The ASX is having a bad day, down 1.6% on the back of plunging ANZ [ASX:ANZ] shares. But the local share market’s problems are nothing compared to what’s going on in China.
Since early June, Chinese stock markets have lost $US3.2 trillion, down 30% since their peak. To put this in perspective, that’s almost twice the size of the ASX’s entire market cap.
But it looks like the average investor is finally getting the message: it’s time to get out.
Since markets started to plummet in June, a staggering 24 million Chinese investors have closed their trading accounts. This figure comes courtesy of the China Securities Depository & Clearing Corp, which tracks accounts.
At the end of July, some 51 million small investors retained stocks in their portfolio. That’s down markedly from the 75 million accounts at the start of June.
These are worrying times for Chinese stocks because individual investors dominate the market. In fact, small investors own roughly 80% of all tradable shares. That’s far in excess of what you’d see in more mature markets, where institutional investing plays a bigger role.
The problem is that market shocks, like the one we’ve seen, shatter confidence. You get a lot of people that were new to stocks leaving the market in droves.
The authorities have been helpless in trying to stop this rot. They’ve taken extreme measures to prevent margin traders from sending stocks plummeting. But clearly it’s not enough to keep the average Chinese mum and dad interested. They’ve watched their savings disappear amid the rout; small wonder then that so many have fled.
At the same time, cheaper shares are also failing to entice new investors to the markets. According to reports, there were 20% fewer accounts created in July than in June.
Chinese investors falling back on bank deposits
The World Bank estimates that Chinese households still favour bank deposits as their primary investment tool. It approximates that up to 50% of disposable income is set aside for savings accounts.
With stock investors abandoning the markets, that should only increase. You’re not likely to see many families risking their savings on the stock market today.
This development is a good thing in one respect. It could lead to more investment in the economy, which is something China badly needs.
However, not all investors are looking for the escape route out of stocks. There’s still a general concern about viable investment alternatives to the share market.
Real estate remains out of the reach of many average Chinese households. That leaves stocks as the cheapest alternative to making quick money.
One third of traders have abandoned the market amid the rout since June. But as long as there’s money to be made, there’ll always be plenty who stay in the game.
Contributor, The Daily Reckoning
PS: 24 million accounts closed, and a 30% decline in the market cap… if this isn’t a wake up call that Chinese stocks are playing a zero-sum game, nothing will be. China’s economy is suffering from weak demand and low investment. The stock markets could get much worse before they get better.
The ASX has barely any exposure to Chinese stocks. But the future of the ASX might resemble what’s going on in China. The Daily Reckoning’s Vern Gowdie says that the ASX is heading for a major correction in the very near future.
Vern is the award-winning Founder of the Gowdie Family Wealth advisory service. He’s been ranked as one of Australia’s Top 50 financial planners. Not only does Vern predict a major crash, but he’s convinced the ASX could lose as much as 90% of its $1.8 trillion market cap.
Vern wants to help you avoid this coming wealth destruction. That’s why he’s written ‘Five Fatal Stocks You Must Sell Now’. As a bonus, this free report will show you which five blue chip Aussie companies could destroy your portfolio. You almost certainly own one of them. To find out how to download the report, click here.