Why you should care
China’s students and workers are driving the country’s equity market.
The world’s most powerful asset managers may be establishing a foothold in Chinese stocks, but retail investors still hold considerable sway over this year’s best-performing major equity market.
University students, migrant workers and elderly patrons of trading halls make up the retail investors who were at the heart of last year’s rout and have been central to 2019’s rebound. They accounted for almost all of the 1 million new trading accounts opened in January, according to China Securities Depository and Clearing Corp.
“[China’s] retail investors are more momentum driven, and that’s why you have seen such strong market moves,” says Alexious Lee, head of China capital access at investment group CLSA.
Retail investors who were previously locked into all these pledged shares or trading-suspended stocks were unleashed
Alexious Lee, head of China capital access, CLSA
This year’s gains for the benchmark index in Shenzhen, home to far more of the mid- and small-cap companies that institutional investors typically shun, underlines the role of retail investors in this year’s rally. It has jumped 28 percent this year compared to a 20 percent advance for the bourse in Shanghai, where larger stocks dominate.
It is a point emphasized by the giddy rise in Shenzhen’s tech-heavy ChiNext, a small-cap board modeled on Wall Street’s Nasdaq, that has done even better, jumping 30 percent. Part of this outsize rise is down to smaller stocks having tumbled further during last year’s rout.
The first rise in a year in margin lending, which helped drive the stock market surge of 2015, is another sign retail investors are “back into active mode,” according to Lee. Such momentum is one reason CLSA has tipped the Shanghai Composite index to break above the 3,500 points level before the end of June.
While last month’s decision by index provider MSCI to increase the weighting of Chinese stocks in its widely followed Emerging Markets index — a trend many expect to continue as part of Beijing’s attempt to open up its capital markets — analysts say retail investors will still wield considerable clout.
Shanghai Stock Exchange figures for 2017 show that retail investors accounted for the vast majority of trading accounts and 82 percent of turnover, and are estimated by Aberdeen Standard Investments to hold more than a third of the market’s free float.
Their influence has also been sharpened after Chinese authorities freed up about RMB 2 trillion (about $297 billion) worth of shares. They had been ensnared last year after trading in up to 265 stocks was halted as companies sought to prevent large-scale selling of shares pledged to banks as collateral for loans — a common practice in China. CLSA estimates the government deployed more than RMB 250 billion ($37 billion) to boost the liquidity in these listed companies.
“Retail investors who were previously locked into all these pledged shares or trading-suspended stocks were unleashed,” Lee says.
As well as volatility, international investors who follow MSCI into China will have to accept valuations that would raise eyebrows elsewhere. Naura Technology Group, a mid-cap stock on MSCI’s pro forma inclusion list, for example carries a price-earnings ratio of 153, about eight and a half times that of the S&P 500.
Moreover, local fund managers point out that the interest of retail Chinese investors does not line up neatly with those from offshore.
“Chinese investors have been grabbing brokerage stocks recently, as these have good elasticity, but they will never be favored by foreign investors,” says Daniel Li, chief investment officer for equities at GaoTeng Global Asset Management.
But Thomas Gatley, China corporate analyst at Gavekal Dragonomics, says Beijing is serious about making shares listed in mainland China a “plausible, reliable citizen of the global financial market,” in large part to bring home the tech unicorns that now prefer listing in New York and Hong Kong.
Beijing has begun to pin those hopes on Shanghai’s nascent Technology and Innovation Board, announced by President Xi Jinping in November. The board, slated to finish trading systems testing in May, would be the first in China to allow listings without prior regulatory approval. It would also require investors to have two years of trading experience and an account balance of at least RMB 500,000 ($74,000).
“This eliminates the majority of individual investors, which in our view is the right approach as it will strike the right balance between market liquidity and potential risk,” analysts at HSBC Qianhai Securities noted.
But as of early March, Shanghai’s exchange said it had yet to receive any applications from companies hoping to file for an initial public offering on the new board. And many involved in China tech listings privately express doubts that top startups would want to raise capital in China’s uncertain regulatory environment.
“It’s going to be very challenging for people to feel as comfortable about [the new board] as they do about the Nasdaq or the Hong Kong exchange,” says one lawyer with experience overseeing China tech listings abroad.
Additional reporting by Yizhen Jia in Shanghai and Louise Lucas in Hong Kong.
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