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Why China's Small-Cap Stocks Like Kingsoft and Joyy Are Soaring Today

What happened

It's a good day for most stocks. But it's a great day for most Chinese stocks. Shares of Zhihu (NYSE: ZH) are up an incredible 64% as of 1:46 p.m. ET Wednesday, outpaced by the 70% gain Kingsoft Cloud Holdings (NASDAQ: KC) investors are currently enjoying. Joyy (NASDAQ: YY), Chindata Group Holdings (NASDAQ: CD), and Kanzhun Limited (NASDAQ: BZ) are up 54%, 50%, and 36% (respectively) as they -- and most of China's stocks -- bounce back from a drubbing suffered earlier this week in response to the country's resurging COVID-19 pandemic and the subsequent lockdowns put back in place as a result.

So what

Don't get too excited. In most of the aforementioned cases today's big rallies only reclaim value that had been lost over the course of the first two days of this week. Investors initially panicked in response to China's rekindled spread of the COVID-19 within that country, and panicked some more following J.P. Morgan analysts' comment that China had now become "uninvestable,"... at least for the time being.

The only company-specific news from any of these names that could be linked to today's rallies comes from Kingsoft and Joyy. The former announced it's considering listing its stock in Hong Kong in addition to its current Nasdaq listing, which is broadly bullish since it adds liquidity and offers access to more investors. Meanwhile, social media name Joyy released fourth-quarter and full-year numbers that are compelling. The company turned its first full-year operating profit since selling YY Live to China's search engine giant Baidu.

Image source: Getty Images.

Neither of those announcements, however, can get the bulk of the credit for Wednesday's moves. Today's double-digit bounces stem almost entirely from investors' sweeping change of heart about the impact of China's new lockdown measures.

Of course, that change of heart didn't materialize without help. China's State Council pledged to the country -- and the world, for that matter -- that it would be moving to "boost the economy in the first quarter." The comments lifted all Chinese stocks, but are sparking exaggerated gains for small caps like the aforementioned Kanzhun, Zhihu, and Kingsoft since they were seen as the most vulnerable companies on Monday and Tuesday of this week.

Now what

While it's certainly encouraging to see so many stocks bounce back so firmly, investors may not want to be too quick to assume Wednesday's gains are a glimpse of what's to come.

As was noted, today's advances mostly unwind the shocking losses taken earlier this week. Every Chinese small cap mentioned here was in a downtrend as of the end of last week, before this week's volatility took shape. In that nothing fundamental has changed between now and then, there's no reason to view today's reversal efforts as permanent.

More than anything the big swing simply underscores the unpredictability of China's small caps, which face much bigger competition in a country where heavy-handed regulation is the norm. That's not a recipe for the sort of growth most investors expect, and need. J.P. Morgan's assessment is still basically correct, as the only thing China's government and regulators can do at this point is provide lip service to buoy the century's stocks and economy. In the current environment, that may not be enough when so many other, more reliable, investment opportunities are available.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool owns and recommends Baidu. The Motley Fool has a disclosure policy.


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