Why Yum China, GDS Holdings, and Other Chinese Stocks Got Thrashed on Tuesday

On Tuesday, the U.S. stock market experienced a slump, but that was nothing compared to the slide of Chinese equities. In exchanges on both sides of the Pacific Ocean, such titles suffered notable declines.

U.S.-listed Chinese companies didn't have a good day on our shores, with many tumbling more sharply than the S&P 500 index's 0.8% fall. It scarcely mattered what industry they operated in -- tech giant Baidu (NASDAQ: BIDU), for instance, declined by over 5% on the day, as did data center operator GDS Holdings (NASDAQ: GDS). Meanwhile, fast-food restaurant operator Yum China Holdings (NYSE: YUMC) dropped by nearly 6%.

The rally is becoming a distant memory

This was particularly discouraging given the sprightly rally those and other China stocks experienced at the end of September and the beginning of this month. Buoyed by the Chinese government's latest promise of a sprawling economic stimulus program, hopeful investors loaded up on such companies.

Since then, however, there has been little movement in actually implementing any of the numerous measures announced by officials. Compounding that, the government hasn't exactly been quick in providing the concrete financial numbers for many of those moves. It's tough to gauge the potential effect of a stimulus program without having a good idea what the inputs will be.

Another factor behind the Chinese stock pullback is the growing fear that no matter how extensive the stimulus, it might not be enough to fully revitalize the massive economy. Growth in gross domestic product (GDP) hasn't been nearly as hot as it was in previous years. This might indicate that the average Chinese consumer of means could be reining in spending as a matter of habit, a trend that might prove tough to reverse.

Careful stock picking is now essential

When a stock slump occurs across business sectors, it suggests investors are worried that negative factors are affecting an entire economy. The Chinese population is very eager to embrace technology, so theoretically the country's tech sector, for example, should be facing a bright future. Yet Baidu, GDS, and other top domestic tech names have been swept up in this latest round of declines.

Lastly, profit taking by investors selling at the peak of the rally also appears to be a factor. This is normal in any situation where equities suddenly vault higher; those who bought at notably lower prices are always tempted to book a quick profit and get on to the next promising situation.

For those interested in Chinese stocks, now is the time to buy more on intrinsic business value and core fundamentals than anything else. We still don't know enough about how each stimulus measure will affect individual sectors and companies; besides, there's a chance that top-level assistance won't materialize as imagined.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Baidu. The Motley Fool has a disclosure policy.