The influence of retail investors in the Chinese stock market is fading as institutional dominance grows, unlike a global surge in amateur trading that has made headlines from New York to Seoul.
Professional investors’ holdings of freely floating stocks in Shanghai and Shenzhen climbed more than 70% between a stock market crash in 2015 and June 2020, according to China Renaissance, an investment bank. Those held by hobbyist traders fell from about 50 to 23 percent over the same period.
This is at odds with the United States, observers say, where the rise of free trading platforms such as Robin Hood led to increased participation of retail investors and wild swings in some stocks. It also raised questions about what the world’s largest stock market can learn from China, where regulators have limited the ability of retail traders to induce huge bouts of volatility.
“The Chinese market is becoming more and more institutional and the US market can become a little less so,” said Andrew Sinclair, assistant professor of finance at the University of Hong Kong.
From late 2014 to mid-2015, retail investors in China borrowed huge sums of money from brokers to buy stocks in a trading frenzy that pushed up the CSI 300 index of Shanghai and Shenzhen-listed stocks by more than 120%. The imploded market after regulators cracked down on margin funding, wiping out more than $ 5 billion in value.
The heartbreaking volatility recently seen in trading U.S. stocks, including retailer GameStop and the AMC movie chain, has sparked déjà vu for Cameron Peng, assistant professor of finance at the London School of Economics.
“The Chinese stock market is a more dramatic version of this,” said Peng, who looked at day trading during the country’s stock market bubble of 2014-15.
At that time, the rise of mobile brokerage apps allowed hundreds of millions of newbie investors to trade leverage with minimal fees. They have also been encouraged to enter the market through online stock advice, internet forums, and even government propaganda.
Analysts point to echoes in the United States in recent months with the popularity of apps such as Robinhood and the r / WallStreetBets online forum.
Sinclair and Peng believe that such an influx of retail investors – in the United States as well as in China – can cause stocks to divorce their underlying securities. Unlike long-term institutional investors, retail traders often drive up stock prices without worrying about fundamental attributes such as a company’s earnings.
As Chinese and foreign institutional investors jumped into the country’s 2014-2015 bubble, many managed to sell before the market plunged, Peng points out.
The collapse of the Chinese market in 2015 inflicted lasting trauma on many retail investors that discouraged them from trading again, according to Alex Wolf, head of Asia investment strategy at JPMorgan Private Bank.
It was also “pretty scary for regulators to see this bubble burst,” he added. “They are [now] very keen to try to avoid this by controlling cash flow as needed. ”
For Beijing, this included a more in-depth look at margin loans from brokers to retail traders. Total margin loan in China remains well below 2015 levels, when only about 1 million new margin finance accounts were opened in 2020, compared to 2-3 million during the bubble years.
Bruce Pang, head of research at China Renaissance, said that a relative decrease in the volatility of the Chinese stock market during more recent crises – like the collapse of Covid-19 a year ago – suggested that the decline in retail holdings had enhanced stability. But institutional participation in Chinese equities is still far behind in some ways.
At the end of 2019, retail investors accounted for more than 80% of turnover in Shanghai and Shenzhen, compared to just 16% in Hong Kong, dominated by institutional investors, according to a report by Goldman Sachs. Goldman estimated that China accounts for more than a quarter of global equity sales, but only 12% of global market capitalization.
Chinese policymakers “want to institutionalize the market, and so far it is a company that has failed to achieve what I suspect is [policymakers’ goals]Said Peter Alexander, Managing Director of Z-Ben Advisors, a Shanghai-based consulting firm.
While retail traders in China and the United States have turned to different forms of leverage in their respective rallies, analysts see little difference in their behavior.
While Chinese amateur traders deployed margin financing to boost their bets in 2014-2015, US retail investors have used in recent months options double bullish and bearish trades at the risk of proportionately larger losses.
“For individual investors or households, it’s not like [the US and China are] their business behavior is radically different, ”said Peng of the LSE.
One aspect that was the same in China and the United States, he added, was the pain of the losses when a bubble finally burst.
“People saw their [shareholdings’] the value decreases by 50 percent overnight, ”Peng said. This hit “retirees, grandparents, parents and students, who knew very little about these [investment] some products.”
Additional reporting by Thomas Hale in Hong Kong