China equity traders abandon ‘bubble stocks’ amid PBOC liquidity signals as reflation bets gain momentum

Zhang Shidong
·4-min read

China’s most crowded stock trades are showing signs of unravelling as liquidity tightening by the central bank and expectations about global economic reflation gave investors some cold feet after they returned from a market break.

Liquor distiller Kweichow Moutai, electric-car battery maker Contemporary Amperex Technology and duty-free shop operator China Tourism Group Duty Free have tumbled by at least 9 per cent since the mainland’s stock exchanges reopened after a five-day Lunar New Year holiday.

The trio are among favourite consumer and technology-related stocks that have skyrocketed over the past year as they prospered from the “new normal” in work and spending patterns during the Covid-19 pandemic. They now appear to be most susceptible to policy tweaks.

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The People’s Bank of China mopped up a net 260 billion yuan (US$40.2 billion) of liquidity from the financial system on Thursday, stoking concerns that policymakers may have started dialling back their accommodative stance after getting the pandemic under control. The central bank has also lowered lending quota in a move seen as reining in asset speculation.

The headquarters of the People's Bank of China in Beijing. Photo: Reuters
The headquarters of the People's Bank of China in Beijing. Photo: Reuters

“We need to pay close attention to the policies on liquidity and institutional inflows,” said Huang Hongwei, an analyst at Chasing Securities. “The stampede bets have pushed stocks to lofty valuations and priced in earnings in the following three or four years. A rise in interest rates could lead to a significant drop in those valuations.”

Kweichow Moutai crashed 7 per cent in Monday trading, while China Tourism slumped 8.9 per cent and Contemporary Amperex retreated by 3.2 per cent. The CSI 300 Index, which tracks the biggest stocks in Shanghai and Shenzhen, fell 3.1 per cent.

Kweichow Moutai slumped 5.4 per cent last week after its price multiple surged to about 67 times forward earnings, approaching the highest since 2007. Contemporary Amperex slid 6.1 per cent and China Tourism retreated 4.1 per cent. They last traded at respective 129 and 174 times forward earnings, compared with an average 13 times for members of the Shanghai Composite Index, according to Bloomberg data.

Besides, progress in global vaccination has also fuelled so-called growth reflation bets as investors look ahead to further reopening of major economies. This has propelled prices of commodities from crude oil to copper and aluminium, while the mainland markets were shut last week.

Traders were quick to pare their holdings of consumer and tech companies and switch into old-economy plays upon their return on Thursday. The conviction has been reinforced by President Joe Biden’s US$1.9 trillion stimulus package and a drop in global Covid-19 infection cases.

The fallout is a stark contrast to the euphoria before the market ushered in the Year of the Ox, when ample liquidity, record fundraising by mutual funds, and shrinking yields on wealth management products prompted traders to stampede on consumer and tech stocks.

For example, a gauge tracking baijiu distillers surged 59 per cent last year, with Kweichow Moutai leading the charge by registering a 69 per cent gain. Contemporary Amperex jumped more than three fold as Beijing’s carbon-neutral goal underpinned demand for new-energy vehicles. China Tourism more than tripled after the government eased rules on duty-free shopping.

While brokerages including Guotai Junan Securities have called these stocks as “bubbles,” some analysts and money managers argue they are solid bets that will deliver sustained profit growth in the foreseeable future. Lofty valuations can be digested by fast expansion.

“The dual force of global recovery and the start of the restocking cycle will make cyclical stocks stand out,” said Yin Yue, an analyst at Yuekai Securities.

Both forces will probably strengthen as markets more correlated with economic cycles such as Europe, Japan and Hong Kong set the pace of stock upturn, while yields on longer-dated global bonds continue to rise, according to Huatai Securities.

HSBC Jintrust Fund Management, one of the top domestic fund managers in 2020, recommends base metal, petrochemical and financial stocks as well as new-energy sectors whose resilient industry sentiment can offset valuation concerns.

Still, matching fundamentals and valuations will be closely watched and will become a top priority for asset allocation, it said.

“With the central bank draining liquidity on the first day of trading in the new year, the market has high expectations about the normalisation of monetary policies,” said Xu Fei, an analyst at Wanlian Securities. “Stocks whose prices can match valuations will fall in favour, while the stampede bets with outsize gains are likely to come under pressure.”

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