China’s stock markets have experienced a record-breaking rally in recent weeks, attracting millions of retail investors. The enthusiasm reached extreme levels, with one driver in Jiangxi province parking for hours on a highway emergency lane, too engrossed in trading shares to heed warnings from other motorists. The rally began in late September, following the central bank’s announcement of measures to boost equity and property markets.
Benchmark CSI 300 index soared 24 percent
The benchmark CSI 300 index soared 24 percent in just five trading days and reopened 11 percent higher after a week-long holiday. However, within hours, the market experienced its biggest one-day fall in over four years due to unmet expectations for deeper fiscal stimulus from Beijing policymakers. This sudden activity highlights a notable return of animal spirits among China’s retail trading crowd, a sharp contrast after many fled the underperforming stock market for assets like gold and government debt.
The phrase “cutting leeks” has surfaced during this frenzy, referring to inexperienced investors plunged into the market only to incur losses. Mou, a 43-year-old investor from Kunming with 20 years of experience, said, “If people are trying to make quick money right now, inexperienced investors are bound to suffer losses.”
Despite the risks, the rush back into stocks has been significant. Retail buying surged after the stimulus announcement on September 24, culminating in nearly Rmb3tn ($424bn) in purchases on October 8 alone.
According to a tracker by Goldman Sachs, new margin trading investors increased by 30,000 over six trading days. Brokers have been overwhelmed by this new wave of clients. A Shanghai-based account manager reported, “Our office phone rings again as soon as I put it down.
China’s roughly 200 million retail investors substantially influence the country’s equity markets.
According to Huaxi Securities, as of the second quarter, they held 55 percent of the free float of mainland Chinese equities, excluding shares held via mutual funds. Many Chinese investors prefer real estate, bonds, and money market funds over the riskier stock market.
China’s stock market frenzy
However, industry experts believe increased stock market participation could dramatically change the investment landscape. Beeneet Kothari, CEO of US-based hedge fund Tekne Capital, estimated that reallocation of household assets could bring more than 350 percent of today’s A-share total free-float market cap into equity markets. Nevertheless, memories of the 2015 crash, when the Shanghai index plummeted after reaching a peak, loom large.
Policy announcements also drove the volatile swings during that period. Many investors now await further government stimulus measures. A Hangzhou-based private equity fund manager who benefitted from the recent bull run drastically reduced his equity holdings from nearly 100 percent to 40 percent when anticipated fiscal policies failed to materialize.
Skepticism remains.
He plans to increase his investments only after clear signs of new stimulus measures from the Ministry of Finance. A finance ministry special briefing scheduled for Saturday could reveal crucial information. The ministry has emphasized “intensifying countercyclical adjustment of fiscal policy,” hinting at potential stimulus measures.
A banker from Anhui province articulated a common concern: “This makes the whole world see how good the Chinese stock market is and how prosperous the Chinese economy appears, but in the end, it’s all about cutting leeks. And who gets cut — the small Chinese retail investors.”
Penny Gao, a 33-year-old stage manager from Beijing, has decided to sell her mutual fund shares to limit her losses. “I don’t want to be trapped again for so long,” she said. “I want to cash out before I turn greedy again.”
