“It is all tears and sorrow now, when people like me look back at the stock market,” said Lu Shunxi, a stock punter since trading first began in Shanghai in November 1990. “The birth of China’s stock market gave an opportunity to novice investors who were drawn to a casino-like market to gamble and prosper.”
For a quarter of a century, Shanghai’s stock market rode on China’s economic engine, which roared along at an average of 10 per cent every year from 1994 to 2007. After the 2008 Beijing Olympics, annual growth slowed to an average clip of 7.6 per cent through 2022.
The largest nation of communists also boasted the world’s second-largest capitalist market, valued at US$13 trillion at its peak in December 2021. China was minting dollar billionaires like the fictional A Bao in Blossoms Shanghai at the rate of almost one every day in 2020, before everything came crashing down.
Frustrated investors voted with their feet, pulling a record amount of money from the stock market over the past six months, punishing China’s reluctance to deploy a stimulus programme to rescue the economy. Shanghai-listed stocks have lost US$1.45 trillion of value since the market’s peak in December 2021. The nation’s equity market shrank by US$4.2 trillion over the same period, according to market data.
“Trading shares has become my biggest mistake in life since I keep losing money over the past two decades,” said Li Yan, an employee with a state-owned media company in Shanghai. “I have had to deposit more money into my brokerage account to try to overturn the losses. But the attempts have all resulted in more nightmares.”
Retail investors, shorn of the financial firepower and acumen of institutional fund managers, habitually pin their hopes on government incentives to spark a rally. Beijing has already rolled out a series of market-boosting measures, from stamp-duty cuts to liquidity injection, to put a floor under the plummeting stock prices.
As panic set in this week, China’s top leadership and policymakers – from Premier Li Qiang to central bank governor Pan Gongsheng – stepped in to stem a loss of confidence. The People’s Bank of China said this week that it would return 1 trillion yuan (US$140 billion) to commercial banks on February 5 to spur lending, after surprising the market with a cut in their reserve-requirement ratio.
The Shanghai Stock Exchange has recouped US$330 billion of value, when the market rebounded by almost 3 per cent this week from a five-year low.
“Retail investors have been eagerly awaiting a rally to recover their losses,” said Ivan Li, a fund manager at Loyal Wealth Management in Shanghai. “They want the authorities to show substantial support to the market.”
Many of China’s retail investors want to believe that Blossoms Shanghai is making an oblique reference to a lasting turnaround in the stock market and the economy. The drama has already effectively bolstered retails spending and tourism in Shanghai. It’s a shot in the arm for Gong Zheng, the mayor of Shanghai, after yet another underperforming year of growth.
Some of the world’s biggest money managers, including Fidelity International and Franklin Templeton, are forecasting a rebound in Chinese stocks. More state support will help revive economic growth and confidence, they said, and investors will soon be lured by deeply discounted valuations.
“The price-to-earnings ratio is standing at a low level,” UBS’ strategist Meng Lei said. “Most investors, without sufficient understanding of the economy, are just not confident that the share prices will rise.”
China opened up its economy in 1978 by giving capitalist forces a greater play in business activities. Shanghai established its stock exchange in November 1990, becoming the first of its kind in the socialist nation. The Shenzhen Stock Exchange was formed in the following month. Beijing did not have one until September 2021.
Today, the Shanghai Stock Exchange is the largest of the three mainland bourses, and home to about 2,300 listed firms with a combined market capitalisation of 44 trillion yuan (US$6.2 trillion), larger than Hong Kong’s US$4.6 trillion market.
Stocks on the Shanghai exchange have gotten cheaper, trading at a price-earnings multiple of 13.4 times future earnings, compared with a five-year average of 14.6 times. The current multiple is 11 times for members of the MSCI China Index, a universe of 700-odd stocks listed at home and abroad.
Market consultant Ying Jianzhong, who played the character of a stock commentator in Blossoms Shanghai, agreed that understanding economic and company fundamentals are indispensable priorities in investing. Confidence among investors, he said, comes from knowing what they buy into.
“In the early days, investors like me had faith in company earnings,” he said in an interview. “We bought bread baked by a listed company we invested in, because we believed that everything we did for the company would help boost its profitability.”
Spurious purchases, driven by excessive speculation, have been the undoing of individual investors in China’s equity market. Some 92 per cent of them lost money in securities trading in 2022, according to a January 2023 survey by state-run broadcaster China Central Television or CCTV.
The hoopla once heightened fears of social disorder. Deng Xiaoping, the late paramount leader and architect of China’s capitalist reforms, soothed the concerns of his comrades, telling them that the market could be closed if the experiment flopped.
Some bold residents got rich overnight from dabbling in the initial batch of eight stocks, which surged by more than 20 times within three years. But wild swings in prices also left many unlucky punters nursing steep losses.
During a market rout of 2015, more than US$5 trillion of value was erased from mid-June to late August. This prompted Beijing to pump about 1.5 trillion yuan in rescue funds to support the market. China’ securities regulator has long been tasked with stabilising the key market indicators, to pre-empt any social unrest.
Blossoms Shanghai re-enacted several scenes from the early days of the market history. There is the rented ballroom in Astor House Hotel on the bund, where the stock exchange’s first trading floor was located. Also featured is the trading counter inside the Industrial and Commercial Bank of China outlet on Xikang Road.
For some of the early stock investors, the scenes are also a rude reminder that years of hard-earned savings could evaporate within minutes of trading.
“Traders at that time were so naive that they believed all the stocks were safe bets, guaranteed to eventually produce handsome returns,” said Jiang Guangyuan, a Shanghai native who has been dabbling in the market since its inception. “I suffered heavy losses in the 1990s because I was aggressive [in chasing returns], unaware of the risks and basics of the market.”
The latest episode or drama, playing out real-time before the global audience this week, is a wake-up call for policymakers in Beijing, said Andy Rothman, a strategist at Pennsylvania-based money manager Matthews International.
“Confidence among entrepreneurs and households has been shaken by poorly explained and poorly implemented economic and regulatory policies,” said Rothman, who previously served as a junior US diplomat in China. “Confidence can be restored if Beijing takes steps that demonstrate it is creating a clear and stable policy environment which supports the private sector.”