Written by Samuel Chen and Summer Chen
SHANGHAI/HONG KONG (Reuters) – Day trader Lu Delong's optimism about a rise in Chinese stocks in the first week of the year quickly evaporated when, just three months after anticipating a rally fueled by Chinese stimulus pledges, he was forced to dump stocks. He counted his losses
Many individual investors like Lu sold their stocks in early January, making for the weakest start to the new year in nearly a decade for China's $11 trillion stock market.
“The brutal sell-off is beyond my understanding. I haven't seen Trump announce anything new against China,” Lu said, referring to doubts surrounding US trade policy under President-elect Donald Trump.
“The only plausible explanation is that the market is pressuring the government for more aggressive policies,” said Lu, who turned bullish on Chinese stocks in late September but now plans to hold money only in the run-up to the Chinese Lunar New Year holiday. Starting in late January.
Disappointed with economic policies and concerns about US trade tariffs, retail investors are selling, threatening to push Chinese stocks back into a years-long downward trend.
Chinese stocks saw their first annual gain in 2024 after an unprecedented three-year decline due to the Covid-19 pandemic, real estate sector woes and weak consumer confidence.
Retail funds account for nearly 70% of equity trading in China, so there is a risk that the sell-off could lead to disorderly unwinding of leveraged bets and losses, which could hamper Beijing's efforts to stabilize capital markets.
Dong Baozhen, chairman of Beijing-based Linggong Xingtai Asset Management, said the government needs a sustained bull market to finance the economic recovery, but another boom and bust would “destroy wealth, hurt consumption and hurt the Chinese economy.”
The sell-off meant another vote of no confidence from investors who had already expressed pessimism about China's economy in the yuan and bond markets, prompting the government to intervene to stem the decline in currency and bond yields.
“cold water”
Markets appeared to be on the cusp of recovery in late September when Beijing announced interest rate cuts and its intention to defend the markets. Desperate investors rushed into stocks, pushing the benchmark index up a whopping 40% over two weeks.
The broad market then cooled as investors waited for more concrete policies, but retail trading remained active, as evidenced by high trading volume, rising penny stock prices, and the rapid accumulation of leveraged bets.
Signs of disappointment have emerged in early 2025, with stocks in Shanghai and Shenzhen down nearly 6% so far, making them the world's worst-performing major markets.
“Policymakers lit a fire in dry wood, but the fire was put out with cold water,” retail investor Zhang Jiannan said, referring to the tepid policy implementation.
The People's Bank of China launched a 500 billion yuan ($68 billion) swap facility to finance stock purchases by institutional investors, but by the end of 2024, only 50 billion yuan had been tapped under the scheme, indicating institutional uncertainties.
“When you see financial institutions pumping money into Treasuries and high-dividend stocks, you know those with deep pockets are pessimistic about the economy,” Zhang said. “Market behaviors don't lie.”
Foreign investors also withdrew from the market.
Global hedge funds increased their exposure to China during last year's stimulus-led rally but quickly unwinded it, while global long-only funds “largely remained on the sidelines,” Goldman Sachs wrote.
Waiting game
The biggest mismatch may be that “the market is anticipating a ‘big bang’ while Beijing is in a ‘wait and see’ mode, awaiting growth conditions and Trump’s policies,” said Yan Wang, senior emerging markets analyst and China strategist at Alpine. Macro (BCBA:).
“Right now we still look at China as a tactical trade.”
Trump's threat to impose 60% tariffs on Chinese goods represents a huge source of uncertainty, said Hao Hong, partner and chief economist at GROW Investment.
“The market is very volatile right now, and Trump is very unpredictable, so this is not the time to rush,” said Hong, who has no Chinese stocks in his multi-asset fund.
“Now it's just a matter of waiting, waiting for policy changes. If there's no opportunity, don't move. Be patient.”
With half a trillion yuan worth of borrowed money pumped into the market since the end of September, the unorganized retail decline could trigger margin calls, and the ensuing stampede could push the Shanghai index below the key level of 3,000 points this month, he said. Investor in Shanghai. Mao Jian.
The Shanghai index ended Monday at 3,160 points, 5% above that level, which many investors consider psychologically important and state funds see as worth defending.
Retail investor Zhang said that in order to prevent another crisis, China should aggressively expand the central bank's balance sheet and create a sovereign market stabilization fund, because “when the firewood is wet, you need a much bigger fire to set it on fire.”
($1 = 7.3320)
