Here’s Exactly How To Play The Surge In Chinese Stocks

China flag near building

Photo by zhang kaiyv on Unsplash

It's been two years since Congress passed the Holding Foreign Companies Accountable Act, demanding audited financials from all companies listed on U.S. exchanges - including Chinese firms which, until then, didn't have to submit audited financials and never did.

The threat of delisting had a predictable impact, beating down several high-quality stocks and postponing a number of IPOs. China responded with some trade actions of its own, such as tariffs and sanctions, but even after the transition to the Biden administration, the 2024 deadline for the audit stayed in place.

Now it seems that talks between the Chinese government and the SEC have taken a positive turn.

On Friday, China announced that it is preparing to give U.S. regulators full access to auditing reports of the majority of the 200-plus companies listed in New York, as soon as this summer, assuaging a lot of concerns about potential delisting.

But it's worth noting that experienced investors don't seem to be worried about it all that much, despite the initial reaction. Many of the affected companies made separate listings on Hong Kong's exchanges, meaning that investors would not lose access to those firms, and the largest mutual funds and ETFs that deal in Chinese stocks have simply begun swapping their U.S. shares for Hong Kong shares.

Still, thanks to a buying spree from the retail crowd, Chinese stocks surged higher in last Friday's session. And I think they could go higher yet.

So we're looking at an ideal short-term trading opportunity here: big companies with high potential liquidity, at great prices, riding a wave of good news and trader confidence.

Here are my three favorites...

China's Amazon Is Back on the Rise

Alibaba Group Holding Ltd. (BABA) is one of China's largest multinationals, dealing in e-commerce, cloud Internet services, and digital media and entertainment.

It is extremely cheap to buy right now, given its financials. Shares of BABA have lost 63% since October 2020, but they were up more than 6.5% in early Friday trading, and 65% since March 15, 2022.

I think we could see shares of BABA easily trade north of $125 in the near term, which is why I want to target a bullish call spread with a May 2022 expiration.

If shares of BABA trade back down to $110 by April 8, 2022, I like buying the BABA May 20, 2022 $120/$125 call spread for $2 or less. Plan on selling the BABA May 20, 2022 $120/$125 call spread for a 100% (or more) profit, or if shares of BABA close below $104.

This Global EV Maker Competes with Tesla

Most Americans aren't familiar with Nio Inc. (NIO). It was founded in 2014 and has quickly risen to become one of the most prominent electric vehicle manufacturers in the world.

Not only has it already released and has begun delivering three of its electric car models to consumers, but its infrastructure technology seeks to arm its customers with battery-swapping, roadside service, and other charging solutions to ensure practical utility for every car it sells.

Needless to say, they represent a serious threat to Tesla in China and abroad.

Just like BABA, shares of NIO have been dragged down, dropping more than 58% since July 1, 2022, but they were up more than 8% in early Friday's trading, and more than 75% since March 15, 2022.

I think we could see shares of NIO trade north of $25 in the near term, but I want to see shares pull back just a little before entering a trade.

If shares of NIO trade back down to $19.50 by April 8, 2022, I like buying the NIO May 20, 2022 $20/$22.5 call spread for $1.15 or less. Plan on selling NIO May 20, 2022 $20/$22.5 call spread for a 100% (or more) profit, or if shares of NIO close below $17.25.

China's Equivalent to Uber Could Be Exempt from Disclosure

DiDi Global Inc. (DIDI) is a large personal transportation company, offering a range of services from rideshares to private cars, food delivery, and even intra-city business freight.

It integrates with a much wider variety of business and services than Uber or Lyft, linking into public transport networks and even providing a dedicated service for designated driving.

Shares of DIDI jumped more than 16% in early Friday trading, but that was after a 90% drop since its June 2021 high. It's been one of the larger targets for Chinese delisting fears, because it was in the unique position of having tension in both Washington and Beijing after its initial public offering on the NYSE last year.

In fact, of today's trade ideas, this is the most speculative because Chinese authorities might want to claim DIDI's technology, and the information it gathers carries national security implications.

If that happens, DIDI could be excluded from the list of companies that will have their books opened up to U.S. regulators - but we won't know the answer to that question until later this year.

In the meantime, traders in the United States are driving shares higher.

If shares of DIDI trade back down to $2 by April 8, 2022, I like buying the DIDI May 20, 2022 $2/$2.50 call spread for $0.20 or less. Plan on selling DIDI May 20, 2022 $2/$2.50 call spread for a 100% (or more) profit, or if shares of DIDI close below $1.70.

As the situation with China develops, we're going to see a yo-yo effect in Chinese stocks. There are a lot of potential profit opportunities for short-term trades like these, but investors taking the long view need to find out-of-the-box solutions for parking their cash.

Disclosure: None.

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