Evaluation-China’s retail investor sours shortly on shares

By Samuel Shen and Summer season Zhen

SHANGHAI/HONG KONG (Reuters) – Day-trader Lu Delong’s optimism for a China shares rally shortly evaporated within the first week of the yr when, simply three months after positioning for a surge fuelled by Beijing’s stimulus pledges, he was pressured to dump shares and tally his losses.

Many retail buyers like Lu offered shares in early January, precipitating the weakest begin to the brand new yr in virtually a decade for China’s $11 trillion inventory market.

“The savage sell-off is past my understanding. I have not seen Trump announce something recent in opposition to China,” stated Lu, referring to the uncertainties surrounding U.S. commerce coverage underneath President-elect Donald Trump.

“The one believable clarification is that the market is squeezing the federal government for extra forceful insurance policies,” stated Lu, who turned bullish on Chinese language shares in late September however now plans to carry simply money within the run-up to the Chinese language Lunar New Yr holidays beginning late January.

Disillusioned with financial insurance policies and the troubles round U.S. commerce tariffs, retail buyers are promoting, threatening to knock Chinese language shares again right into a years-long downtrend.

Chinese language shares noticed their first annual acquire in 2024 following an unprecedented three-year decline set off by the COVID-19 pandemic, property sector woes and weak shopper confidence.

Retail cash accounts for roughly 70% of China’s share buying and selling, therefore there’s a threat {that a} sell-off might set off a disorderly unwinding of leveraged bets and losses which might stymie Beijing’s efforts to stabilise capital markets.

The federal government wants a sustainable bull market to fund financial revival however one other boom-and-bust would “destroy wealth, harm consumption and hurt China’s financial system”, stated Dong Baozhen, chairman of Beijing-based asset supervisor Lingtong Shengtai.

A sell-off would imply one other vote of no-confidence from buyers who’ve already vented pessimism over China’s financial system within the yuan and bond markets, prompting the federal government to step in to arrest falls within the foreign money and bond yields.

‘COLD WATER’

Markets appeared on the cusp of a restoration in late September when Beijing introduced rate of interest cuts and intent to defend markets. Determined buyers dived into shares and drove the benchmark index up a whopping 40% over two weeks.

The broad market then cooled as buyers waited for extra concrete insurance policies, however retail buying and selling remained energetic, evidenced by excessive turnover, hovering costs of small-cap shares and a fast build-up of leveraged bets.

Indicators of disillusionment emerged early in 2025, with shares in Shanghai and Shenzhen down roughly 6% thus far, making them the world’s worst-performing main markets.

“Policymakers sparked a blaze over the dry wooden, however the hearth has been put out by chilly water,” stated retail investor Zhang Jianan, referring to half-hearted coverage implementation.

The Folks’s Financial institution of China kicked off a 500-billion-yuan ($68 billion) swap facility to fund share purchases by institutional buyers however by end-2024 solely 50 billion yuan underneath the scheme was tapped, indicating institutional scepticism.

“Once you see monetary establishments ploughing cash into treasury bonds and high-dividend shares, these with deep pockets are pessimistic towards the financial system. Market behaviours do not lie,” Zhang stated.

International buyers have additionally withdrawn from the market.

International hedge funds raised publicity to China throughout final yr’s stimulus-led rally however quickly unwound them, whereas international long-only funds “have stayed largely on the sideline”, Goldman Sachs wrote.

WAITING GAME

The largest mismatch may very well be that the “market expects a ‘huge bang’ whereas Beijing is in a ‘wait and see’ mode, pending progress circumstances and Trump’s insurance policies”, stated Yan Wang, chief rising markets and China strategist at Alpine Macro (BCBA:BMAm).

“For now we nonetheless view China as a tactical commerce.”

Hao Hong, companion and chief economist at GROW Funding, stated Trump’s menace to levy tariffs of 60% on Chinese language items is a big supply of uncertainty.

“The market is extraordinarily risky proper now, and Trump is extremely unpredictable, so it isn’t time to hurry in,” stated Hong, who has no China shares in his multi-asset fund.

“Now it is only a matter of ready, ready for coverage adjustments. If there isn’t any alternative, do not act. Be affected person.”

With half a trillion yuan price of borrowed cash ploughed into the market since end-September, a disorderly retail retreat might set off margin calls and the following stampede might knock the Shanghai index beneath the important thing 3,000-point stage this month, stated Shanghai-based investor Mao Jian.

The Shanghai benchmark ended Monday at 3,160 factors, 5% above that stage, which is seen by many buyers as psychologically essential and by state funds as price defending.

To forestall one other disaster, China ought to aggressively develop the central financial institution’s stability sheet and arrange a sovereign market stabilisation fund, as “when the wooden is moist, you want a a lot greater hearth to set it ablaze”, retail investor Zhang stated.

($1 = 7.3320 Chinese language yuan)