China’s hopes for a strong post-pandemic recovery are dwindling as small-scale investors in the country are becoming increasingly bearish on equities.
Instead of risking their savings in the stock market, these investors are opting for safer assets, exacerbating the struggles of the country’s faltering economic rebound.
Earlier in the year, brokers and money managers anticipated a surge of funds into the stock market as the Chinese economy regained momentum and uncertainties persisted in the real estate sector.
However, just as foreign investment failed to materialize, households are also turning away from equities and flocking towards bonds and deposits, leaving the stock market adrift.
Chinese blue chips, which had experienced a 20% rally from October to January, have now given back their gains and are down 1% year-to-date. The Hang Seng index has reached its lowest point in 2023, and sovereign bond yields are falling.
The expected trade of the year is fizzling out, and the resulting loss of momentum is deterring investors from putting their money into the market.
“I am quite dissatisfied,” uttered Eric Yu, a programmer in Shanghai who partakes in investment for the past three years. “I will not invest any more cash in stocks until I recuperate all my losses,” he added.
Concerned about potential tech layoffs and youth unemployment, he is now allocating half of his monthly income to wealth and deposit products. “Safety is quite important in such situations; it’d be best to not lose my principal,” he reiterated.
Several interviews with other small investors echoed similar sentiments, indicating a reasonably widespread lack of interest in stocks.
These small investors wield significant influence, accounting for approximately 60% of turnover, according to China Securities Regulatory Commission Chairman Yi Huiman.
In comparison, estimates from JPMorgan suggest that small investors constitute less than 25% of turnover in the United States.
The disinterest among Chinese investors is reflected in market data, with China’s securities margin trading balance, a measure of risk appetite, hovering around one-month lows. A-share market turnover is currently at its lowest level since early March.
Data from China Securities Depository and Clearing revealed that brokerage account creation, though volatile, declined in April after showing promising momentum in February and March. Mutual fund launches, which serve as a proxy for investor interest, also decreased. The broad Shanghai Composite index is trading at similar levels to early 2022.
“It is as if stocks are losing faith in the China recovery story,” remarked Hong Hao, chief economist at Grow Investment Group. Notably, he observed that stocks have deviated from their long-standing correlation with deposits and liquidity, suggesting a loss of confidence.
Investor enthusiasm has waned due to weakening economic indicators and a global environment marked by escalating political tensions and declining growth.
China’s April industrial output and retail sales growth fell short of expectations, signalling a faltering recovery.
Loans have experienced an unexpected and sharp decline, while Western efforts to reduce dependence on Chinese manufacturing have gained traction.
These factors have made domestic investors too nervous to venture beyond deposits, which, according to central bank data, are growing at an even faster rate than during the height of the pandemic a year ago.
“One of the challenges this year is the rapid rotation of investment themes, making it quite difficult to seize investment opportunities,” noted Wang Zaizheng, another cautious investor.
“Sentiment is pretty bleak, and there are several policy or geopolitical risks,” he added, highlighting the prevalent concerns among investors.
Nevertheless, it is crucial to recognize that the situation is not entirely bleak, and there are those who foresee a favourable result with the resurgence of domestic investors.
Chi Lo, the senior investment strategist at BNP Paribas Asset Management, pointed out that “Some experts in the market estimate that approximately 10% of these surplus savings might find their way into asset market investments, amounting to approximately 800 billion yuan.”
This indicates a glimmer of hope for a potential boost in the market as local investors re-enter the fray.