On October 10, 2024, according to reports from Epoch Times, the Chinese stock market experienced a rollercoaster ride on Wednesday, October 9, after China’s National Development and Reform Commission announced economic policies that fell far below expectations. All three major indexes plummeted, leaving investors in a state of distress. Mainland Chinese scholars pointed out that in a bullish stock market, small and medium retail investors need to be cautious as more than 90% of the prosperity does not belong to them.
On that day, over 5000 individual stocks in the A-share market experienced declines, with more than a hundred stocks hitting their daily limit down. By the end of the trading day, the Shanghai Composite Index fell by 6.62%, the Shenzhen Component Index dropped by 8.15%, and the Chinext Index plunged by 10.59%. The total trading volume in the Shanghai and Shenzhen stock markets was 2.9398 trillion yuan, a decrease of 512.1 billion yuan compared to the previous trading day’s volume of 3.4519 trillion yuan.
The National Development and Reform Commission held a press conference announcing a package of economic stimulus policies on the same day, but the results fell well below expectations. Subsequently, the stock market experienced a sharp decline, leading to a significant number of small and medium retail investors being trapped.
With the stimulus from a series of policies by the Chinese government at the end of September, the stock market saw significant gains, attracting millions of retail investors eagerly opening trading accounts.
Blogger “Mu Jie Kan Pan” noted that currently in the A-share market, retail investors make up a significant proportion of the investor base.
Looking at the distribution of free float market value in the A-share market in the third quarter: retail investors accounted for 42%, general corporate investors 27.5%, domestic institutional investors a combined 19.5%, with central Huijin and securities firms accounting for 5.5%. Among domestic institutional investors, public funds accounted for 7.4%, insurance and social security funds for 7.1%, sunshine private equity for 3.4%, and securities firms for 1.6%.
However, the reality of the Chinese stock market shows that small and medium retail investors are always the “sheep to be sheared,” and cutting losses and exiting is their ultimate fate.
An article by Chinese scholar Wang Mingyuan published on Caixin.com pointed out that in a bull market, small and medium retail investors should be cautious as there is a high probability of wealth loss and it is difficult to make money.
Using data from the Shanghai Stock Exchange’s last release of profit information for different types of investors in 2017 as an example, individual investors contributed 82.01% of the trading volume but received less than 9% of the profits. In contrast, institutional investors accounted for less than 18% of the trading volume but made over 91% of the profits.
While the profit gap of small investors widens, their losses far exceed those of professional investors.
Taking 2016 as an example, the total market value of stocks held by individual investors was only 39.4% of the market value held by corporate investors. However, their losses accounted for 72%, which is nearly twice the loss proportion of institutional investors.
In the prolonged downturn from the end of 2022 to the middle of this year, it is estimated that individual investors suffered losses of around 4 trillion yuan, averaging about 100,000 yuan per household.
Blogger “Ping Shuo Cai Jing” author Zhang Ping stated that data shows that in 2021, individual investors lost an average of 41,000 yuan each. In 2022, the average loss per individual investor increased to 78,700 yuan, and by 2023, the A-share market evaporated 14 trillion yuan in market value. If this loss is spread over the 219 million stock investors, the average loss per person reaches 64,500 yuan.
Wang Mingyuan warned small and medium retail investors that during an exuberant bull market, it is a period when their wealth will mainly dissipate, with “more than 90% of the apparent prosperity not belonging to you.”
Looking back at the bull market and bear market of 2015 (the stock market crash of 2015), top retail investors with assets exceeding 10 million yuan saw a 76% increase in their assets, while small investors with assets below 300,000 yuan experienced a 33% decrease in their assets.
Mr. Zhang, a securities worker in Shanghai, told Central News Agency that the recent surge in account openings in the stock market, dominated by young people in their twenties, reveals that many of them lack investment experience and only enter the market thinking they can make money, making them prone to losses.
According to a recent report by Caijing, the new wave of investors consists mainly of young people. The post-1985 generation, post-1990 generation, and even the post-2000 generation have shown a significant increase in account openings.
The sharp decline following the surge in the stock market has led to substantial losses for these new investors.
Chen, a stock investor from Changsha, told Radio Free Asia that young investors lack experience and often lose their way in the frenzy of the stock market. He believes that the current market rebound is temporary, and the influx of young investors is impulsive. In the long run, the economy shows no signs of improvement, indicating a complete paralysis. “It’s clear that the economy is now completely paralyzed. The North (Beijing) wants to drive the stock market to an exciting point to stimulate the economy, but this is a short-term effect with no lasting impact.”
Mr. Zeng, a stock investor from Guangdong, shared a similar sentiment. He noticed that some residents sell their homes or take out loans to invest in the stock market, indicating excessive market speculation. “The policies before were aimed at attracting new players. In a situation where the economy is not doing well, a sudden surge in the stock market is a big scam. Young people lacking experience are inevitably deceived into joining.”
Online commenters from mainland China have also expressed their anguish, sharing stories of heavy losses.
“I bought in heavily yesterday, but today I plummeted into an abyss of losses.” “I just graduated and lost two days’ worth of salary today, totaling a loss of 1,400.” “As a new investor in the market, I invested 4,000 yesterday, but today the stock market plummeted. This is all the savings I’ve accumulated in six months of work.”
Zhang Ping believes there are four reasons for the losses suffered by small and medium investors in China.
Firstly, the IPO prices of new stocks are excessively high. Since 2024, as of August 30, 59 companies had gone public with an average P/E ratio of 33.02, as compared to 44.39 in the same period in 2023 and 55.70 in 2022. Such high P/E ratios indicate that A-share stocks are more speculative than investment-worthy. Shortly after their IPOs, new stocks often drop below their issue prices, gradually returning to a reasonable valuation range.
Secondly, the performance of listed companies is declining. In recent years, due to the overall economic downturn in China, the performance of many listed companies has declined while the A-share index remains historically high above 3000 points. The downward shift of the A-share index’s center of gravity leads to prolonged bearish market conditions.
Thirdly, retail investors engage in speculation rather than investment. Chinese retail investors prefer short-term trading in the A-share market. Even if they profit from each trade, a single loss can wipe out previous gains and even result in further losses. In reality, more active trading in the A-share market often leads to more substantial losses.
Fourthly, market makers set traps for retail investors. In the A-share market, each stock has its own market maker. Leveraging their financial and information advantages, market makers continuously set traps for retail investors, enticing them into “buy high, sell low” scenarios, ultimately leading to most retail investors exiting with losses.
Investors are now shifting their focus to when fiscal stimulus policies will be implemented. The Chinese Ministry of Finance is set to hold a press conference on Saturday, October 12, where Finance Minister Lan Fo’an will outline efforts to increase the intensity of fiscal policies to counter-cyclically adjust the economy.
Nick Ferres, Chief Investment Officer at Vantage Point Asset Management, stated that additional support measures for the Chinese economy need to be further increased based on previous commitments in order to boost the country’s Gross Domestic Product (GDP) by approximately two percentage points to have a substantial impact.
Many economists believe that to address China’s current economic weakness, a critical step is to change the country’s long-term policy focus of heavy investment and light consumption. Increasing consumer incomes and raising the proportion of consumption in the Gross Domestic Product (GDP) are essential for revitalizing the economy.