Bad Liquor

“Many investors who once called themselves fans of Zhang, began to raise questions and engage in verbal abuse and even defamation,” reads a piece published Wednesday in China’s Global Times.

Zhang is Zhang Kun, whose E Fund Management “invests heavily in liquor companies and Hong Kong-listed high-tech firms.” That was a good combination right up until the last several weeks.

Now, barely a month after Weibo users were comparing the fund to Domaine Romanée Conti and Lafite Rothschild, Zhang is known to some as “Kun the dog” amid a stretch of underperformance. (And you thought Reddit investors were fickle beasts.)

One problem is Zhang’s bet on Kweichow Moutai, China’s most valuable listed company. The shares dropped another 5% Thursday, extending a horrendous post-Lunar New Year rout that’s cost the liquor maker some $110 billion in market value so far.

This is not new. Kweichow Moutai is a market darling. And like all market darlings, regardless of locale, it tends to become more and more crowded until it finally tips over, sometimes in dramatic fashion.

Last summer, for example, after Beijing became concerned that a local bull market might turn into what state media amusingly called “a mad cow meat grinder,” Moutai was bludgeoned by almost 8% in a single session. Party mouthpieces chided the company, saying its products were becoming ubiquitous in corruption scandals.

“Alcohol is meant for drinking, not for speculation or corruption,” The People’s Daily scolded at the time.

Fast forward eight months and Moutai is at the heart of ongoing weakness in mainland shares, as investors await word from the National People’s Congress and seek clarity on the country’s economic future from the new five-year plan. Recent nods to tighter monetary policy have traders on edge and “bubble” warnings from a top official earlier this week dented sentiment further. “Any focus on leaning against leverage via policy tightening will be closely watched in the context of the banking regulator’s comments earlier this week,” AxiCorp’s Stephen Innes remarked.

The ChiNext was crushed Thursday, while the CSI 300 dropped the most since last summer.

The “problem” with Chinese shares is that officials can and will countenance a lot of pain. Unlike their western counterparts, policymakers in Beijing don’t necessarily subjugate every objective to the stock market.

That’s not to say they won’t intervene. They will. In fact, they’ll halt the market (as they did in the summer of 2015) if falling stocks risk catalyzing social upheaval. But that’s not relevant right now.

In the same Global Times piece linked here at the outset, the tabloid “casually” cites China’s equity fund management authority. “Companies in the fund management sector should not carry out or participate in entertainment-related activities,” the regulator said, after a handful of managers were invited to appear on a popular Chinese talk show.

“Alcohol is meant for drinking.”


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