Erratic small investors bow out of maturing China market

There’s a fair chance that the Chinese government will stop meddling with its stock market in the near future. A fundamental transition seems to be taking place in the very nature of the bourses.

The past year has seen the exit of hundreds of individual investors, leaving a space for mature institutional investors to dominate the market. If this trend is allowed to develop, China’s paternalistic central government may no longer feel the need to play “saviour” every time the small investor gets hit by market forces.

Last year, more than two-thirds of active accounts of individual investors were recorded to be “sleeping” since they had not registered any transaction. Retail investors’ passion for stocks reached a peak five years ago when the Index hit the 6,000 mark in October 2007 and individual investors accounted for more than 95 per cent of all stock accounts. But since 2008, the stock market went on wild roller-coaster rides resulting in small investors behaving in subdued and at times erratic ways.

Transition

The serious losses suffered in 2012, due to continued downward trend of the stocks, drove a large number of investors out of the market, with accounts either closing down or recording no activity. This, however, is not necessarily an ominous sign.

Such a transition — where individual investors are leaving the market — could be a sign of maturing. In developed markets, institutional investors account for about 80 per cent of the total number of transactions, thus contributing to market stability.

In the US market of 2008, individual investors accounted for only 34 per cent of the market’s value. In contrast, the current share of individual investors in China’s total trade is still a high 80 per cent, although participation is coming down. There is now a sense that an increasingly sophisticated market may no longer be friendly for the small player. This trend became apparent when a greater number of professional institutional investors entered the market in 2012, clamouring for more leeway. In December 2012, China Securities Regulatory Commission (CSRC) approved six more Qualified Foreign Institutional Investor to enter the China market, taking the number of foreign investors to 207. Interestingly, regulators have declared that they want the number of qualified foreign institutional investors to increase ten-fold in the future.

Analysts in favour of foreign players say, higher the number of financial institutions, greater is the likelihood of a change in the structure of market valuation, which is quite eccentric at the present juncture. Institutional investors are known to focus on long-term investment instead of pursuing short-term gains, which is quite different from the unpredictable Chinese investors who are known to take investment decisions based on bizarre rumours or even superstitions. Crucial test

In the past, Chinese market regulators have tended to cater to the fears of small investors at the cost of major listed companies. Since the end of 2012, CSRC had placed a moratorium on IPOs, ostensibly to placate investors who blamed the drain of investment funds for their losses in a weak market.

At the time, more than 800 enterprises had applied to go public, raising fears of an oversupply of shares that could plunge the market into chaos. The CSRC blocked this deluge, demanding greater scrutiny of the companies and imposing the “most stringent” inspections into firms awaiting IPO approval. Last week, small investors once again got into jittery mode when regulators reopened the IPO door by launching preliminary reviews of as many as 88 companies that have applied for market listing.

This will be a crucial test for regulators. Will they once again take heed of the small investor’s fears of a flood of new shares affecting the just-recovered market, or will they depend on the maturity of institutional investors to guide investor sentiment? So far, the Index seems to be holding good, ignoring predictions that a deluge of IPOs in the next six months will affect the recovery of a fragile equity market.

The writer is a freelance journalist based in China.