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Retail Investors, a Dominant Force for Stock Market Stability

Retail Investors, a Dominant Force for Stock Market Stability

11:18 on Jul. 8, 2015  Author: Gan Li (28)


In 2015Q2, 8.8% of the households participated in the stock market in China; the stock-owning households reached 37 million, including 93.8% of urban households. The households investing in stocks by borrowing money only accounted for a small proportion. However, they were still optimistic about stock market development, and were cautious about stock sales. Therefore, I hold that retail investors are not the push for stock market crash, but a dominant force for stock market stability.


From Jun. 15 to Jul. 2, 2015, we conducted a quarterly telephone interview with 5,000 representative households in China. The data indicated that 8.8% of the households participated in the stock market in China in 2015Q2, and stock-owning households reached 37 million, including 93.8% of urban households. The households investing in stocks by borrowing money only accounted for a small proportion. However, they were still optimistic about stock market development, and were cautious about stock sales. Therefore, I hold that retail investors are not the push for stock market crash, but a dominant force for stock market stability.


Only 3.5% of stock-owning households participated in margin trading, with a small proportion investing in stocks by borrowing money.

Only 3.5% of stock-owning households participated in margin trading; 1.5% of stock-owning households invested in stocks by financing from relatives and friends and other private financing channels; and 0.7% of stock-owning households invested in stocks via loans from such formal financing channels as bank. Generally speaking, only a small proportion of stock-owning households invested in stocks under liabilities. Therefore, it can be speculated that forced “close position” by retail investors was not the push for recent stock market crash.


Stock-owning households were still optimistic about stock market development, and the stock market expectations index was 111.

Since 2014, the stock market expectations index of stock-owning households in China had kept rising, and peaked at 142 in 2015Q1 (the index above 100 indicated generally bullish stock market, while the index below 100 indicated a bearish stock market). However, the index decreased to 111 under negative effect of stock market crash on domestic investor sentiment. Nevertheless, the index was still above the critical value 100, and the investors were still relatively optimistic about stock market development. Therefore, the possibility of stock market crash from the dumping by retail investors was relatively low in the near future.


Stock-owning households were gradually selling stocks without panic dumping.


In 2015Q1, the stock plan index of stock-owning households was 102.1 (above 100 for stock purchase, below 100 for stock sales), and decreased to 84.6 in 2015Q2. Stock-owning households were selling stocks. Under continuous stock market crash in mid-to-end June, even though the index was below 100, no obvious decrease occurred. However, it increased to some degree. Therefore, stock-owning households were gradually selling stocks without panic dumping.


From the perspective of households with different degree of earnings and loss, the stock plan index for households with great loss reached the lowest level, only 62.1, indicating their maximum willingness to sell stocks; while the stock plan index for those with great earnings reached the highest level (91.6), indicating their minimum willingness to sell stocks even with overall decrease.

The proportion of stock households with earnings declined for the first time in 2015Q2, and decreased to 40.5% after Jun. 26.


From 2014Q1 to 2015Q1, the earnings ratio of stock households in China had kept rising, but declined for the first time in 2015Q2. Before the crash on Jun. 19, 73.8% of stock households earned money from the stock market. However, the ratio declined to 56.2% before another crash lasting from Jun. 19 to 26, and further declined to 40.5% after Jun. 26. With further adjustment of stock market, the proportion of households earning money from the stock market would show further decline.


The households owning no stocks expected bearish stock market; and the “crazy bull” market had come to an end due to lack of fresh blood in afternoon market.


Since 2014Q3, the households owning no stocks had generally expected bullish stock market; and a lot of new investors entered the stock market. In 2014Q4, the expectations index for the households owning no stocks increased to 113.5. The index declined to 109.3 in 2015Q1, and further declined to 90.5 in 2015Q2, which was below the critical value 100, indicating that the households owning no stocks generally expected bearish stock market. Meanwhile, the number of new accounts in the stock markets of SSE and SZSE and showed a dramatic decline recently. Therefore, we hold that the “crazy bull” market starting from the second half of 2014 may come to an end due to lack of fresh blood in afternoon market.


The funds in the stock market served as a booster in house market, so a seesaw effect occurred between the stock market and the house market.


From the beginning of this bull market to the end of 2015Q1, the house price expectations index of stock-owning households was lower than 100, indicating that stock-owning households expected bullish stock market and bearish house market. However, in 2015Q2, the house price expectations index of stock-owning households rose to 111.8, but the stock market expectations index declined to 110. In turn, stock-owning households expected bullish house market, making the seesaw effect between the stock market and the house market more obvious.


The effects of households’ investment in house market were reflected not only in house price expectations but also in their house-purchase behaviors. In 2015Q1, the house-purchase proportion for stock-owning households was similar to that for those owning no stock. However, in 2015Q2, the proportion for stock households increased from 2.3% in 2015Q1 to 3.7%, but that for those owning no stock decreased slightly. Overall, the trend that funds might be withdrawn from the stock market to the house market became obvious, and might be another impetus for the development of house market.

 

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