Patriotism Boosts Chinese Stocks, But Are Gains Sustainable?

The sentiment of patriotism has been a powerful force driving the performance of Chinese stocks in recent years. As seen in various sectors and companies, nationalistic fervor has lifted market sentiment and contributed to significant gains. However, the sustainability of these gains remains uncertain, as international factors and economic fundamentals play a crucial role in the long-term prospects of Chinese equities.



Patriotism and Stock Performance

The patriotic sentiment in China has boosted several sectors and companies, with notable examples including:

1. Animation and Movie-related Stocks: The success of the animated film "Ne Zha 2" has lifted related stocks. Beijing Enlight Media (300251.SZ), the film's creator, saw its shares surge from 9.5 yuan at the beginning of the year to a record 34.73 yuan on Feb. 14, raising its P/E ratio to 140.6 times. Other animation and movie-related stocks also experienced gains.
2. Domestic Sports Brands: In 2021, boycotts of Western sports brands like nike and Adidas led to a surge in popularity for domestic brands such as li Ning (2331.HK) and Anta (2020.HK). Li Ning's stock reached a record high of HK$104 in September 2021, almost doubling from HK$54 earlier in the year. Li Ning even briefly surpassed Adidas in market cap, becoming the world's second biggest sports brand only behind Nike.
3. AI and Tech Stocks: The breakout of AI darling DeepSeek has triggered a massive re-rating of Chinese tech stocks. E-commerce giant Alibaba has surged 56% so far this year, while Xiaomi is up 52% and JD.com has gained 21%.

International Factors and Sustainability

International factors, such as trade tensions and geopolitical risks, can significantly impact the sustainability of gains in the Chinese stock market driven by patriotism. Here's how:

1. Trade Tensions: Trade tensions, particularly with the U.S., can affect the Chinese stock market's performance. For instance, the U.S.-China trade war in 2018 and 2019 led to a significant decline in Chinese stocks. The Shanghai Composite Index fell by around 25% during this period (Source: Bloomberg). The imposition of tariffs and other trade barriers can disrupt supply chains, reduce exports, and lower corporate profits, which in turn can negatively impact stock prices.
2. Geopolitical Risks: Geopolitical risks, such as political instability, territorial disputes, or military conflicts, can also influence the Chinese stock market. For example, the ongoing tensions in the South China Sea and the dispute over Taiwan can create uncertainty and volatility in the market. In 2020, when U.S.-China relations deteriorated due to various geopolitical issues, the Chinese stock market experienced significant fluctuations (Source: Wind). Geopolitical risks can erode investor confidence, leading to capital outflows and a decline in stock prices.
3. Investor Sentiment: International factors can also influence investor sentiment, which can impact the sustainability of gains driven by patriotism. For instance, if international investors perceive China as a risky investment destination due to trade tensions or geopolitical risks, they may reduce their exposure to Chinese stocks. This can lead to a decline in demand for Chinese equities, putting downward pressure on stock prices. Conversely, if international investors view China as a safe haven or a promising market, they may increase their investments, supporting the sustainability of gains in the Chinese stock market.
4. Policy Response: The Chinese government's response to international factors can also influence the sustainability of gains in the stock market. For example, if the government implements countermeasures to mitigate the impact of trade tensions or geopolitical risks, it can help maintain investor confidence and support the stock market. However, if the government's response is perceived as ineffective or inadequate, it can exacerbate market volatility and negatively impact stock prices.

In conclusion, patriotism has been a powerful force driving the performance of Chinese stocks in recent years. However, the sustainability of these gains depends on various factors, including international factors such as trade tensions and geopolitical risks, as well as the broader economic environment. Therefore, investors should monitor these developments and assess their potential impact on the Chinese stock market to make informed investment decisions.