China’s retail investors, who outnumbered the Chinese Communist Party membership more than two to one, should embrace value investing and shun speculative junk stocks
as the onshore market faces a myriad of headwinds.
That reminder, more relevant than ever in a market recently hammered by unprecedented regulatory oversight
and geopolitical tensions, came from one of the last few interviews with Yang Huaiding, who struck gold in the early days of the local stock exchange’s 30-year history.
Yang, an ex-steel factory worker better known as “Millionaire Yang”
and lionised by the state as a trailblazer among local retail investors, died on Sunday in Shanghai. He was 71.
Since the Shenzhen and Shanghai exchanges were established in the 1990s, China’s economic expansion has created entrepreneurs and billionaires, who inspire small-time investors among housewives, students, factory hands and office retirees to strike it rich in the market. Today, they number about 200 million, or about twice the size of Communist Party membership.
A view of the China Securities Regulatory Commission building in downtown Beijing’s Financial Street. Photo: Simon Song
Much to the chagrin of market officials, the world’s second-largest stock market is abound with millions of traders who buy and sell stocks on rumours and pay scant attention to fundamentals for fear of missing out
. The government has called on more institutions to spearhead the market and wean punters from one-way bets.
“In this market, no one really has investment wizardry to make money all the time,” Yang said in an interview with the Post
in December. “You need to constantly learn company fundamentals, policy directions, new regulations and economic conditions to avoid losing money.”
China’s often arcane stock market now has a horde of retail investors who contribute a sizeable chunk to the market’s daily turnover of about 500 billion yuan (US$77.8 billion) vs 200 billion yuan a decade ago. Many, though, are still accustomed to chasing short-term rallies and jumping on get-rich-quick punts.
The China Securities Regulatory Commission, however, is keen to see some maturity. Last December, it called
for an expansion in the size of stock-focused mutual funds and linking of pension funds to the capital market. These actions were on its to-do list for 2021.
Yang was an unknown 40-year-old warehouse worker at a Shanghai steel factory earning 51 yuan a month in 1990. He scored winnings from dabbling in the initial batch of eight stocks soon after the local bourse came into operation in December that year.
One of his bets was Shanghai Vacuum Electron Device, a television tube manufacturer that he believed was undervalued given its rich stream of cash dividends. While luck also played a part in his success as an early investor, Yang advised others to focus on beaten-down stocks.
“Buying low and selling high is the name of the game,” said Yang. “That was how I quickly made more than 1 million yuan.”
Most retail investors in China tend to flock to hot stocks whenever a strong rally occurs to ride the momentum, abandoning company fundamentals. Not many survived unscathed in the market’s worst sell-off on record.
As much as US$5 trillion of market value evaporated between mid-June and late August 2015, with millions of retail investors getting slammed in the crash. China pumped about 1.5 trillion yuan in rescue funds into the system to shore up prices, staunching any potential social unrest.
“Retail investors pay a large sum of brokerage fees when they frequently buy and sell shares to pursue profits,” said Wang Feng, chairman of financial services company Ye Lang Capital in Shanghai. “They have a wrong perception that everyone could make a killing when prices and volume surge. Stock bubbles tend to burst at the end of the day.”
The Shanghai Stock Exchange’s trading data, for example, showed that some underperforming and unprofitable stocks were still actively traded by individual investors. Small investors still prefer junk stocks over dividend-rich blue chips, one official said.
“It is sad that most individual investors still believe they can earn money by taking advantage of volatility in this market,” Yang said. “I hope they understand the high risks and avoid getting burned.”