The stock markets in China have seen an unprecedented surge in the past few weeks, drawing in millions of individual investors. The excitement reached astonishing heights, exemplified by a driver in Jiangxi province who spent hours parked on a highway’s emergency lane, too absorbed in trading stocks to notice other drivers’ warnings. This rally initiated in late September, following the central bank’s announcement of strategies to invigorate the equity and property sectors.
CSI 300 index jumps 24 percent
The CSI 300 index experienced a remarkable increase of 24 percent within just five trading sessions and reopened 11 percent higher following a week-long holiday break. However, just hours later, the market faced its largest single-day decline in more than four years as expectations for additional fiscal support from Beijing officials fell short. This sudden market action underscores a remarkable resurgence of speculative behavior among retail traders in China, contrasting with the previous trend where many invested in safer assets like gold and government securities.
The term “cutting leeks” has emerged during this trading spree, describing inexperienced investors entering the market, only to face losses. Mou, a 43-year-old investor from Kunming with two decades of experience, commented, “If individuals are seeking quick profits now, novice investors are likely to face losses.”
Despite potential downsides, the influx of capital into stocks has been substantial. Retail investments surged following the stimulus announcement on September 24, leading to nearly Rmb3 trillion ($424 billion) in stock purchases on October 8 alone.
As reported by a Goldman Sachs tracker, there was an uptick of 30,000 new margin trading investors over six trading sessions. Brokerage firms have been inundated by this influx of new clients. A manager based in Shanghai noted, “Our office phone starts ringing again as soon as I hang up.”
China’s approximate 200 million retail investors play a crucial role in shaping the nation’s equity markets.
As per Huaxi Securities, by the second quarter, these investors accounted for 55 percent of the free float of mainland Chinese stocks, excluding those held through mutual funds. Numerous Chinese investors tend to favor real estate, bonds, and money market funds instead of the more volatile stock market.
The stock market surge in China
Nevertheless, industry specialists believe that a rise in stock market engagement could significantly alter the investment climate. Beeneet Kothari, CEO of the US-based hedge fund Tekne Capital, predicted that adjusting household asset allocations could channel over 350 percent of the current A-share total free-float market capitalization into equities. Nonetheless, the shadow of the 2015 market crash, where the Shanghai composite index plummeted after peaking, still looms large.
Policy announcements also contributed to the market’s erratic fluctuations during that period. Many investors are currently on the lookout for further governmental stimulus initiatives. A private equity fund manager from Hangzhou who capitalized on the recent bull market drastically reduced his equity exposure from nearly 100 percent to 40 percent when the expected fiscal measures didn’t emerge.
Lingering skepticism.
He intends to boost his investments only upon clear indications of new stimulus from the Ministry of Finance. A special briefing from the finance ministry set for Saturday could provide vital insights. The ministry has stressed the need for “intensifying countercyclical adjustments to fiscal policy,” suggesting potential stimulus actions.
An Anhui province banker expressed a widespread concern: “This highlights the attractiveness of the Chinese stock market and the apparent strength of the Chinese economy, but in the end, it’s all about cutting leeks. And who suffers the most? The small retail investors in China.”
Penny Gao, a 33-year-old stage manager residing in Beijing, has made the decision to sell her mutual fund investments to mitigate her losses. “I don’t want to remain trapped for an extended period again,” she explained. “I prefer to cash out before I become greedy once more.”
