Analysis: China’s retail investors quickly fell on stocks, according to Reuters

By Samuel Shen and Ga Zen

SHANGHAI/HONG KONG (Reuters) – Day trader Lu Delong’s optimism for China’s stock market quickly evaporated in the first week of the year, forcing him to dump shares three months after he was set for a sharp rise due to Beijing’s stimulus pledges. and details of his losses.

Many retail investors such as Lu sold stocks in early January, prompting the weakest start for China’s $11 trillion stock market in a decade.

“The brutal sell-off is beyond my understanding. I don’t see Trump announcing anything new on China,” he said of the uncertainty surrounding U.S. trade policy under President-elect Donald Trump.

“The only plausible explanation is that the market is pressuring the government for tougher policies,” said Lu, who was bullish on Chinese stocks in late September but now plans to cash in ahead of the Chinese Lunar New Year holidays. Since the end of January.

Retail investors, reeling from concerns over economic policies and US trade tariffs, are selling, potentially ending a years-long downward slide for Chinese stocks.

Chinese stocks have seen their first annual gains in 2024 following an unprecedented three-year slump due to the Covid-19 pandemic, problems in the property sector and weak consumer confidence.

Retail funds account for 70 percent of China’s stock trading, so there is a risk that the selloff could trigger organized bets and losses that could hamper Beijing’s efforts to stabilize capital markets.

The government needs a sustained bull market to support economic recovery, but another boom would “destroy wealth, hurt consumption and hurt China’s economy,” said Dong Baozhen, chairman of Beijing-based asset manager Lingying Shentai.

The sell-off meant another loss of confidence in the yuan and the bond market from investors who were pessimistic about China’s economy, as the government intervened to control the currency and bond yields.

‘cold water’

In late September, markets appeared to be recovering after Beijing announced interest rate cuts and plans to hedge. Desperate investors poured into stocks, sending the benchmark index up a whopping 40 percent in two weeks.

The broader market then cooled as investors awaited more hawkish policies, but retail activity remained buoyant, with high turnover, small-cap stocks rallying and rich bets quickly building.

In the year There have been signs of disappointment in early 2025, with shares in Shanghai and Shenzhen down roughly 6% so far, making them the world’s worst-performing major markets.

“Policymakers set fire to dry wood, but the fire is put out with cold water,” said Zhang Jiannan, a retail investor, referring to half-hearted policy implementation.

The People’s Bank of China launched a 500 billion yuan ($68 billion) exchange facility to support the purchase of shares by institutional investors, but in 2016 it closed. The fact that only 50 billion yuan is shown in the plan by the end of 2024 shows institutional uncertainty.

“When you see financial institutions plowing their money into Treasury bonds and high-dividend stocks, you know people with deep pockets are pessimistic about the economy. Market behaviors don’t lie,” Zhang said.

Foreign investors also left the market.

Global hedge funds increased exposure to China during last year’s stimulus-led rally but soon pared their wounds, while global long-only funds “remained largely on the sidelines,” Goldman Sachs wrote.

Waiting game

The biggest imbalance could be that Beijing is in ‘wait and see’ mode, waiting for growth conditions and Trump’s policies as the market expects a ‘big bang’,’ said Yan Wang, China strategist at Alpine. Macro (BCBA:)

“For now, we still see China as a tactical business.”

Hao Hong, partner and chief economist at GROW Investments, said Trump’s threat to impose 60% tariffs on Chinese goods is a major source of uncertainty.

“The market is very volatile right now, and Trump is very unpredictable, so it’s not a good time to jump in,” said Hong, who has no Chinese stocks in his multi-asset fund.

“Now it’s just a matter of waiting, waiting for policy changes. If there’s no chance, don’t act, be patient.”

With nearly half a trillion yuan of borrowed money poured into the market since late September, a retreat in disorderly retail trade could trigger margin calls and the ensuing turmoil could knock the Shanghai index below the key 3,000-point level this month, a Shanghai-based investor said. Mao Jian

The Shanghai benchmark ended Monday at 3,160 points, 5% above the level, which is considered by many investors to be psychologically important and should be protected by state funds.

To prevent another crisis, China should aggressively expand the central bank’s balance sheet and set up a sovereign market stabilization fund because “when the wood is wet, you need a very big fire to burn it,” said retail investor Zhang.

($1 = 7.3320)