The Chinese Communist Party is making efforts to create a bull market, and the stock market surge may become an opportunity for big Chinese investors to unload their holdings. As of the closing on October 14th, a total of 1,097 stocks in the Shanghai and Shenzhen markets have been sold off by major funds for 5 consecutive days or more.
Major funds consist of foreign funds (Northbound funds), public funds, private equity, and speculative funds, among others. Experts believe that the performance of the Chinese stock market has been extremely poor, and once the market is artificially inflated, long-trapped major investors and foreign funds will be the first to exit. The stock market then turns into their cash withdrawal machine, causing heavy losses for retail investors.
At the end of September, the Chinese authorities announced a series of measures to boost the Chinese stock market. When A-shares rise rapidly, they fall rapidly as well. From 2,689 points to 3,674 points, the A-share market only took less than half a month. The market dropped back from 3,674 points to 3,187 points, with nearly 500 points of adjustment taking only four trading days. The 3,227.64 point mark is the bull and bear dividing line in the A-share market.
On October 14th, the three major indexes of A-shares all opened higher: the Shanghai Composite Index reported 3,241.43 points, up 0.74%, the Shenzhen Component Index rose by 0.57%, and the ChiNext Index was up by 0.88%. All showed gains of over 2% throughout the day.
However, despite the stock price increase, a net outflow of 4.782 billion yuan occurred in the Shanghai and Shenzhen markets on that day. In 19 industries such as pharmaceuticals, power equipment, automobiles, and non-ferrous metals, the net outflow of major funds exceeded 1 billion yuan in 5 industries.
According to Data Bao statistics, as of the closing on October 14th, a total of 1,097 individual stocks in the Shanghai and Shenzhen markets have suffered continuous sell-offs by major funds for 5 consecutive days or more.
In terms of the total magnitude of major fund outflows, Eastern Wealth has accumulated a net outflow of 21.933 billion yuan over six days, with major fund outflows accounting for 8.15% of trading volume. Wuliangye followed closely with a net outflow of 3.967 billion yuan over 6 days, with a cumulative stock price increase of 1.37%. Chang’an Automobile had a net outflow of 3.750 billion yuan over 7 days, with a cumulative stock price increase of 2.62%. Hikvision had a net outflow of 3.437 billion yuan over 7 days, with a cumulative stock price increase of 7.80%. Zhongjixuchuang had a net outflow of 2.197 billion yuan over 6 days, with a cumulative stock price increase of 21.26%. Zhinanzhen had a net outflow of 2.164 billion yuan over 6 days, with a cumulative stock price increase of 24.01%. Huafeng SuperFine Fibre had a net outflow of 1.948 billion yuan over 5 days, with a cumulative stock price increase of 37.46%.
In terms of the proportion of major fund outflows to trading volume, Aier Ophthalmology, Hikvision, Pacific, Huafeng SuperFine Fibre, Guojin Securities, Dongxing Securities, China Eastern Airlines, Semiconductor Manufacturing International Corporation, Southern Airlines, Shanghai Lai Shi, Mountain Eagle International, Xinwei, Hainan Airlines Holding, and others all exceeded 10%, with Mountain Eagle International reaching 18.27%.
During the period from September 24th to October 11th, 172 Chinese A-share listed companies issued announcements to reduce their holdings. Among the shareholders reducing their holdings, there were 27 controlling shareholders or actual controllers.
“The Chinese stock market is now internationalized, not isolated, so it likely includes a lot of foreign funds that have been trapped in the market for some time,” said Qiu Junrong, an economics professor at Central University in Taiwan. “Now the Chinese government is trying everything to inject funds into the stock market, which actually helps many foreign funds to unload their positions quickly, turning the stock market into a cash withdrawal machine for them.”
“It has taken away what they previously lost in the entire market during the market’s rise.”
He said that even though the stock prices have risen this time, reaching over three thousand points, it was already at that level during the 2008 financial crisis. In the past decade or so, the Shanghai Composite Index has basically not shown significant growth, while the Dow Jones in the United States, as well as the Taiwan stock market and stock markets of various countries around the world, have risen significantly.
He believes that compared to global stock markets, the performance of the Chinese stock market is very poor. Now, with someone inflating the stock market, it provides foreign funds with an opportunity to quickly withdraw their funds, avoiding further losses. “Soon, this stock market will return to its original state.”
During this recent A-share surge, the well-known internet financial service platform operator, Eastern Wealth, saw its stock price double and hit a historic high. By the closing on October 11th, the price had increased by 94.32% compared to September 23rd, and the highest price on October 9th was up by 170.27%. Currently, Eastern Wealth’s stock price has seen a cumulative increase of 24.53%.
However, Eastern Wealth’s performance in the first half of this year was not ideal. Wind data shows that its operating income was 1.523 billion yuan, a decrease of 28.83% year-on-year, with net income from investment banking business at 1.6678 million yuan, a decrease of 73.37%.
Qiu Junrong told Dajiyuan that the effect of the CCP artificially boosting the stock market is ineffective because of the real economic issues. “You have to rely on policies related to the real economy to solve it. Seeking to resolve the difficulties faced by the real economy through financial means is like grasping at straws, and it’s very difficult.”
“From a fundamental perspective, from the standpoint of the real economy, it is impossible for the government to artificially boost the stock market to a high level all at once and correct the distorted state of the real economy,” he said. “Now the finances are also in a dilemma, so using these methods too often, such as lowering reserve requirements, will make things worse. When you keep lowering them, doing so beyond what is feasible, the situation will become uncontrollable. It will really push China’s economy closer to a dead end.”
“So, it seems that the crisis of a complete economic decline in the future is very, very high,” he said.
At a news conference on October 12th, the Chinese Ministry of Finance discussed a series of challenging economic issues in China, such as the increasingly heavy debt burden on local governments, concerns about bank capital levels, and the dilemma in the Chinese real estate market, but did not provide any specific response details.
CITIC Securities believes that due to the impact of policy expectations, A-shares have experienced intense short-term volatility after the impulse rises and falls. Behind this round of impulse market trends, the main feature is the influx of incremental funds, mainly from retail investors.
Retail investors incur far greater losses than professional investors. The Shanghai Stock Exchange had published data on the profitability of different types of investors in 2017, revealing that individual investors accounted for 82.01% of the trading volume but only gained less than 9% of the profits. In contrast, institutional investors contributed less than 18% of the trading volume but gained over 91% of the profits.
During the long-term downturn from the end of 2022 to the middle of this year, it is estimated that losses for individual investors reached about 4 trillion yuan, approximately an average of 100,000 yuan per household.
Qiu Junrong said, “Once the entire stock market returns to square one, or even drops even lower, those retail investors are in very bad shape. They have seen a significant reduction in wealth, and under the circumstances of reduced income from work, these Chinese people will likely face immense economic pressure.”
“If it’s severe, it will definitely lead to some social issues,” he said.