Loss-making firms become new favorites for investors

In a year full of surprises for China's equity market, here is another one to ponder: Loss-making companies are some of the country's best-performing stocks.

Not only have they trounced the Shanghai Composite Index with an average 60 percent gain this year, money losers are also outperforming China's most profitable firms by 5 percentage points. In the United States, by contrast, shares of loss-making businesses have tumbled an average 15 percent.

While it is tempting to discount the outperformance as a sign of irrationality among China's 97 million individual investors, there is a certain logic to it. Loss makers are prime targets for policymakers seeking to improve the efficiency of State-owned companies and reduce industrial overcapacity via mergers. Reverse takeovers, meanwhile, are unlocking the value of stock-market listings at businesses too far gone to repair.