Chances are that you know someone investing in China’s stock market. The PRC had 167 million retail investors, also known as individual investors, in June of this year. The figure is likely to have increased in the following months due to the strong performance of China’s main stock exchanges. On October 14, the total value of all company shares listed in both Shanghai and Shenzhen markets reached USD10.08 trillion – surpassing the previous record high in market capitalization in 2015. (A peak that led to drastic sell-offs in 2016.)
Despite the global economic slowdown due to COVID-19, China’s stock market has recovered with more and more investors joining the fray as the Chinese economy gets back on track. Fiscal stimulus has played a deciding factor in which direction the stock market – and the economy at large – is trending.
While understanding the risk of investing in China’s historically volatile market, individual investors in the PRC are buying in, especially millennials who have easy access to online trading platforms. With the PRC’s ever-changing stock market landscape, here’s how domestic traders view their home market as an opportunity to build wealth.
Time to Trade
Justin Lu used to work in advertising. But now, he spends his days buying and selling stocks. Living in the southern city of Guangzhou, Lu made a big career change in the spring of 2020 during the midst of a pandemic. “I’ve invested in the stock market for years, but felt like it was time to fully commit and really learn how to trade,” Lu tells us over drinks at a neighborhood bar across the road from his apartment on a warm September night.
Married with young children, Lu now has more time on his hands as he mainly works from home. He’s able to stay up-to-date not just on the markets in China but also around the world, which he says helps indicate how the trading hours may pan out in the PRC.
“Since I work from home, I can keep a close eye on the markets. I have a group of friends that also invest, but they have full-time jobs so I give them updates,” Lu says.
He doesn’t beat around the bush, acknowledging that there’s plenty more for him to learn about investing. “I went out and bought several books to build a bigger foundation of knowledge on investing and go from there,” says Lu. One book he ended up purchasing was The Intelligent Investor by Benjamin Graham.
Widely regarded as a playbook for value investing (an investment strategy focused on picking stocks believed to be undervalued by the market), Lu tells us that he likes this long-term investment approach. However, he’s a bit skeptical about whether China’s stock market is mature enough for him to adopt this type of strategy.
At the beginning of April 2020, Nasdaq, a US-based stock exchange, issued an embarrassing high-profile delisting notice to Chinese coffee chain Luckin Coffee following a fraud scandal that revealed the company’s sales in 2019 were inflated by RMB2.1 billion. Luckin shares plummeted 80% in premarket trading following the regulatory filing. Chinese authorities also opened an investigation after the notice, with the incident leaving a negative impression in global markets.
While Luckin shares aren’t easily accessible to Chinese investors (unless they trade in overseas markets), it is a reminder here in China for increased transparency (availability and reliability of information).
In June of this year, Zhou Xiaochuan, China’s former central bank governor, called for greater transparency, accounting standards and governance of listed companies and financial markets, according to Caixin Global. Zhou said the country was capable of becoming an alternative listing destination outside the US, but uncertainties remained.
A Global Times article by Li Xuanmin back in August 2018 echoed similar sentiments on the need to protect shareholders’ interests.
The article cited Liu Xiaoxue, an associate research fellow at the Chinese Academy of Social Sciences’ National Institute of International Strategy, who urged regulators to learn from mature stock market systems. It also noted that some Chinese firms have fabricated their financial records to cash out after listing in the market.
However, Chinese retail investors have taken a favorable stance on what regulators have been doing to improve the market environment.
“The history of China’s capital markets is relatively short, and market regulations and supervision standards are constantly changing,” says Wang, a Shanghai-based investor who requested that we only use his surname. Wang adds, “Generally speaking, it is moving towards marketization, with regulators recently pushing for policies that better protect the interests of investors.”
Back in Guangzhou, Lu agrees with Wang, saying that more is being done to hold companies to higher accounting standards that won’t deceive investors.
This comes at a time when Chinese millennial investors have a rising interest in the market.
China’s technology companies have played a key role in influencing the investing habits of young professionals in recent years. CNBC’s Evelyn Cheng reported in March 2019 that “young people are increasingly turning to new smartphone apps to trade stocks,” largely focusing on Chinese tech giants like Alibaba and others listed overseas. Beijing-based Tiger Brokers said more than 70% of its users – or individual brokers – were under the age of 35 at the end of 2019, according to its prospectus.
Young China Group Founder and CEO Zak Dychtwald notes this has only been exacerbated by a global pandemic. “Idle hands, idle times and impinged job prospects have made for eager retail investors in 2020, especially among young people who are newly cash conscious since the pandemic hit,” Dychtwald tells us via WeChat from New York.
Author of Young China: How the Restless Generation Will Change Their Country and the World, Dychtwald provides insight into Chinese millennials’ mentality and their rising role in consumption.
US-based Robinhood made waves on the Chinese mainland back in 2016 after the stock trading app partnered with tech giant Baidu to allow Chinese citizens the opportunity to buy and sell US stocks with zero fees. Since then, there’s been a proliferation of apps to give young Chinese individual investors access to equities.
Robinhood’s platform is user-friendly making transactions much simpler compared to traditional investing sites
But what makes the Chinese stock market attractive for traders relatively new to this investment vehicle?
“First, you have an average wage that has not kept up with the average expectations around a ‘good life.’ It costs the average full-time employee in New York roughly six days of full-time work to buy an iPhone; in Beijing, it takes 39 days, according to a UBS study,” Dychtwald tells us. He adds, “We often overstate how wealthy China is currently because we focus on the top 10% who are redefining global luxury sales. That’s not the majority of people’s reality in China.” Dychtwald views the stock market as the “newest tool” for Chinese millennials to add to their wealth without purchasing real estate or starting a company.
Some point out that China’s investment vehicles are limited and rather complicated for laobaixing (a term referring to common people) to understand. “Relatively speaking, these are complex financial products designed with intricate transaction structures,” says Chi Yipin, a Shanghai-based market watcher in his 40s. “The stock market is comparatively easy to navigate and, for the most part, has favorable transaction fee rates,” he adds, noting that other investment vehicles will ‘pluck your feathers’ by tacking on excessive commission fees.
“We often overstate how wealthy China is currently because we focus on the top 10% who are redefining global luxury sales. That’s not the majority of people’s reality in China”
Another reason China’s younger generations are flocking to the stock market to invest is the low requirements to join. “There is no limit of capital, no age limit and doesn’t necessarily require a high level of expertise, so it’s the largest market,” says Xu. As an employee at a securities firm in Shanghai, Xu asks us to only use her surname for the purpose of this story.
But despite the lower barriers to entry, she says it’s not a suitable market for individual investors. “The future trend may be for people to let the professionals invest for them, and we’ll see the proportion of retail investors shrink,” Xu comments.
But for now, China’s individual investors appear optimistic about their prospects.
Winners and Losers
Kong Guosheng, a 34-year-old stock trader living in Nanjing, tells That’s that China’s stock market performance gives him confidence and excitement. “In recent years, the world has taken notice of China’s economic development, transitioning from a manufacturing economy to an innovation powerhouse,” Kong says. He points to a growing number of registered patents by Chinese companies and other developments that signal future economic success in the Middle Kingdom.
In addition, ongoing tensions between China and the US have led to more Chinese companies considering listing shares on domestic stock exchanges. Wall Street Journal reported that exchanges in Shanghai and Shenzhen have hosted nearly USD50 billion of initial public offerings (IPO) and listings from firms with shares trading overseas.
The Shanghai STAR market, an equities market focused on Chinese science and technology, has garnered international recognition since launching in July 2019. Most recently, all eyes have been on Alibaba-backed Ant Group’s upcoming dual-listing in Shanghai and Hong Kong, which will be the first simultaneous listing in the special administrative region and STAR market. Reuters reports that Ant’s IPO could be the world’s largest in history.
“The culture of luck and ‘social gaming,’ like Mahjong or Dou dizhu, create a fluency in odds making and risk tolerance that translates easily into retail investing”
High-profile offerings in China can add credibility to Shanghai’s STAR market and can help Chinese exchanges become more attractive.
And for China’s individual investors, the intrigue is there. Dychtwald tells us, “The culture of luck and ‘social gaming,’ like Mahjong or Dou dizhu, create fluency in odds making and risk tolerance that translates easily into retail investing.”
From those we interviewed for this story, most defined themselves as being more risk-seeking compared to risk-averse. And given the volatile nature of China’s stock market since it reopened in 1990, expect there to be winners and losers.
Additional reporting by Wang Ziyan
[Cover image by Ryan Gandolfo/That’s]