Herd mentality spurs China trading

Volumes were up by over 50% in the Chinese markets in 2014 as retail investors awoke from a multi-year slumber.

Volumes were up by over 50% in the Chinese markets in 2014 as retail investors awoke from a multi-year slumber.

The value of stocks traded in Shenzhen was up 53.8% in 2014 to RMB 366750.87 (RMB 100s m). That market has recently been tagged by Communist Party chief Xi Jinping as the venue for the next version of the Shanghai-Hong Kong Stock Connect.

The SZSE Component Index finished 2014 at 11,014.62 points, up 35.62% for the year. The SZSE Composite Index ended at 1,415.19 points, up 33.80 % for the year.

Volumes in Shanghai rose 63.6% to a total of RMB 375634 (RMB 100s m). The Shanghai Index rose 52.9% during the year to 3,234 points.

Statistics indicate that the money has come into the markets jointly from institutions and retail, but underlying that, the reality is that retail investors have pushed the institutions back into the markets as they are investing via institutional and wealth management products – that then washes into the institutional basket.

Oftentimes, there has been a herd-like mentality in the Chinese stock market, witnessed throughout all of the market’s swift moves, from the run-up in 2006-2007 to the market’s crash in 2008 and its recovery a year later. Those swings were driven by retail investors.

“These shifts don’t actually reflect a casino mentality. The investors are well informed and take a reasoned view on the fundamentals markets and economy,” explained Aaron Boesky, the CEO of China A share specialists Marco Polo Pure Asset Management. “Retail investors have a strong effect because the Chinese market is so homogenous. Mainland Chinese investors account for 97% of the market and they are nearly all urban Han Chinese digesting the same news and media. When they all make a move into the market, they aren’t necessarily chasing returns, but are a huge group taking a similar informed view and the market moves swiftly, with there being many buyers and very few sellers.”

During the bear market there was an exodus of the retail investor. That was explicable due to the slowdown in headline gross domestic product and the sobering effects of the tightening of interest rate policy as the government sought to slow down various sectors of the economy, such as real estate or steel. That wasn’t the type of environment in which retail investors felt comfortable in investing in stocks and they took that capital and put it in savings accounts and property.

“China-A is still very retail driven,” said Stephane Loiseau, head of Asia Pacific cash equities at Societe Generale. “You have to correlate market volumes with the number of new accounts opened by securities houses in the last few months and the price performance of their stocks.”

According to the exchanges, in Shanghai the number of new accounts rose by 7.5% in 2014 and in Shenzhen the number of investors rose by 8.5%.

One of the strongest negative market correlations in recent years has been the Shanghai and the USA, with the former being one of the worst performers and the latter reaching new highs. During that entire time, China has maintained a hawkish interest rate policy, in contrast to the opposite approach being practiced in the USA.

“I think we are going to continue to see a strong negative correlation this year,” said Boesky.  The US is likely to raise interest rates which should lead to their stock indices dropping, China on the other hand will be dovish – and that could be via liquidity operations, cutting interest rates from the current 5.6% or by reducing reserve requirements – and then the Shanghai index perhaps achieving new highs.”

He added that wealthy mainland Chinese investors have placed a lot of money in the US markets. “I think a lot of that capital will be recalled to the Shanghai markets, and that will be a big flow story in 2015 – which may or may not make the financial newspapers.”