Yesterday’s sharp decline in Chinese stocks interrupted months of low volatility, as the benchmark Shanghai Composite index suffered its worst one-day fall since June 2016.
Reports suggest the selloff also stems from efforts by Chinese authorities to cool investment in one of China’s hottest companies.
The company in question: Kweichow Moutai Co Ltd, the biggest liquor company in China and the maker of Baiju, a popular beverage derived from grain.
Last Friday, shares in Kweichow closed 4% lower after state-run news agency Xinhau published an article discouraging speculative investment in the stock, according to the South China Morning Post.
The company’s shares have subsequently fallen every day this week and its now lost 11.8% since closing at an all-time high on November 16:
So why did authorities target Kweichow in particular?
For starters, it’s huge — which makes it a target for regulatory supervision given the potential impact on the broader market from moves in the stock price.
According to Bloomberg, Kweichow has the second highest weighting in the SSE50 index — comprised of the 50 biggest stocks traded on mainland China — behind Ping An Insurance.
Shares in the company have also surged this year, thus increasing concerns about speculative investing activity.
Despite the 11.8% slide over the past week, Kweichow has more than doubled in value in 2017:
The company operates with huge profit margins compared to industry peers, and currently has a price to earnings (PE) ratio of more than 30 times.
Earlier this year, it surpassed Diageo as the most valuable liqour company in the world, Bloomberg said.
Combined with the recent rise in Chinese bond yields as authorities clamp down on excessive leverage, the latest effort by Chinese regulators to cool speculation in Chinese stocks appeared to rattle markets yesterday.
The losses in mainland China extended to Hong Kong’s Hang Seng index, which fell by 1%.
After yesterday’s jitters, Chinese markets will be in focus today during Asian trade when the Shanghai Composite index opens at 12:30pm AEST.