Patriotism Boosts Chinese Stocks, But Are Gains Sustainable?

The nationalistic forces that boosted ‘Ne Zha 2' and DeepSeek have also lifted Chinese stocks. But are the gains sustainable after the excitement fades?

The animated film "Ne Zha 2" achieved a blowout success during the Lunar New Year holiday, sending China's box office soaring to record new heights. China's national pride, weighed down by the country's economic slowdown of recent years, also received a much-needed boost from the big success.

The film has already grossed 14.1 billion yuan ($1.95 billion), surpassing not only "Captain America: Brave New World" during the same season but also the 2021 blockbuster "Spider-Man: No Way Home," to take the prize as the world's seventh best grossing movie of all time. Such shiny achievements have turned this three-year-old demon boy known as Ne Zha into the new symbol of national pride for China, capable of slaying Spider Man and Captain America.

Its smashing success owes to relentless enthusiasm from Chinese moviegoers. By Feb. 28, the film had secured overseas ticket sales of just 150 million yuan, accounting for only about 1% of its total box office earnings. Instead, it was the film's homefield Chinese audience that singularly lifted "Ne Zha" to its crowning success.

Online remarks by Chinese netizens revealed their pride at contributing to the "one-billion-yuan box office." Some said they watched the film 10 times, while some businessmen spent tens of thousands of yuan renting out entire cinemas for whole towns to watch the film. And when "Ne Zha" started screening in Hong Kong and Macao, local officials showed up to watch as local media fawned over it.

Officials in Macao brimmed with praise for the film, while pointing out the enclave's own role as a cultural hub bringing together Chinese with other diverse global cultures to co-exist in harmony. With such relentless promotion and concurrent flag-waving, the film has taken on a patriotic sheen as a beacon of Chinese culture.

The film has cast a similar halo on related stocks. Shares of the film's creator, Beijing Enlight Media (300251.SZ), surged on the back of the success, soaring from 9.5 yuan at the beginning of the year to a record 34.73 yuan on Feb. 14. That raised its price-to-earnings (P/E) ratio to an atmospheric 140.6 times. Other animation and movie-related stocks also got nice bounces from the publicity.

Such occurrences aren't rare. The concepts of patriotism and national self-reliance, deeply etched in China's psyche, have become a "magical Oriental force" that has surprised everyone.

National pride

In 2021, a decision by sports brands including Nike and Adidas not to use cotton produced in Xinjiang was met with boycotts of the brands by Chinese consumers, resulting in sales declines for the two in Greater China for seven consecutive quarters. Meanwhile, domestic sports brands such as Li Ning (2331.HK) and Anta (2020.HK) gained popularity and stepped in to pick up market share lost by the big Western names. Li Ning, in particular, was hailed by media as marching at the forefront against Western efforts to demonize China.

Sales for Li Ning and Anta jumped by 50% in the first half of 2021, far outpacing Nike and Adidas in the Chinese market. Li Ning's stock reached a record high of HK$104 in September that year, almost doubling from HK$54 earlier in the year. Li Ning even briefly surpassed Adidas in 2023 in market cap, becoming the world's second biggest sports brand only behind Nike.

But the hand that gives can also take away. Li Ning learned that lesson when some of its new designs unveiled in October 2022 were criticized for looking like Japanese-style military uniforms, setting off a public-relations crisis. The "hero" that once stood out as a force against U.S. bullying was suddenly demoted to "lapdog" for currying favor with Japanese invaders. The brand paid the price in a 70% decline stock decline in 2023, wiping out HK$200 billion ($25.7 billion) in market value.

Most recently the Mainland Chinese and Hong Kong stock markets have come back to life on the breakout of AI darling DeepSeek, which in a stroke triggered a massive re-rating of Chinese assets, especially tech stocks. E-commerce giant Alibaba has surged 56% so far this year, while Xiaomi is up 52% and JD.com has gained 21%, even as the benchmark S&P index in the U.S. is up just 1.4% and U.S. tech darling Nvidia is down almost 10%. Against the backdrop of the threat posed by a flood of U.S. tariffs, Chinese stocks' surprising outperformance this year has been nothing short of spectacular.

In fact, not much has really changed with China's economic fundamentals. Official data for January show China's consumer price index (CPI) missed expectations once again, and its producer price index (PPI) stayed negative for a 28th consecutive month. The significance of China's "DeepSeek moment" lay in its ability to boost market confidence, shattering previous assumptions that the country lagged behind the U.S. in the AI race. Its success, even in the face of growing U.S. tech restrictions, is encouraging more investors to pump more money into Chinese AI concept stocks, to the delight of investors in those stocks.

The ongoing rally for Chinese stocks is being driven by a combination of technological advancements combined with an outpouring of nationalist sentiment, testifying to the power of the "magical Oriental force." But patriotism is a double-edged sword. Li Ning's story offers a cautionary tale of how excessive market euphoria and stratospheric stock prices can be followed by drastic corrections that leave many investors stranded. We can also draw lessons from the cases of TikTok and Huawei that close association with China, while a source of national pride, might become liabilities when companies try to expand abroad.

So, how do you make rational investments during times of such emotional market euphoria? That's one of the toughest needles to thread.