Why Chinese Stocks Dropped on Thursday

In one of the more spectacular examples of a large group of stocks quickly obeying gravity, Chinese equities again suffered notable drops on Thursday. In what's basically a "no news is bad news" scenario, investors are growing increasingly wary of the lack of detail provided by the country's authorities about their recently announced economic stimulus program. The rout that quickly overtook the explosive "stimulus rally" continued.

As with previous bear sessions for Chinese titles, this affected companies in many different sectors. Tech companies GDS Holdings (NASDAQ: GDS) and Tencent Holdings (OTC: TCEHY) saw the prices of their U.S.-listed stocks melt by a respective 2% and 4% on the day. Over in the high-profile electric vehicle (EV) industry, Li Auto (NASDAQ: LI) decelerated harder, braking to a 5% decline at the close of the U.S. market.

Too little and too late?

It's all well and good to announce a sprawling stimulus initiative, but it helps to put as much meat on that bone as possible. Chinese officials have provided a few details of the program so far; however, these haven't been enough to sustain that initial rally.

Discouragingly, it was more of the same on Thursday. The country's housing minister Ni Hong held a press briefing, during which (it was hoped) he'd fill in many details of the program -- at least as it pertains to the nation's troubled real estate market.

Although the minister announced the government would boost by nearly 100% the loan quote for unfinished housing projects for residential use (to 4 trillion yuan, or $562 billion), for the most part he only parroted utterances from his fellow high government officials.

Another factor in the investor pull-back with Chinese equities is an upcoming data set, slated for release on Friday. The most closely watched figure in that set will certainly be third-quarter gross domestic product (GDP) growth. According to a poll conducted by news agency Reuters, the expectation is for a 4.5% increase year over year. If achieved, that would be the lowest figure since 2023's first quarter.

While that rate would be the envy of many economies, China is exceptional. Not long ago its quarterly growth was well higher than that, as the country maneuvered itself into being the factory of the world. Those hot numbers have cooled, however, and the trend is expected to continue -- by comparison, year-over-year GDP growth for the second quarter was 4.7%.

Waiting for more

All things being equal, securities trade on future expectations and not past performance.

And that's the root of the problem with Chinese stocks now; without sufficient detail, it's hard for even the most masterful stock picker to gauge how the promised stimulus measures will affect the many economic sectors and individual companies hungry for government-level help. As I've opined before, until we get some more clarity, it's likely best for investors to stay on the sidelines for now.

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