The strong Chinese liquor known as Baijiu, is among the most popular alcoholic drinks in the world. Although consumption in China has been falling in recent years, stocks are experiencing a historic rally. So is the drink's valuation justified? Yang Chengxi finds out.

YANG CHENGXI Shanghai "This is a shot of Baijiu, the most popular and iconic of Chinese liquors. My Asian flush is coming on, and my heart rate is rising. But you know what's also been rising for the past couple of years? Baijiu stocks! Look at this chart. The Baijiu industry stock index rose a whopping 92 percent in 2019, and a staggering 120 percent in 2020.

"But China's love of Baijiu alone doesn't seem to explain the industry's spectacular rally over the past two years. Last year, the market value of the high-end baijiu maker Kweichow Moutai exceeded that of Cola-Cola. That's right, despite the fact Coca-Cola is sold in almost every corner of the world, and Moutai is mainly sold inside China! And the prices of Moutai seem to reflect just how hot it is. The official price of one bottle is about 231 U.S. dollars, but these days you'd be lucky to get hold of one for 450 dollars which means, I couldn't afford it. This one here is just a prop, and I've actually been drinking water.

"Anyway, I've been talking to fund managers here in Shanghai, to get their take on whether Baijiu stocks are currently over-valued."

SHI XINGTAO Portfolio Manager, Consumption Equity Fund HSBC Jintrust Fund Management "Within the Baijiu index, there are indeed stocks that are at historic highs. But we think our assessment shouldn't be stationary. Through a dynamic perspective, we believe many high-quality Baijiu stocks can justify their current valuations by achieving strong future growth."

But how does this explain the huge rally in recent years that's led to the Baijiu index reaching this point?

SHI XINGTAO Portfolio Manager, Consumption Equity Fund HSBC Jintrust Fund Management "When the pandemic happened, global central banks started to release a lot of liquidity. Places like America, Europe and Japan have entered an era of low to even negative interest rates."

LI MAO AVP, Equities Research, Fullerton Investment Management "There were more international institutional investors entering into the market, and made the comparison, and found that Baijiu sector has a strong cash flow and higher ROE. So this is very attractive for them."

Fund managers around the world love baijiu. Many funds have included them in their portfolios. But here comes a plot twist. Baijiu stocks have started to fall consistently this week. Kweichow Moutai's biggest fund shareholder, the Europacific Growth Fund, has reportedly been lowering its holdings and many people are saying 'Wow, wait a minute, should I jump ship?' In other words, does baijiu still have growth potential in the future?

SHI XINGTAO Portfolio Manager, Consumption Equity Fund HSBC Jintrust Fund Management "I think the correction is healthy. If there's no correction, that would in fact be scary."

LI MAO AVP, Equities Research, Fullerton Investment Management "For the small liquor brand companies, I think there's a little bubble in their share prices. In the long-term perspective, we are still positive on the high-end baijiu sector. As China is facing an aging population, the Baijiu volume consumption will decline. But we see that China has an increasing number of the wealthy, the rich class, the middle class. There's a strong demand for high-end liquor."

YANG CHENGXI Shanghai "Well, professional assessments aside, there's a long-standing joke on the Chinese internet that goes: if the economy is doing well, it's good for Baijiu stocks. If the economy is bad, it's good for Baijiu stocks, because more people will drink their troubles away. Food prices rising? Good for Baijiu stocks, because they'd be more expensive. Food prices fall? Of course, that's still good for Baijiu stocks because costs will be lower. Baijiu stock prices falling, is that good for baijiu stocks? There'll be an explanation somewhere, but I'm not the one that's going to figure it out."