China's post-pandemic rally, which was once seen as the country's path to economic recovery, is losing steam as small investors turn bearish on equities. Despite expectations that excess savings would flow into the stock market, households are now opting for safer assets like bonds and deposits, leaving equity markets adrift.
Chinese blue chips, which experienced a 20% rally from October to January, have now given up their gains and are down 1% year-to-date. The Hang Seng index is at its lowest point since 2023, and sovereign bond yields are falling. As a result, the much-anticipated stock market boom has fizzled, and investors are keeping their money out.
Eric Yu, a programmer in his 30s in Shanghai, expressed his disappointment and reluctance to invest further in stocks until his losses are recovered. Concerned about potential tech layoffs and youth unemployment, Yu has been redirecting a significant portion of his monthly income into wealth and deposit products, prioritizing the safety of his principal.
Interviews with several other small investors revealed similar sentiments. These investors have a significant impact on the market, accounting for around 60% of turnover, according to China Securities Regulatory Commission Chairman Yi Huiman. In contrast, the estimate for the United States is less than 25%, according to JPMorgan.
Market data reflects the lack of interest from small investors. China's securities margin trading balance, an indicator of risk appetite, is hovering around one-month lows, and turnover in the A-share market is at its lowest level since early March. The creation of brokerage accounts and mutual fund launches, both indicative of investor interest, have also declined.
The Shanghai Composite, the broader stock market index, is trading at a similar level to early 2022. The decoupling of stocks from deposits and liquidity, a correlation that persisted for years, is further evidence of the erosion of faith in China's recovery story, according to Hong Hao, chief economist at Grow Investment Group.
Softening economic indicators, coupled with rising political tension and slowing growth globally, have contributed to the waning enthusiasm among investors. China's industrial output and retail sales growth in April fell short of forecasts, signaling a shaky recovery. Additionally, loans have unexpectedly declined, and efforts by Western countries to reduce reliance on Chinese manufacturing have gained momentum.
These factors have left domestic investors too nervous to move beyond deposits, which are growing at a faster rate than during the peak of the pandemic last year, as indicated by central bank data. The fast-paced rotation of investment themes and the presence of policy and geopolitical risks have further contributed to cautious sentiment.
However, not all signs are negative, and some anticipate a return of local investors as a significant boost to the market. Chi Lo, senior investment strategist at BNP Paribas Asset Management, estimates that around 10% of the excess savings could flow into the asset market, amounting to approximately 800 billion yuan. Hayden Briscoe, Asia-Pacific head of multi-asset management at UBS Asset Management, believes that these investors will eventually drive the market higher, citing the recent expansion in non-bank lending as a positive sign of cash flowing into the economy.
Currently, the weight of investor money remains on the sidelines. Even sectors that are outperforming, such as state-owned enterprises, are driven more by bond-like dividends than risk appetite. With the exception of the AI sector, attractive returns are scarce. Investors like Meng, a Shanghai resident in his 40s, find themselves with substantial losses in their stock portfolios and can only wait for a turnaround.
