Samuel Shen and Summer Zhen
SHANGHAI/HONG KONG (Reuters) – Day trader Lu Delong’s optimism about rising Chinese shares quickly evaporated in the first week of the year when, just three months after positioning for a rally spurred by Beijing’s stimulus promises, he was forced to dump the stock and pile on his losses.
Many small investors like Lu sold shares in early January, precipitating the weakest start to a new year in nearly a decade for China’s $11 trillion stock market.
“The wild sell-off is beyond my understanding. I haven’t seen Trump announce anything new against China,” Lu said, referring to uncertainties surrounding US trade policy under President-elect Donald Trump.
“The only plausible explanation is that the market is pressuring the government for stronger policies,” said Lu, who became bullish on Chinese stocks in late September but now plans to hold only cash ahead of the Chinese Lunar New Year holiday. starting at the end of January.
Disillusioned with economic policy and concerns over US trade tariffs, retail investors are selling, threatening to send Chinese stocks back into a multi-year downtrend.
Chinese stocks posted their first annual gain in 2024 after an unprecedented three-year slide caused by the COVID-19 pandemic, problems in the real estate sector and weak consumer confidence.
Retail money accounts for roughly 70% of China’s stock trading, so there is a risk that the sell-off could trigger a disorderly reversal of leveraged bets and losses, which could hamper Beijing’s efforts to stabilize capital markets.
The government needs a sustained bull market to fund an economic revival, but another boom and bust would “destroy wealth, hurt consumption and hurt China’s economy,” said Dong Baozhen, chairman of Beijing-based asset manager Lingtong Shengtai.
A sell-off would mean another vote of no confidence from investors who have already expressed pessimism about China’s economy in the yuan and bond market, prompting the government to step in to stem a slide in the currency and bond yields.
‘COLD WATER’
Markets appeared to be on the verge of a recovery in late September when Beijing announced interest rate cuts and an intention to defend markets. Desperate investors plunged into stocks, sending the benchmark index up a whopping 40% in two weeks.
The broader market then cooled as investors awaited more concrete policy, but retail trading remained active, evidenced by heavy turnover, a jump in small-cap prices and a rapid increase in leveraged bets.
Signs of disappointment have emerged in early 2025, with shares in Shanghai and Shenzhen down roughly 6% so far, making them the world’s worst-performing major markets.
“Politicians started a fire over dry wood, but the fire was extinguished by cold water,” said retail investor Zhang Jianan, referring to the hesitant implementation of the policy.
The People’s Bank of China launched a 500 billion yuan ($68 billion) swap to fund stock purchases by institutional investors, but by the end of 2024 only 50 billion yuan of the scheme had been drawn, indicating institutional skepticism.
“When you see financial institutions putting money into government bonds and high-dividend stocks, you know that those with deep pockets are pessimistic about the economy. Market behaviors don’t lie,” Zhang said.
Foreign investors also withdrew from the market.
Global hedge funds increased exposure to China during last year’s stimulus-led recovery but soon pulled back, while global long funds “largely stayed on the sidelines,” Goldman Sachs wrote.
THE WAITING GAME
The biggest mismatch could be that “the market is expecting a ‘big bang’ while Beijing is in ‘wait and see’ mode, anticipating growth conditions and Trump’s policies,” said Yan Wang, chief emerging markets and China strategist at Alpine Macro (BCBA:).
“For now, we still view China as a tactical trade.”
Hao Hong, partner and chief economist at GROW Investment, said Trump’s threat to impose 60% tariffs on Chinese goods is a big source of uncertainty.
“The market is extremely volatile right now and Trump is very unpredictable, so it’s not a good 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 act. Be patient.”
With half a trillion yuan worth of borrowed money pumped into the market since the end of September, the erratic pullback in retail sales could trigger margin-seeking and the ensuing stampede could push the Shanghai index below the key 3,000-point level this month, Shanghai-based investor Mao said. Jian.
The Shanghai benchmark ended Monday at 3,160 points, 5% above that level, which many investors consider psychologically important and sovereign wealth funds worth defending.
To prevent another crisis, China should aggressively expand the central bank’s balance sheet and establish a sovereign fund to stabilize the market, because “when the wood is wet, you need a much bigger fire to light it,” retail investor Zhang said.
(1 USD = 7.3320 )
