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Best Chinese Stocks To Buy And Watch Amid China Crackdowns

https://www.investors.com/news/best-chinese-stocks-to-buy/?src=A00220

Hundreds of Chinese companies are listed on U.S. markets. But which are the best Chinese stocks to buy or watch right now? Weibo (WB), Sohu (SOHU), Nio (Nio), BYD Co. (BYDDF) and Li Auto (LI).

China is the world's most-populous nation and the second-largest economy with a booming urban middle class and amazing entrepreneurial activity. Often dozens of Chinese stocks are among the top performers at any given time, across an array of sectors.

But with China's crackdowns on Didi Global (DIDI), for-profit education firms and other sectors, U.S.-listed Chinese stocks are reeling. While there may be big growth opportunities going, forward, the risks are very high.

Best Chinese Stocks Across Many Industries
As the world's largest internet market, it's no surprise to see big growth from China stocks focusing on e-commerce, messaging or mobile gaming. Notable Chinese internet stocks include:

Alibaba (BABA)
JD.com (JD)
Pinduoduo (PDD)
Tencent (TCEHY)
Vipshop (VIPS)
Baidu (BIDU)
Tencent Music Entertainment (TME)
NetEase (NTES)
Trip.com (TCOM)
Dada Nexus (DADA)
Bilibili (BILI)
Joy (YY)
KE Holdings (BEKE)

In electric vehicles, several Chinese companies are becoming serious rivals to Tesla (TSLA) in the world's biggest auto market.

Nio (NIO)
Xpeng Motors (XPEV)
Li Auto (LI)
BYD Co. (BYDDF)
Several Chinese financial firms or brokerages listed in the U.S.

Futu Holdings (FUTU)
Up Fintech Holding (TIGR)
360 Digitech (QFIN)
Noah Holdings (NOAH)

Several China stocks are in solar power.

Daqo New Energy (DQ)
JinkoSolar (JKS)
For-profit education Chinese stocks are a notable non-tech sector.

New Oriental Education (EDU)
Tal Education (TAL)
17 Education & Technology Group (YQ)
Gaotu Techedu (GOTU), formerly known as GSX Techedu.
Don't forget stocks in other fields, such as riding-hailing firm Didi Global (DIDI), beauty products maker Yatsen (YSG) or data-center operator GDS Holdings (GDS).

Beijing Crackdown On Chinese Stocks
Investors should be aware of significant risks with investing in Chinese stocks. The authoritarian state and its regulators can impose sweeping restrictions, fines or bans on major companies, often with little notice or transparency.

That risk has been very apparently over the last several months.

Alibaba ran afoul of regulators in late 2020, with regulators opening probes into internet platforms and suspending the Ant Group IPO. In April, China fined Alibaba $2.8 billion for anti-competitive actions and ordered it to change various practices. Alibaba affiliate Ant Group limiting the scope of some of its businesses to comply with regulators' demands.

Further antitrust probes and fines are likely for other internet giants.

China's cybersecurity regulator earlier this month ordered app stores to remove Didi Chuxing, just days after Didi Global (DIDI) held one of the biggest U.S. IPOs in years. The cybersecurity regulator said Didi violated restrictions on the collection and usage of personal information, but didn't offer any specifics. That came just days after announcing a probe and ordering Didi to suspend new user sign ups.

More broadly, China will impose cybersecurity reviews on internet and data-centric companies listing overseas. Hong Kong listings appear to be exempt, suggesting far fewer Chinese companies listing in the U.S. going forward. Many big U.S.-listed Chinese companies already have secondary listings in Hong Kong.

For-profit school operators, including New Oriental Education (EDU), TAL Education (TAL) and Gaotu Education (GOTU), crashed on July 23 as Beijing mulled whether to make after-schooling tutoring firms nonprofit. These stocks had already fallen sharply in 2021 as regulators and leaders signaled new restrictions.

Beijing confirmed for-profit restrictions over the weekend, triggering continued huge losses in Chinese school stocks and big losses among U.S.-listed China stocks. China also is setting new rules on app-based delivery firms and has signaled it may target the property sector. Finally, Beijing has hinted at even-tougher rules for Hong Kong and Macau.

Chinese Stock Risks, Continued
Accounting fraud, while less likely with institutional-quality names such as Alibaba, remains a concern. Luckin Coffee admitted to widespread fraud in 2020. Fraud charges alone can trigger massive share price losses.

Meanwhile, a new U.S. law could force Chinese companies to delist from U.S. markets. That threat isn't imminent, and could be averted with negotiations between the Treasury Department and Beijing over accounting oversight. Still, it's something that could loom large for China stocks in the coming years.

China Stock Investing Via ETFs
One way to minimize individual China stock risks is via ETFs. Another advantage of buying ETFs is that a growing number of Chinese companies are listing in Hong Kong or Shanghai, instead of in addition to the U.S.

KraneShares CSI China Internet ETF (KWEB) tracks major Chinese internet companies. Many Chinese stock holdings in the KWEB ETF are U.S.-listed or traded, such as Alibaba stock, JD.com, Tencent, Pinduoduo and Bilibili, but KWEB also holds companies listed on Chinese markets. Direxion Daily FTSE China Bull (YINN), a three-times levered ETF of the 50 largest companies listed in Hong Kong, including Alibaba, JD.com and Tencent stock, but its biggest weights are in financials. (The Direxion Daily FTSE China Bear (YANN) is a three-times levered ETF shorting Hong Kong's biggest companies.)

Stock Market Trend Key
As always, investors should be following the overall stock market trend, adding exposure in confirmed uptrends and paring exposure or going fully to cash in corrections or bear markets. Right the stock market rally remains under pressure.

Best China Stocks To Buy: Key Ingredients
Focus on the best stocks to buy and watch, not just any Chinese companies.

IBD's CAN SLIM Investing System has a proven track record of significantly outperforming the S&P 500. Outdoing this industry benchmark is key to generating exceptional returns over the long term.

Look for companies that have new, game-changing products and services. Invest in stocks with recent quarterly and annual earnings growth of at least 25%.

Start with those with strong earnings growth, such as Alibaba or Pinduoduo stock. If they're not profitable, at least look for rapid revenue growth as with Nio stock. The best China stocks should have strong technicals, including superior price performance over time. But we'll be highlighting stocks that are near proper buy points from bullish bases or rebounds from key levels.

Chinese stocks are out of favor. Whether it's a general malaise for EV names such as Nio and Xpeng, or a regulatory crackdown for Alibaba, Didi or New Oriental Education, U.S.-listed Chinese stocks have been notable losers in 2021.

After a brief attempt in May and June, China stocks are under heavy pressure once again.

Chinese stocks rebounded on July 28 after state media blamed the recent sell-off on "venting of emotion." That suggests leaders would like stock prices to stabilize.