Traders and investors see opportunity in high-stakes 'musical chairs' of Chinese stocks, Stocktwits says

By James Rogers

One of the biggest challenges related to Chinese stocks is working out exactly what is happening in China, says Stocktwits

Despite the opacity of China's economy, small-cap Chinese stocks continue to attract attention, according to Stocktwits, a social platform for investors and traders.

"Investors still think they can play this high-stakes game of musical chairs," Tommy Tranfo, head of community at Stocktwits, told MarketWatch.

Tranfo explained that one of the biggest challenges related to Chinese stocks is working out exactly what is happening in China. "It's impossible to know what is true coming out of China," he said. "Any financial news or data that comes out of China has so many grains of salt associated with it that it's inedible."

Related: Small-cap Chinese stocks spark meme-like buzz

Nonetheless, a host of small-cap Chinese stocks, notably TOP Financial Group Ltd. (TOP), sparked meme-like attention earlier this year. Shares of the Hong Kong-based trading firm skyrocketed after they proved popular with the WallStreetBets group on Reddit.

TOP Financial's stock has fallen 23.1% in the last three months, while shares of Huadi International Group Co. (HUDI), another favorite, have fallen 22.2%. Shares of fellow buzzy Chinese small caps Addentax Group Corp. (ATXG) and Magic Empire Global Ltd. (MEGL) have fallen 79.7% and 25.9%, respectively, outpacing the S&P 500 index's SPX decline of 0.8%.

But there's still interest in Chinese stocks, according to Tranfo, who pointed to insurance-technology specialist Cheche Group Inc.'s (CCG) recent merger with special purpose acquisition company Prime Impact. The combined company began trading on the Nasdaq on Sept. 18, with its stock surging more than 581% that day.

Related: Meme stock TOP Financial Group soars more than 890%, spurred on by the Reddit crowd

"When our community sees that kind of activity, they raise their eyebrows," Tranfo said. "The interest [in these stock movements] is coming from traders, more so than investors. People are looking to quick opportunities."

Some investors, however, are taking a long-term approach to certain Chinese stocks. "We have seen really amazing stuff from our community," Tranfo said, citing the example of coffee chain Luckin Coffee Inc. (LKNCY), which had what he called an "incredibly positive" IPO in 2019.

Luckin subsequently became been embroiled in a financial misconduct investigation that caused its stock to collapse. The Starbucks Corp. (SBUX) rival was eventually delisted from the Nasdaq but is now trading over the counter.

Related: China's economy is suffering, and consumers won't open their wallets -- except to see movies

In an attempt to find out what was happening at Luckin, some investors on the Stocktwits platform dived deep into the company's operations. "What came about over the next few years was that we had people in our community go to mainland China," Tranfo said, adding that the "boots on the ground" researchers tracked orders at Luckin stores and reported the data back to the Stocktwits community.

Set against this backdrop, Luckin was brought back to a penny stock and is now trading above $32, Tranfo said, while acknowledging that China poses a unique set of challenges to investors.

Last month officials in China said they would stop reporting youth unemployment data after months of spiraling increases, the Wall Street Journal reported. The move comesat a time when the Chinese economy faces multiple challenges, from a reported real-estate crunch to consumer-spending woes, all amid ongoing geopolitical tensions with the U.S.

But traders and investors on the Stocktwits platform are still finding ways to look beyond these issues and tap into Chinese stocks. "The commonality between these two groups of people is that they can ignore all the noise," Tranfo said. "The ability to drown that out is like a superpower."

-James Rogers

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09-23-23 1022ET

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