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Need to Know: This China skeptic concedes tech stocks are cheap as chips but warns against holding for the long term

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It looks like traders think there are some bargains among Chinese internet stocks.

Pinduoduo
PDD,
+22.25%

jumped 22% on Tuesday as the Chinese ecommerce group pledged $1.5 billion in future earnings to charity, following Tencent in making sizeable donation as Chinese President Xi Jinping cracks down on the business sector.

It wasn’t the only China stock that surged. JD.com
JD,
+14.44%

jumped 14%, after reporting stronger-than-forecast revenue and earning an investment from star fund manager Cathie Wood. Tencent Music Entertainment
TME,
+12.75%

added 13%.

George Magnus, the former chief economist at UBS and the author of Red Flags: Why Xi Jinping’s China is in Jeopardy, concedes traders may have a point in bidding up these stocks.

“On mean reversion criteria, these tech and related stocks are now cheap as chips,” he tells MarketWatch. But, he says, they should be for trading only, and not for a pension or long-term portfolio. “If many of these firms are being brought to political and regulatory heel, they shouldn’t trade as growth stocks, in my opinion. The valuation shift should be permanent,” he says.

Magnus authored a piece on Xi’s crackdown for the London-based SOAS China Institute, in which he said “everything about Xi’s China suggests a craving for control and Leninist discipline that are not compatible with good economic outcomes.” He agrees that Chinese authorities have reason to tackle inequality, but says to do so effectively, China will have to do more than crack down on the super rich.

“The government would have to ensure that tax receipts raised would go directly to other less well off households, including migrant workers in urban areas without urban registration, and not into government coffers or other projects of little value to the majority of citizens. Otherwise, it would not be possible for lower income households to consume more and save less, and in so doing become more mobile geographically and job-wise,” says Magnus.

The rise in the gig economy is even more pronounced in China than the U.S., where informal employment accounts for nearly 60% of jobs. This low wage, insecure job situation makes China’s inequality issue so important, he says, especially as its social safety net is not generous.

The buzz

The People’s Bank of China vowed to stabilize the supply of credit and boost the amount of money for smaller businesses, and the country’s third-largest container port re-opened after shutting for COVID-19.

The Democratic-run House on Tuesday advanced a key measure tied to President Joe Biden’s big spending plans, diffusing a rebellion from centrists. Biden is due to meet leading technology executives, including Apple’s
AAPL,
-0.06%

Tim Cook, Microsoft’s
MSFT,
-0.67%

Satya Nadella and Amazon’s
AMZN,
+1.22%

Andy Jassy, to discuss cybersecurity on Wednesday.

Durable-goods orders data is due for release.

After the close, business software giant Salesforce.com
CRM,
-0.33%

and database software company Snowflake
SNOW,
+1.78%

report results. Retailer Urban Outfitters
URBN,
+5.44%

late Tuesday reported stronger earnings than forecast, as did tax-preparation software maker Intuit
INTU,
+0.28%
.

In Germany, the Social Democratic Party is now polling ahead of the CDU/CSU bloc ahead of the Sept. 26 election. A measure of German business confidence dropped for a second month.

The markets

Looks like a pre-Jackson Hole lull has kicked in, with stock futures
ES00,
+0.01%

NQ00,
-0.02%

steady. The yield on the 10-year Treasury
TMUBMUSD10Y,
1.308%

crept up to 1.30%.

Random reads

How the anonymous English artist Banksy manages to avoid detection.

Cotton tote bags are not helpful to the environment, it turns out.

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