One lesson China should learn from its stock market rout
A year on from the start of the huge slump in mainland share prices, analysts say the feverish trading among retail investors highlights the lack of investment options available to the public, beyond speculating on property and earning minimal interest through bank deposits
Yu Dalin, an IT engineer who earns about 500,000 yuan (HK$ 590,000) a year, said his stock portfolio shrank by 5 million yuan in China’s market rout over the past year and he is still wondering how things turned out so ugly.
Emboldened by slogans such as “reform-driven bull market” and the grand themes of “One Belt, One Road”, a strategy to boost China’s trade ties with the rest of the world that was supposed to benefit some stock market listed companies, Yu invested his own savings, his wife’s, his father-in-law’s, plus an equally large amount borrowed from his broker, in shares last year.
“I had thought I was going to win a new house from the stock market,” said Yu, after losing most of his cash. “Now I guess the right attitude should be ‘if you are willing to gamble, you just accept the result, whatever’.”
Yu, 39, is one of hundreds of millions of Chinese retail investors who got their fingers burned in the stock market plunge that started about a year ago, evaporating about 250,000 yuan from every share trading account – a big number in a country where the per capita disposable income was 22,000 yuan in 2015.
One year later, the jury is out regarding what China should learn from the rout and whether the conditions are right to avoid the next boom and bust after the benchmark stock index lost about 45 per cent from a peak last June and retail investors shunned trading.
The options for Chinese investors are actually quite limited – you either buy property or buy stocks
“Turnover has essentially collapsed, prices remain boosted by public buying, significant numbers of stock remain suspended, regular problems exist with information disclosure and shareholder rights, and the ability to buy and sell or hedge risk remains at times and in some instruments difficult – that simply is not indicative of a well-functioning market,” said Christopher Balding, an associate professor of finance and economics at Peking University’s HSBC Business School, located in Shenzhen.
“The level of state involvement in China and their clear preference for specific outcomes make it very difficult for a stock market to function properly in China,” he said.
While the nation’s stock market has many defects, it is often the only place for investors like Yu to put their money to seek returns higher than those given by bank deposits.
“My savings are not enough to speculate in property, but I can’t spend them in day-to-day spending,” said Yu. “So I am still keeping the rest of money in stocks and I’m quite sure prices will rebound, but I have to wait.”
Retail investors like Yu have benefitted in the past from China’s economic boom and have cash to invest.
He earned decent salaries from employers such as in the internet giant Baidu, owns two cars, including a BMW; lives in his own apartment near the Olympics Park in Beijing and paid large sums to send his wife to Los Angeles to have their second daughter.
Gan Li, a professor at the Southwestern University of Finance and Economics in Chengdu who leads a regular China household finance survey, said a key lesson from China’s stock market rout was that the government has to provide more options for people like Yu who want to invest.
“The options for Chinese investors are actually quite limited – you either buy property or buy stocks, and the third choice is to put money in banks at extremely low interest,” he said.
“The lucky thing for China is the great majority of Chinese household wealth is in property, not stocks,” said Gan. “A stock market rout is not a fatal blow to Chinese household wealth, but property a price crash is – that’s probably why every government institution is quite sensitive to signs of a property price bubble.”
The boom-bust cycle will repeat if … a key policy is decided not through public debate but by a small group of people in a closed-door meeting
China’s latest stock market boom took place against a backdrop of hefty money supply growth following a massive stimulus programme rolled out in 2009. China’s broad money supply, or M2, stood at 146 trillion yuan at the end of May, almost double the money supply in the United States although China’s economic size is smaller.
As China still applies capital account controls banning individual residents from investing freely in overseas markets, the huge amount of unleashed money is moving around China’s different asset classes.
The stock market crash was followed by a boom in property prices in some cities. In the early part of this year there was also heavy speculation in commodities, from steel bars to iron ore.
China’s stock market, which was created in early 1990s to help China’s state-owned companies, has experienced many cycles of boom and bust in the past, but the recent case was a real bubble as many retail investors borrowed money to gamble in stock trading, said Zhao Xijun, a finance professor at Renmin University of China.
“It’s a costly lesson for both regulators and investors,” said Zhao. “The government has to walk a tightrope. On the one hand, a stock market should function to facilitate effective use of capital and on the other, the government has to step in to protect retail investors”.
Chinese stock regulators have taken measures to instil calm in the market. These include direct purchase of stocks by a so-called national team, a crackdown on stock speculation through irregular margin trading and the indefinite postponement of an IPO registration system that could potentially open a flood of new offerings to weigh down prices.
“If the government’s visible hand is doing too much, it may hurt the invisible hand of the market,” said Chen Xingdong, chief China economist at BNP Paribas. “The boom-bust cycle will repeat if … a key policy is decided not through public debate but by a small group of people in a closed-door meeting.”
