China's bourses surged through 2020 but some are asking if the momentum will be maintained in 2021. Photo: AFP

China’s stock market exuberance since the second half of last year has continued into 2021, with investors hoping that the current bull run will accelerate in the run-up to the week-long Lunar New Year break this month and usher in an even bigger upswing in the Year of the Ox.

The benchmark Shanghai-Shenzhen 300 Index that measures the market-capitalization-weighted performance of the 300 biggest firms listed on both bourses soared more than 26% from 4,100 to 5,200 in 2020, despite a pandemic-battered global economy. 

The Shanghai Composite Index has hovered above the psychological level of 3,500 so far this year. 

But there are plenty of reasons those upbeat sentiments could fade, analysts say. About 2,000 stocks, or more than half of the total listed companies in Shanghai and Shenzhen, suffered losses and share price declines in 2020, according to Asia Times’ review of preliminary data furnished by the two bourses.

The growing number of listed loss-making companies, with some reportedly on the edge of being expelled from bourses by market watchdogs for various reasons, is a reminder of the rising risks behind the market euphoria.   

“It is merely a dozen of big-cap firms enjoying strongholds on their respective industries that are driving the rally, as reflected in the Shanghai-Shenzhen 300 Index that tracks these big players,” said Hou Anyang, founder of the Shenzhen-based Frontsea Asset Management Ltd, one of China’s largest fund operators.  

“Their shares are much-sought-after because their core business is about consumption, new economy and new energy, but retail investors are priced out and even losing money because of the higher threshold of investing in these leading firms,” wrote Hou on his blog. 

He said the dozen or so companies favored by institutional investors typically included Kweichow Moutai, a distiller based in western Guizhou province known for its baijiu Chinese liquor whose share price has recently surged to dizzying new highs.

Moutai’s shares changed hands at 2,109 yuan (US$326) on Monday, more than twice its 1,003 yuan level a year ago. Other Chinese wine producers like Wuliangye, Luzhou Laojiao and Yanghe Brewery also saw their share prices bubble up in 2020. 

Liquor stocks are driving Chinese stock markets to dizzying new highs. Credit: Handout.

Battery manufacturer Contemporary Amperex Technology, based in Fujian province and one of the nation’s largest suppliers of lithium-ion packs, is another favored company. Its share price has soared from 106 yuan a year ago to 350 yuan on Monday, partially on Beijing’s policy drive to phase out polluting petrol guzzlers for electric vehicles. 

Other stocks that are favorite fund manager picks are high-flying firms involved in 5G, healthcare and solar energy. Assets and stocks managed by public funds in the country grew more than a third last year to almost 20 trillion yuan by the end of 2020.  

On hopes 2021 will be another banner year, more than 300 new such funds are in the pipeline, as applications pile up on the desks of the People’s Bank of China and China Securities Regulatory Commission.

Some fund managers whose returns rocketed last year are becoming superstars who command cult followings as more funds and individual investors move in lockstep with their picks.

One such fund manager is Zhang Kun, an investment advisor with the Shenzhen-based Efunds asset management firm. He now reportedly looks after a portfolio worth 120 billion yuan and is known for his penchant for Moutai and Wuliangye shares.  

Yuan Yuwei, a hedge fund manager based in Shenzhen, told the Guangzhou-based Southern Weekend newspaper that even though companies like Moutai and Contemporary Amperex have sound business models and strong annual returns were buoying their prospects, their prices had been pushed to price levels “out of touch with basic fundamentals.”

A Chinese investor walks past a screen displaying stocks rising (red is up and green is down) across the board in Shanghai. Photo: AFP

“I didn’t want to purvey gloom and doom, but when everyone thinks these firms’ risk premiums are low and when every fund is buying their shares, what we get is similar risk exposures but are these firms always on a sustained climb?” said Yuan. “When everyone is in the same room and there is only one exit, I’m worried about the risk of a stampede when there is a fire.” 

His concerns are apparently shared in certain quarters of the PBOC’s monetary policy committee.

“I have guarded optimism about the Chinese economy for 2021, but when stock indices surged 30% last year at a time the economy was still on a long haul to recovery, the risks are apparent,” said Ma Jun, an advisor to the PBOC’s monetary policy committee and former chief economist with Deutsche Bank, during a seminar last week.

He warned during the seminar that bubbles had already appeared in the stock market and that monetary policies should be calibrated to prevent financial system risks. 

Fund operator Guotai Junan Securities thinks there is still room to rise as the growing dominance of institutional investors in the market is in line with Beijing’s drive to raise Chinese markets to international levels.

It said in a report that fund operators are “more rational” than retail investors and speculators who previously represented the majority of punters on Chinese stock markets. The report said that the listed companies driving the current rally do not look bubbly as they have relatively low price-earning ratios compared with small-cap stocks and S&P 500 shares in the US.