 10% drop in a bear market behaves differently from a 10% drop following a short squeeze. The FXI has given back about one-third of its recent gains, now returning to its short-term 10-day moving average for the first time. This level may represent a favorable entry point for investors who missed the initial rally.

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Image Source: TradingView

Stock Buybacks Provide Additional Support

Alibaba (BABA), a leading player in the e-commerce industry, is noteworthy for investors. Similar to how Apple (AAPL) managed to boost its stock price through buybacks, BABA has been active in repurchasing shares almost daily in September, totaling more than $4 billion in buybacks for the third quarter. Although the company has temporarily halted buybacks in the wake of the equity squeeze, there are indications that it will resume these operations to leverage current price dips, potentially driving share prices higher.

Chinese Stocks Remain Attractively Priced

Although a significant short squeeze has raised Chinese stock prices, overall valuations still appear historically low. For instance, Alibaba’s price-to-sales ratio is around 2x, just one-fifth of its level in 2020.

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Image Source: Zacks Investment Research

Conclusion

While Chinese equities faced a sharp drop on Tuesday, the underlying fundamentals suggest that this decline could be a prime buying opportunity rather than a sign of market peaks.

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Apple Inc. (AAPL): Free Stock Analysis Report

iShares China Large-Cap ETF (FXI): ETF Research Reports

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Alibaba Group Holding Limited (BABA): Free Stock Analysis Report

Futu Holdings Limited Sponsored ADR (FUTU): Free Stock Analysis Report

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The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.

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