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A screen shows China’s Shanghai stock index is closed at 2786.89, 0.41 per cent up, on Tuesday, in Beijing’s CBD area on Jul. 3, 2018. 03JUL18 SCMP/Simon Song

China’s retail traders covet ‘demon stocks’ for wild gains, ready to crash and burn, as blue chips struggle to repeat feat

  • China’s retail investor base consists of 206 million accounts with a collective investment power of about 24 trillion yuan (US$3.55 trillion)
  • At least 18 stocks have surged by more than 50 per cent this year in onshore markets, while four have more than doubled
Put aside the “white horses,” the local parlance for blue-chip stocks in mainland China. The nation’s army of mom-and-pop traders with US$3.55 trillion buying power are enchanted by “demon stocks”, and regulators are presumably not too happy about it.
Like AMTD Digital, the little-known Chinese fintech company that surged as much as 21,426 per cent over three weeks in New York, retail traders want to find and own the next Andon Health, Zhongtong Bus and Huitong Construction – three of the stocks with the wildest runs on the Shanghai and Shenzhen bourses this year.

Andon Health surged 1,438 per cent between October 2021 and April this year after announcing a deal to supply Covid-19 test kits to the US army. Zhongtong Bus soared 626 per cent between April and July this year after selling 20 vehicles fitted for mobile Covid-19 tests. Huitong rallied 761 per cent between December last year and February, including 16 straight days of upper-limit, for no apparent reason.

They fit the bill as demon stocks, which can defy fundamentals or prevailing market conditions, and hard to spot or catch. These stocks can equally crash and burn quickly, producing supercharged volatility that authorities frown upon.

Zhang Xiaoyan, associate dean and professor of finance at Tsinghua University’s PBC School of Finance. Photo: Handout

“People are willing to pay more for [demon] stocks, which is similar to buying an overpriced lottery ticket, even though these stocks might have not-so-good fundamental performances,” said Zhang Xiaoyan, associate dean of PBC School of Finance at Tsinghua University in Beijing. While retail traders play a significant role in market developments, “the caveat is that they have limited financial literacy, which is why the regulators now want to aim at investor protection through education,” she added.

Those outlandish gains are likened to high-stake gambling, especially when fund favourites like Kweichow Moutai, Contemporary Amperex Technology and Shenzhen Mindray have struggled to repeat their euphoric gains of recent years. The nation’s biggest companies, proxied by the CSI 300 Index, have fallen 16 per cent this year, after more than doubling over the past decade.

China’s retail investor base is made up of 206 million accounts, with a collective buying power of 24 trillion yuan (US$3.55 trillion), according to official statistics. They contribute 70 per cent of the daily trading volume on onshore stock exchanges.

Investors play cards in front of an electronic board showing stock information at a brokerage house in Shanghai. Photo: AFP

Their pursuit has prompted several lists of likely demon stocks. One of them contains small-caps like electrical transformer maker Shenzhen Invt Electric and adhesives products maker Shenzhen Cotran New Materials, though both have slumped 21 per cent since end-July.


“It’s usually a small cap with a relatively low starting price of below 20 yuan,” said Lu Daoyin, a quant trader who blogs about markets on ByteDance-owned news app Toutiao and social e-commerce platform Xiaohongshu. “As a demon stock, it must align with the latest and hottest topics, which can appeal to big funds or big retail investors.”

Lu has suggested a way to catch the demons, using the KDJ technical indicator to predict changes in stock trends and patterns. The best time to buy is when all three measures in purple, white and yellow surpass the 80-point threshold, he added.

Two KDJ technical charts of unnamed ‘demon stocks’ tracked by day trader blogger Lu Daoyin. Source: Lu Daoyin

Alman Liang, 35, recently sold her shares in Zhejiang Construction, which has rallied 222 per cent this year, after the stock became a hot topic online before the recent outbreak of Covid-19 cases, a signal to sell as latecomers join the rally.

“It’s easy to drive up the prices of small-cap stocks, and when retail investors dive in, market manipulators with relatively large funds would leave,” said the Shanghai-based financial professional, who has been investing for seven years. “Then it’s game over.”

Retail investors were partly blamed for the 2015 market plunge and China’s market regulator wants to prevent that episode from repeating. Beijing envisions a stable capital market and eschews short-term gains. The China Securities Regulatory Commission in 2019 called for “rational investing.” Vice-chairman Li Chao in June reiterated the message to “optimise” investment structure.

Zhang, who is also professor of finance at Tsinghua’s PBC School of Finance and co-authored “Understanding Retail Investors: Evidence from China” in 2019, said when these smaller retail investors trade, they are more likely to follow momentum strategy, which is to buy previous day winners and sell previous day losers.


“They are more likely to show behavioural patterns such as overconfidence and gambling preferences,” she added. “These traits all contribute to our finding that they have a negative predictive pattern for future price movements.”

Still, a healthy dose of speculation may be part and parcel of any growing or mature market, said Wang Chen, a partner at Xufunds Investment Management in Shanghai. This year is no exception. As China’s monetary easing goes against tightening bias in major economies, betting on stocks that can profit from policy stimulus has been rife.

Most demon stocks are linked to the state agendas and hot headlines, such as technology self-sufficiency to carbon neutrality and zero-Covid policy. At least 18 stocks have surged by more than 50 per cent this year, while four have more than doubled


Nothing beats a punishing loss for a lesson in bad investing habits, according to Wang at Xufunds Investment. Demon stocks exposed small investors to pump-and-dump manipulation that characterised the onshore markets from its early days.

“The best education is to let the market educate investors,” he said. “I believe that most demon stocks will return to fundamentals and their basic values. Losing money from these stocks is a very good experience for education.”