The latest IPO of DiDi Global (DIDI) has shed some negative light on foreign company stocks, mainly coming out of China. Unless you've been living under a rock, you've likely heard the story about this fabled IPO. The ride-hailing app company was forced to remove its app from app stores in China. The Cyberspace Administration of China said that it would take down apps operated by Didi from stores to favor government intervention to crack down on the company.

In a statement, Didi said, "The CAC notified app stores to take down these apps and cease to provide viewing and downloading service in China, and required the Company to strictly comply with relevant laws and regulations... and rectify the problem to ensure the security of users' personal information."

This comes shortly after the company was at the center of a $4.4 billion listing on the NYSE, one of the largest in recent history. On its IPO, shares traded as high as $18.01 after opening at $16.65. Since then, however, the stock slid down to lows of $11 and still has yet to break back above $13. In any case, this has caused China-based company stocks to fall under the scrutiny of regulators and investors alike. But, unlike what we saw last year with companies including Lukin Coffee (LKNCY) and others like GSX Techedu (GOTU) earlier this year, the sentiment is very mixed, and I'll explain why.

China Stocks: Good, Bad, Ugly, or Something Else?

In most cases, the bigger waves of excitement are enjoyed by traders more so than long-term holders. Sure, you've got the traditional companies like Alibaba (BABA), Baidu (BIDU), Nio Inc. (NIO), JD.com (JD), and Tencent (TCEHY). But then you've got your "not so popular" stocks that traders seem to have flocked to recently. These have come with massive moves in the market as well. SGOCO Group, Ltd. (SGOC) was the latest to grace the triple-digit club's ranks. In just a few days, SGOC stock jumped from around $2 last Thursday to highs of $29 this past Monday for a rally of nearly 1,300% from last week's lows of $2.09. The interesting part and a common theme among many China stocks is that there wasn't much to point to when it came to the move fundamentally. There weren't any headlines, filings, or media blitz to go along with the explosive jump. But as some reports highlighted, "the company filed its Form 20-F. This is a form submitted by foreign private issuers with listed stock on US exchanges. This Form 20-F is submitted to show a company’s annual report. In SGOCO’s case, the company’s filing showed 2020 revenues coming in at $4.29 million, which was down from 2019’s $5.11 million."

The relation to any positive sentiment could have been correlated with the fact that SGOCO received a deficiency letter from the Nasdaq in May regarding failure to file its annual report. Was this a bullish reaction based on traders previously counting out the stock, and now, with the new filing, it showed that SGOCO is still "in the game"? A lot is left to speculation as the company has yet to release any update discussing the latest activity in the market. 

You've also got companies like Takung Art (TKAT), a former NFT stock. During the crypto resurgence this year, non-fungible tokens or NFTs grew in popularity. The famous record sale of Beeple's $69 million digital piece of art sparked a huge jump in speculative trading around companies that "could" have some exposure to this new trend. Takung, based in Hong Kong, operates a platform allowing the trading of fine art between collectors and investors. The fact that it was online and dealt with art was enough for hoards of traders to flood into TKAT stock. Look at what has happened since the initial run. TKAT is down more than 80% from its high. That goes for other Chinese NFT stocks like Oriental Culture Holding Ltd (OCG), which was a sympathy trade alongside TKAT this year.

But what should investors and traders take away from all of this? Is it a minefield, or are there ways to benefit from this niche?

Looking At Analyst Commentary

On an episode of CNBC's Squawk Box Asia, Mixo Das, equity strategist at JPMorgan, said, "Ever since the highs in February we’re down quite a bit in Asian equities and the way we look at it is, our framework is telling us that now is probably the best time to be taking risks in Asia."

Highlighting decreasing valuations, Das explained that investors are positioning right now and that "Asia stocks could move a lot higher" if things in the region stabilize. One of the things that could help this is the continued economic reopening and decrease in covid cases.

On the other side of this coin, you've got analysts like Morgan Stanley’s chief Asia and emerging market equity strategist Jonathan Garner. He told Squawk Box Asia that he thinks he sees "that the anti-trust regulation is proving sort of much deeper and more long-lasting than we had thought."

Morgan Stanley recently reiterated its bearish stance on China stocks, in general. The bank calls for a downgrade of Chinese stocks under the MSCI China index to equal weight. While this is the case, Morgan Stanley isn't sweepingly bearish on all Chinese stocks. The bank also explained that "Not all companies are likely to be affected equally. We think Chinese companies in certain sensitive sectors, e.g., data-rich tech firms and those operating in areas where foreign ownership is restricted, will likely seek more onshore and/or HK listings instead of in the US."

Will The Government Ultimately Decide What Happens Next?

Investors may be at a crossroads right now. However, regulatory decision-making could be the final straw that opens or closes the floodgates. PLenty of industry regulatory tightening has been going on since 2020. If that continues, the chances are that would reflect negatively for related stocks. Then again, should new rules open up more possibilities for "real" companies to list shares on major exchanges, including more stringent reporting requirements, that could be a bullish event to factor in down the road. At the end of the day, whether you're investing or trading, understand the make-up of this niche and play the market accordingly.