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New study dispels conventional myths about Chinese equity investors

In the aftermath of China's 2015 stock market crash, mainland investors have often been referred to as "punters," "gamblers" or "cash hoarders." Authors of a new study beg to differ.

A report released Thursday by Charles Schwab and the Shanghai Advanced Institute of Finance seeks to dispel the characterization of China's emerging affluent investors, whose annual after-tax income ranges from $19,060 to $152,500. By 2020, this group is projected to more than double to 280 million, from 120 million in 2012, the study said.

"This group is neither a homogenous mass nor a group of thrill-seeking speculators. It is a diverse group with long-term goals that has been forced to rely on short-term methods to cope with volatile markets and an immature financial services industry."

Investors look at an electronic board showing stock information at a brokerage house in Shanghai.
Aly Song | Reuters
Investors look at an electronic board showing stock information at a brokerage house in Shanghai.

Having surveyed 450 investors, only 13 percent invest for short-term purposes, such as turning a quick profit or generating enough cash to make a major purchase, while 87 percent invest as a means to improve their standard of living, retire or their children's education, the study found.

Analysts have long bemoaned the lack of sophistication among Chinese investors for the gyrations in the country's financial markets.

From June-August last year, market commentators cited the short-term activities of retail investors, who make up the bulk of trades, as a key factor in the millions of dollars' worth of shares that were wiped out in Shanghai and Shenzhen.

Long-time China watchers such as Fraser Howie, an independent analyst and co-author of "Red Capitalism," have argued that the bulk of Chinese are speculative traders.

Thursday's study revealed greater factors were at play.

"Much of Chinese investors' herd mentality stems from the fact that regulatory changes have a far greater influence on equity investment in emerging markets than in developed markets."

Investors in developed markets can invest money in stocks, real estate, bonds, and other derivatives but their Chinese counterparts lack such a wide array of choices and as a result, choose wealth management products (WMPs) issued by banks, the study stated.

The lack of a mature bond market, long-term products on the market and professional financial advisors were major challenges, the authors explained.

"While the incomes and expectations of China's emerging affluent have risen, China's financial services sector has not kept pace...Unlike upper-middle class investors abroad, most Chinese investors chart their financial futures without assistance from financial service professionals," the authors said.

As a result, Chinese often don't understand the content of their investments and the risks they carry, the study noted, pointing to WMPs as an example. Detailed information isn't always provided to customers and this lack of transparency is intentional since most WMPs are concentrated in China's increasingly troubled industrial sector, the study said.

Because advisors tend to generate the majority of their revenues through sales commissions, they often sell products without regard for their clients' needs, doing little to educate investors, according to the study.

"Although most Chinese investors are generally risk-averse, their risk appetite may be affected by policy. The government and media create a layer of guarantee, which leads investors to believe otherwise risky investments to be safe, [so] investors sometimes tend to act recklessly."

Emerging affluent investors only invest 20 percent of their total assets in stocks due to market turbulence and aggressive government intervention forces. Because of this tiny allocation, Chinese tend to time the market, which isn't usually a winning strategy for the average retail investor, the study noted.

"Speculative inclinations among investors are further reinforced by the disconnect between China's stock markets and its real economic situation," it said, revealing that only one-fifth of China's industrial companies are listed on its A-share markets, while almost no emerging technology companies are represented.

"When a stock market fails to reflect the circumstances of the broader economy, rumor-driven speculation gains an upper-hand over strategic decision-making."

The market's isolated nature also intensifies the likelihood of hasty decision-making, the authors explained, noting that Beijing caps foreign ownership of shares to under five percent of total market capitalization, and its strict controls on capital outflows makes offshore investments hard.

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