Chinese Dream of Instant Stock-Market Riches Faces Harsh Reality

Fang Tao’s hopes of striking it rich in the Chinese stock market died as his investments plunged by half over the past year. Now, he’ll be happy just breaking even.

The 28-year-old employee of a clothing company in Shanghai has pared his allocation to equities by as much as 15 percent since Chinese shares peaked last June. He sees no sign of the Shanghai Composite Index returning to its highs anytime soon, despite efforts by the ruling Communist Party to prop up the market.

“The most significant change has been my mindset,” Fang said. “Now I feel like when I’m not making a loss, I’m winning.”

The crash that erased $5 trillion from mainland stocks in 2015 has had a sobering effect on the nation’s 106 million individual investors, many of whom piled into shares just as prices peaked a year ago. While realistic return expectations should improve the health of China’s notoriously speculative markets, there is a downside: Companies may find it harder to raise the equity financing needed to wean themselves off a record reliance on debt.

“People realized that it can’t go up forever after the crash,” said Steve Wang, chief China economist at Reorient Financial Markets Ltd. in Hong Kong. Creating a strong market for equity financing “is a huge challenge for the government,” he said. “IPO activities and direct financing through the equity market have been reduced.”

The influence of mom-and-pop investors is bigger in China than nearly every other major market. Individuals drive more than 80 percent of trading on bourses in Shanghai and Shenzhen, versus about 15 percent in the U.S.

China’s bubble began inflating in late 2014 as policy makers touted the importance of equity financing and state media ran a series of articles promoting the market. As the buzz around shares grew, investors opened new trading accounts at a record pace and took on unprecedented amounts of margin debt.

When the reckoning came, it was swift. The Shanghai Composite Index crashed more than 30 percent in the first month, before eventually losing as much as 49 percent. The Communist Party, seeking to prevent the tumble from infecting an economy growing at the slowest pace in 25 years, allowed hundreds of companies to halt trading, banned major shareholders from selling and ordered state-owned institutions to buy.

The turmoil roiled shares across the globe, with Federal Reserve Chair Janet Yellen citing China’s volatile markets as a reason to keep benchmark interest rates on hold in September.

Government interference during the rout is one reason why Zhang Kai, a 28-year-old financial analyst at a consulting firm in Beijing, has soured on stocks. He sold most of the 1.5 million yuan ($229,000) that he and his parents invested before the market peaked last year, paring their holdings to about 300,000 yuan.

"I no longer have confidence in the stock market," Zhang said. "I used to think I was playing a game with a bunch of inexperienced investors, and I could make profits because I was more sophisticated. Now, what disappoints me the most is that the authorities keep meddling."

The Shanghai Composite lost 0.3 percent at the close on Wednesday.

Wu Yuetian, who lives in Hangzhou and works in Internet finance, experienced the meddling first hand. He has 40,000 yuan trapped in stocks that remain suspended. These days, his spare cash goes to local wealth management products, which offer yields of 8 percent to 10 percent.

“I will be cautious and just stay on the sidelines," Wu said.

Property Boom

Not all Chinese investors are cutting back on speculative trading, with many shifting to the property and commodities markets instead. New home values in Shenzhen have jumped 62 percent in the past year amid a real estate boom in China’s biggest cities, while prices for everything from iron ore to steel and eggs surged on the nation’s futures exchanges earlier this year, before reversing at the end of April.

The volatility in commodities suggests China’s individual investors still have a lot to learn, but the hope is that their casino-like mentality will fade over time, according to Reorient’s Wang.

“Trees don’t grow to the sky,” he said. “And neither does the stock market.”

--With assistance from Kyoungwha Kim To contact Bloomberg News staff for this story: Tian Chen in Beijing at tchen259@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Michael Patterson