(Oct 16): China’s 200 million-strong army of retail investors was supposed to help the market turn a corner. Instead, it has become a source of weakness.

The country’s US$9.7 trillion (RM41.74 trillion) stock market experienced a rapid boom and bust starting late September, when central bank stimulus pushed the benchmark CSI 300 Index 25% higher in five days of trading. Many small investors who came late to the party were caught out when equities then slumped, and were forced to beat a hasty retreat.

“Close securities account” as a phrase cropped up 56 million times on social media platform WeChat on Oct 9, as the benchmark index posted its worst performance since 2020. Money soon shifted back into savings from stock trading accounts, according to a bank index. Retail investors took to social media to lament their losses, with one user on Xiaohongshu saying “the stock market is really not suitable for a novice like me”.

The abrupt shift in sentiment has undermined hopes among bulls that China’s huge retail investor base, sitting on US$21 trillion of deposits, will help drive a long term rally. Whipped by social media, small investors have instead proven fickle, turning a positive — the ability to quickly deploy capital to the stock market — into a negative, as they exacerbated price swings.  

Shelton Wang, a 32-year old technology sector worker in Beijing, was one of the many who succumbed to the euphoria, making “impulsive” transfers into his trading account after the initial surge. Having seen stock prices plunge after a one-week public holiday, he pulled back.

“Everybody was talking about it — the policy outlook and the cheap Chinese valuation — and you saw it everywhere on social media,” he said. “The market’s plunge calmed me a bit and also erased my gains made before the holiday. On reflection, I have always been quite pessimistic about the economy and the government’s resolve to boost the market.”

The reality check for amateur stockpickers shows the steep challenges facing President Xi Jinping‘s vision for the country. While China’s leader is relying on technology investment to give the economy a boost — stressing so-called ‘new productive forces’ — analysts point to the need to revive lacklustre consumer demand and better utilise the huge pools of savings.

With China’s stock market a reflection of faith in Beijing’s economic revival plan, the skittish sentiment among retail investors is a sign of fragile confidence.

Foreign investors have long been enticed by the chance of Chinese families shifting more of their wealth to the stock market. Equities made up just 2% of household assets in 2019, according to the latest central bank survey, compared to around a third in the US.

“China has one of the highest savings rates in the world, and redirecting even a fraction of these funds into equities would provide substantial liquidity and buying power, helping to boost stock prices and market sentiment,” said Manish Bhargava, chief executive officer at Straits Investment Management in Singapore.

The large-scale deployment of Chinese savings to the stock market finally appeared to be under way in early October, but almost as soon as it started the buying frenzy went in reverse. On Oct 9, amid profit-taking and widespread questions about when the next big stimulus announcement was coming, the CSI 300 index fell 7%, its worst performance since early 2020. 

“Abundant retail participation can help to form a quick or crazy market, which is not ideal for market authorities who wish for a slow bull market,” said Xiadong Bao, fund manager at Edmond de Rothschild Asset Management, who described the lessons as “growing pains” for the market. 

The herd mentality was partly fuelled by social media, said Bao. He compared the influence of Chinese social media to the controversial WallStreetBets community in the US, which also spurred a rise in retail participation but has occasionally been blamed for worsening volatility.

Lucy Chen, a 28-year old designer in Shanghai, is one of the amateur investors who bought stocks after seeing social media posts, following the advice of an influencer on Douyin, a popular website. 

“I wanted to get in on some of the profits that people around me were talking about,” she said. Instead, Chen has suffered losses since her first day of trading.

WeChat’s index of “close securities account” shows that the phrase appeared around 56 million times in messages and news reports shared by users on Oct 9, the onshore market’s biggest down day for around four years. It had been used less than 10 million times per day in the weeks before.

Around the same time, an index compiled by Industrial and Commercial Bank of China Ltd showed more transfers being made from securities accounts to bank accounts, reversing a trend in the first week of October when small investors were tapping their savings to trade the markets.

Some market participants think the recent downturn in stock prices will be a good thing in the long term, since it has pushed out some fickle investors who are more likely to fuel herd behaviour.

“It’s much healthier that the frenzy was nipped in the bud — very few can profit from a crazy bull run,” said Wu Xuan, a fund manager at Borui Funds Management Co in Beijing. “The core policy intention is to end the deflation cycle by boosting the wealth effect and sharing the prosperity in stocks. The only way the masses can profit is if the uptrend is gradual and lasting.”

Investors will now turn their attention to a briefing on Thursday by China’s central bank and its finance and housing ministries, the next chance for government officials to impress retail investors — or disappoint them.

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