Day-trader Lu Delong’s optimism for a Chinese stocks rally quickly turned to despair after he was forced to dump shares and tally his losses in the first week of the year. Many retail investors like Lu sold shares in early January, marking the weakest start to the new year in almost a decade for China’s $11 trillion stock market.
The savage sell-off has left many puzzled, with some attributing it to the uncertainties surrounding U.S. trade policy under President-elect Donald Trump. Others point to the slow implementation of economic policies and the heightened worries around U.S. trade tariffs.
Retail money accounts for roughly 70% of China’s share trading, making it a vital segment to stabilize the market. However, a sell-off could trigger a disorderly unwinding of leveraged bets and losses, which could stymie Beijing’s efforts to stabilize capital markets.
The government needs a sustainable bull market to fund economic revival, but another boom-and-bust scenario would “destroy wealth, hurt consumption and harm China’s economy,” said Dong Baozhen, chairman of Beijing-based asset manager Lingtong Shengtai.
Some analysts believe that policymakers sparked a blaze, but the fire has been put out by “cold water,” referring to half-hearted policy implementation. The People’s Bank of China kicked off a 500-billon-yuan swap facility to fund share purchases by institutional investors, but only 50 billion yuan was tapped by the end of 2024, indicating institutional skepticism.
Foreign investors have also withdrawn from the market, with global hedge funds raising exposure to China during last year’s stimulus-led rally but soon unwinding them, while global long-only funds have stayed largely on the sidelines, according to Goldman Sachs.
As the market waits for policy changes, some investors are urging the government to take more aggressive measures, such as expanding the central bank’s balance sheet and setting up a sovereign market stabilization fund, arguing that “when the wood is wet, you need a much bigger fire to set it ablaze.”