Why Is This Expensive Chinese Booze Acting as a Barometer for Stocks?

International investors have cooled on Chinese stocks as the May rally in mainland shares peters out. They have been disposing of the shares in June, with successive sessions of selling in the “northbound connect” link between the markets in Hong Kong and mainland China.

Perhaps no stock sums up the situation better than Kweichow Moutai (SH:600519), the largest listing in Shanghai by market capitalization. The state-backed company produces premium maotai, a strong clear grain-based baijiu spirit that is similar to Japanese shochu or the soju you’d find in Korea.

Flying Fairy is the top-of-the-line brand from Kweichow Moutai, which is also the world’s largest alcoholic-drinks producer by market cap, having surpassed Diageo DEO back in 2017. But the price of a bottle of Flying Fairy, a prized gift or status symbol for an after-dinner toast, has plunged, offering a barometer of Chinese consumer, business and investor confidence.

Kweichow Moutai is again leading the share selling on Thursday for international investors using the northbound “stock connect” link between the Hong Kong and Shanghai market. It’s a way for global investors to buy or sell into the walled-off mainland “A share” markets, which are otherwise off-limits to international buyers.

And they have been selling of late. They have disposed of a net C¥7.4 billion (US$1.02 billion) in Kweichow Moutai shares since the Dragon Boat Festival on June 10, which meant there was a holiday that skipped trading on the first day of last week. Overall, international investors have sold more Chinese stocks than they’ve bought every day since the festival.

Mainland and Hong Kong markets both peaked on May 20. The euphoria has worn off leaving Kweichow Moutai investors with a bad hangover. There’s been net selling of the drinks maker every trading day in June bar three. The spirit producer’s shares peaked earlier than the broader market, on May 7, since when the stock is down 15.2%.

The price of a bottle of Kweichow Moutai Flying Fairy has also slipped. It crested to a high in September 2021, when the wholesale price neared C¥4,000 (US$550), but is down 13.0% this year, to C¥2,580 (US$355) as of mid-June. The cost of a bottle correlates pretty closely with the price of property, Nomura’s economists note, so it’s a good measure of any kind of wealth effect in China.

The name maotai comes from a town in Guizhou Province, by the way, where the waters of the Chishui River and fine locally grown wheat are thought to give the spirit its best flavor. The Romanization of the drink’s name varies a bit depending on the producer.

You’re far more likely to splash out on a pricey bottle of booze to impress your friends, business partners or government connections if you’re feeling flush. Yet home prices took a turn for the worse soon after the Beijing administration introduced its “Three Red Lines” in August 2020, forcing a painful deleveraging on the property sector, which continues to suffer. It was the start of a series of problems that have robbed consumers and homeowners of their confidence.

In fact, figures released by the National Bureau of Statistics this week show that new-home prices in 70 major cities fell at their fastest pace in almost a decade, the 0.7% monthly decline for May the worst reading since October 2014. That’s despite the central bank reducing downpayment ratios on first and second homes, and setting up a C¥300 billion (US$41 billion) facility to support state-owned companies in buying incomplete homes at cut-rate prices, to finish projects.

Kweichow Moutai stock, meanwhile, reached an all-time high in February 2021, during the euphoric rally in Chinese stocks when it appeared Covid-19 pandemic was nearing an end. It was a false dawn. Chinese shares then cratered in late 2022, only recovering somewhat after China abruptly scrapped its futile quest to eliminate Covid altogether, punishing restrictions that were essentially removed overnight in December that year.

The drinks company’s stock is still a far cry from those heady days of early 2021. As of today, they’re down 11.0% in 2024, and down 42.3% from that record closing high.

While the broader Chinese market is narrowly in the black for the year, with the CSI 300 index of the largest listings in blue-chip-focused Shanghai and tech-oriented Shenzhen up 3.45% so far in 2024, they are drifting slightly lower coming into summer.

Hong Kong stocks have suffered four straight years of declines, meaning investors haven’t made any money this century, if they bought and held. The benchmark Hang Seng is up 9.2% so far in 2024, and is looking a little livelier than mainland markets. But it is where international investors get to express their opinions on Chinese stocks.

It is not unheard of for Chinese stocks to rally rapidly, as much as 60%, when they turn. So far, investors looking to buy into any hint of recovery have only been disappointed, with the government struggling to turn the economy around. The Communist administration keeps tinkering with the rules of operation without making any fix to fundamentals.

Will we be toasting the closing bell with a shot glass of Flying Fairy maotai come year end? Whereas May made that prospect look likely, we can see that confidence on Chinese stocks is fragile, and easily derailed.