A-Share Fortunes Are Knocking — Will You Answer?

A Market Phenomenon: Small Caps and Loss-Makers on the Rise

A striking trend has emerged in China’s A-share market: loss-making stocks and micro-cap companies are rallying day after day. Once again, we’re in a phase where focusing on fundamentals seems like starting the race behind everyone else.

Take the case of Cambricon Technologies — a recent sensation and market darling in the STAR Market. In reality, it’s still a catch-up player: capital-intensive, dependent on financing, with a fragile ecosystem. For years, it operated at a loss, surviving on government subsidies. It only turned profitable this year, yet its share price has skyrocketed dozens of times in two years. Its P/E ratio is in the hundreds, and its market cap has surpassed 500 billion RMB — all fueled by the grand narrative of domestic substitution.

So, in this structural bull market frenzy where “wealth comes knocking,” should investors really turn it away?

I. What’s Driving This Structural Frenzy?

This isn’t just a mindless bull market rally — it’s a highly structural trend driven by specific market dynamics.

Several factors are at play:

1. Macro Backdrop
   China’s economy is in an adjustment cycle. Property prices continue to decline, risk-free yields have dropped to historical lows (10-year government bonds dipped to 1.6%), bank wealth products offer diminishing returns without guarantees, and overseas investment channels are limited. This “asset shortage” pushes domestic liquidity into a game of rapid in-and-out trades on the stock market.
2. Liquidity in Small Caps
   Active funds — from speculative capital to private equity — are steering clear of heavyweight stocks until the macro outlook clears. Instead, they target small, thinly held micro-caps that are easier to push up — the “small boat turns quickly” liquidity sweet spot.
3. Quant Strategies Intensifying the Trend
   Quantitative DMA strategies, driven by automated trading, are clustering into micro-caps, amplifying the Matthew effect. As these stocks rise, retail traders and hot-money flows chase the momentum.
4. IPO Supply Constraints
   After the registration-based IPO reform experiment, the market has reverted to a 2015-like environment with tightly limited new share issuance. Supply falls short of demand, and the A-share market’s “glorious traditions” — speculating on shells, small caps, newly listed, poor performers, stories, and concepts — are making a full comeback.
5. Policy Alignment
   Recent policy rhetoric around new quality productive forces and innovation dovetails with many small, loss-making companies in high-end manufacturing, AI, and biotech. For these, valuation metrics like P/E and P/B lose relevance, replaced by “price-to-dream,” “price-to-courage,” and “price-to-foolishness” ratios — betting on the slim possibility of becoming future industry leaders.

II. Is This Really “Wealth Knocking at the Door”?

This is far from the first — or last — frenzy of its kind in A-shares. Historically, such rallies have a clear outcome: a small minority walk away wealthy; the majority face losses.

• Winners: Major shareholders of loss-making small caps, selling “stones at gold prices” through relentless share reductions.
• Short-Term Traders: A lucky few time the market style shifts perfectly, enforce strict stop-loss/stop-gain rules, and capitalize on rare windows. Success rate? Very low.
• Latecomers & Chasers: For them, this is a party before the “meat grinder.” The end result? Wealth evaporates.

Cambricon, now crowned “A-share king” with a stock price above Moutai’s, offers a cautionary tale. Moutai earns hundreds of billions in net profit annually. Cambricon only just turned profitable in H1 this year — and by a slim margin.

History shows that any stock surpassing Moutai’s price sees its peak in that year — with a subsequent 70–90% decline. This is the so-called Moutai Curse. Will this time be different? The optimists say yes. We’ll see.

III. But What If the Dream Comes True?

Some investors argue: “We’re supporting domestic tech — what’s wrong with that?” Indeed, tech innovation drives national progress, and AI is the future.

But investing in the stock market is about preserving and growing personal wealth, not national tech policy. Even if Cambricon somehow becomes the next NVIDIA, would we capture 10,000x returns?

Consider NVIDIA’s journey:

• 1999 IPO: Valued at $230M with the groundbreaking GeForce 256 GPU.
• 2003 Crash: Revenue halved, stock fell 90% to $7.
• 2008 Crisis: Another >90% drop after CUDA investments and product defects.
• 2016 Boom: Data center growth and crypto mining spurred rapid gains.
• 2018 Correction: AI hype cooled, crypto collapsed — another sharp pullback.

Could you have held through two 90% drawdowns and several 50% drops to reap long-term gains? Most couldn’t.

From an industry perspective, the next AI leader may not be NVIDIA — but it will likely still be born, grow, and thrive on NASDAQ, just as all the last industrial revolution’s tech giants (Apple, Microsoft, Meta, Google, Amazon, Tesla, NVIDIA) did.

IV. Positioning for the AI Wave

If we truly want to seize AI’s historic investment opportunities, allocating part of our portfolio to NASDAQ is a sound strategy. Personally, my NASDAQ index investments from over a decade ago have grown nearly tenfold.

Meanwhile, Hong Kong’s tech index better reflects China’s genuine tech strength, while A-shares still house top-tier leaders in consumer goods, advanced manufacturing, and healthcare — all with long-term potential despite near-term underperformance.

V. A Word of Caution

Investing is “easy to know, hard to do.” Many investors can see the risks but still can’t resist the allure of soaring loss-making micro-caps.

If you must participate, treat it as entertainment — and only use money you can afford to lose entirely. Once you enter, the outcome is already set.

As for me, I’ll never risk my hard-earned capital in this game. The choice, of course, is yours.