The Chinese population is continuing its headlong plunge into the stock market, a second monthly surge that sustains the momentum behind one of the world’s best-performing major benchmarks this year.
July’s new A-share trading accounts more than doubled from last year to 2.43 million, according to data by the China Securities Depository and Clearing (CSDC). That raised the total to 170.2 million accounts as of July 31, making it the world’s eighth largest cluster of people, more than the population of Bangladesh and just behind Nigeria.
While new stock accounts give legs to the bull market, having so many first-time investors – retail traders make up an estimated 70 per cent of China’s stock transactions – raise the political and socioeconomic stakes for the authorities, forcing them to do all they can to sustain prices and avoid scaring traders. Unlike markets elsewhere, short-selling is severely curtailed and offers very limited use to hedge against declines in China, which would almost certainly translate to a financial catastrophe in the event of the 2015 market rout that wiped out US$5 trillion.
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“The big number of new investors reflects the influx of fresh funds, which would sustain the market for a while,” said Ding Haifeng, a consultant with Shanghai-based financial advisory firm Integrity. “After all, strong runs on China’s stock market were often driven by speculative capital, rather than economic and company fundamentals.”
For now, sage advice for restraint appear to have fallen on deaf ears, as the Shanghai Composite Index’s 11 per cent jump this year put it behind Copenhagen’s OMX20 and Buenos Aires’ Merval as the world’s third-best performing major index. In the first six months, 7.98 million new equity trading accounts were added on the Shanghai and Shenzhen stock exchanges, data showed.
Bullish sentiments in China were boosted by an economy that reversed the first quarter’s contraction with a 3.2 per cent growth from April to June, as output and consumption creaked back into life in the first major country to emerge from its coronavirus lockdown.
Since the establishment of China’s stock market in 1990 with its twin exchanges of Shanghai and Shenzhen, Chinese investors have been prone to trading on rumours, rather than valuation. The Communist Party of China, which dominates the country’s life and politics, has 92 million members at last count.
The world’s second-largest capital market, only 3 per cent shy of US$10 trillion in capitalisation, is essentially a one-way bet that dispenses prosperity during rallies, but one which leaves countless investors ruing losses during slumps.
“Unseasoned investors should learn that a roller-coast A-share market could cause them huge losses,” said Zhang Wei, who had been trading stocks for 20 years in Shanghai. “It is dangerous to play stocks now since the key indicator had already chalked up a stellar gain.”
Dozens of retail traders - typically pensioners - gathering around electronic data boards to keep score of their investments is a common and enduring scene across thousands of stockbroking firms in the country. During market crashes, when large losses are incurred, these traders can also turn ruly, showing up in protest rallies outside regulatory offices to demand recourse and compensation.
That is a structural deficiency that the market regulator had been trying to repair for decades, as it sought to create a bigger role for long-term, institutional investors like the sovereign wealth fund unit Central Huijin Investment to help infuse the market with discipline and informed investment decisions.
Consumer stocks, beaten down during China’s coronavirus lockdown, are the odds-on favourites of the moment on China’s stock market, as retail investors took their cue from Huijin and the national pension fund as they bought into the segment. China Pacific Insurance said earlier that beaten-down stocks in consumer sector, which include liquor, clothing and daily necessities were good buys as mainland economy recovers from the coronavirus pandemic.
More from South China Morning Post:
- Buying frenzy takes China’s stock market close to US$10 trillion – the ominous milestone that marked the start of the 2015 crash
- Is Chinese capitalism in crisis, as stock market rout drives private companies into the state’s arms?