Back in March of last year we noted, with some incredulity, that some 30% of China’s newly-minted day traders had an elementary education [9] or less. Even more incredible, we learned that nearly 6% of the country’s new “investor” class were illiterate.
Just days after we made that startling revelation we gave readers an idea of just how many Chinese were opening new stock trading accounts each month. In March for instance, Chinese farmers, housewives, and all manner of other amatuer traders opened enough brokerage accounts [10] for every man woman and chile in Los Angeles.
But it gets worse. Not only were millions of semi-literate Chinese starting to trade without being able to read let alone conduct fundamental analysis, they were buying into a market gone parabolic:
[11]
Worse still, they were buying on margin - heavily:
[12]
By summer, the stage was set for a truly epic meltdown on the SHCOMP and especially on the tech-heavy Shenzhen.
Sure enough, in June, the wheels started to come off.
As we warned when the plunge began, China was facing more than a stock market selloff. Beijing had managed to give legions of day trading Chinese the idea that stocks always went up. That encouraged many people to plow their life savings into the market on margin. When the unwind began - starting with the half dozen or so backdoor margin lending channels that helped to pump an extra CNY1.5 trillion into stocks - many Chinese were confronted with the possibility that they may lose everything.
Take the case of Yang Cheng [13] for instance, who, having piled his life savings (plus his relatives' money) into the market thanks to encouragement from his broker, borrowed $1 million in margin and bet it all on one stock - a local mining company. When the trade blew up, he lost it all. "I don't know what to do. I trusted the government too much. I won't touch stocks again, I have ruined everyone in my family," he lamented.
In short, China faced the prospect that the meltdown could trigger social unrest, which partly explains why Beijing scrambled to funnel nearly CNY2 trillion propping up the market. The story of the Chinese retail investor became so ubiquitous that Western media started what at times felt like a contest to see who could capture the most amusing pictures of distraught Chinese day traders.
Now, having watched their money disappear into the Beijing smog, many Chinese are bitter and say they have given up on the stock market forever.
"Unlike Western markets where institutional investors dominate, individuals account for 80 percent of transactions on Chinese exchanges [and] nearly 100 million people have trading accounts," Reuters wrote [14] on Thursday. "Their enthusiasm for stocks drove China's main indexes to record highs in the first half of 2015, but after enduring a summer bust that saw prices plunge around 40 percent, the January sell-off has been the final straw for many."
Many, like 22-year old Zhou Junan who says he "had planned to sell when indexes got a little bit higher," but missed the top. "I don't have faith in the stock market any more. I think it's better to buy dollars," he says, underscoring the extent to which everyday Chinese are rushing to exchange RMB for USD in the new year.
Reuters also quotes a 48-year old bank accountant from Kunshan who recently bought 500,000 yuan ($76,000) worth of U.S. currency. The Chinese stock market is "a mess," she says. "Dollar is far less risky."
Now you're beginning to see why the likes of ICBC are running out [15] of physical dollars.
But it's not just greenbacks Chinese are turning to. They also like gold. "Except for gold, all other assets are just bubbles to me," one 24-year-old female investor in Beijing said. "I guess I am a pessimist. If there are really some global conflicts, even dollars and bonds could not buy a meal."
Unfortunately it's out of the proverbial frying pan and into the fire for many Chinese though, as it seems that the allure of high yielding assets is just too much for the uninformed masses. "A number of retail investors were also switching money out of stocks and into wealth management products (WMPs) and principal-protected funds," Reuters adds.
"I have bought different kinds of WMPs from banks. The majority of them are backed by bonds, which are less risky," said a 50-year-old woman surnamed Wang, from Guangzhou, who said she lost 30 percent of her stock market investment in the summer meltdown before selling out in August.
That, as we've shown, is not necessarily the case [16]. In many cases, investors have no idea what "assets" are backing the WMPs. Additionally, investors are often unaware that the products suffer from duration mismatch, meaning that if the paper stops rolling, the music stops until the underlying assets can be liquidated. Perhaps Ms. Wang should ask some investors in Fanya Metals' WMPs [17] what can happen in a pinch.
In any event, the message is clear: the disaffection with stocks in China is rampant which means every rip will be sold as the retail investors which comprise more than three quarters of the market scramble to salvage what's left of their money. Once they've cashed out of equities they'll promptly exchange their yuan for dollars as the capital flight which China so desperately needs to contain continues unabated.
