Free exchange | China's wild stockmarket

Why bull calves and bear cubs are responsible for China's crazy share prices

A youth movement fuels volatility in China’s stockmarket

By S.R. & Q.Q. | SHANGHAI

THE “national team” was supposed to save China’s stockmarket. Investors were coming round to the view that the government had succeeded in stabilising share prices after the central bank had pumped billions of yuan into the market in recent weeks. Stocks were slowly clawing back territory lost in their sharp tumble of the previous month. But on Monday the Shanghai Composite, the country's main index, fell 8.5%, its biggest one-day fall since early 2007 (see chart).

As with any sudden sell-off, the reasons given by analysts were varied and more akin to guesses than solid explanations. Many pointed to a call by the International Monetary Fund, reported by Bloomberg, a media outlet, for the government to wind down its extraordinary measures to prop up the market. Some said regulators had quietly resumed a crackdown on unofficial margin lending used to buy shares. Others pointed to a drop in industrial profits in newly published data, a reminder of China’s ongoing economic slowdown; to fast-rising pork prices, which threaten to push up Chinese inflation and lead to tighter monetary policy; as well as the likelihood that the Federal Reserve will soon raise interest rates, luring investment capital away from China and into America.

There is one thing that is certain. Take a quick glance at manyof thereports about China’s stockmarket bust today, and you will come away with the impression that the primary victims are the country’s retirees. The images adorning the stories are of grey-haired punters sitting in brokerage halls, looking on with despair at screens full of falling stock prices. On better days, the cavalry of geriatric investors is again out in force, elated rather than crestfallen, in media coverage of the market. Though ubiquitous (including on the pages of The Economist), the pictures are misleading. It is not China’s grizzled stock pickers but rather their inexperienced grandchildren who have been the much bigger force in the market’s wild ride of the past year.

The generational shift in China’s investor base has been steady. In 2004, 27.8% of those with stock-trading account were under the age of 30, according to the stockmarket regulator. This rose to 36.1% by 2013. At the start of this year, when the stockmarket was about halfway through a bubble that saw it nearly triple in 12 months, the balance swung even more sharply towards youth. In the first quarter of 2015 (figures for the second quarter have not been published), 62% of a record 8m new trading accounts were opened by people born after 1980. By contrast, just 5% were opened by those above the age of 55. Having experienced big crashes in the past, China’s pensioners were more wary about jumping back into the fray. For the young, who have less memory of past turbulence and more disposable income, investing in shares beckoned as a shortcut to riches.

Assessing the market impact of this youth movement is tricky. Some, like Luo Dunyi, a 29-year-old IT engineer, boast of having mastered the vagaries of the market. Mr Luo put a third of his savings in stocks but sold out in early June, avoiding the worst of the market’s subsequent plunge. The key, he says, is to “have your own logic” for interpreting economic data and government policies. “Otherwise, you are simply gambling.” Others are less sure. Jin Ye, a 25-year-old video editor, invested 20,000 yuan ($3,200)—all of her savings from two years of work—only to watch her stocks halve in value in June and July. “Before the crash, everyone was an expert,” she jokes.

China’s young investors are well educated. Around 81% of them hold post-secondary degrees, 13 percentage points higher than the average investor, according to a survey by the Shenzhen stock exchange.But that does not necessarily make them better at picking stocks. According to the same survey, 44% of young investors said they relied on tips from friends when making decisions about what to buy or sell, whereas just a third of other investors trusted word of mouth.

Hong Hao, a strategist with Bank of Communications, a state-owned lender, believes that the presence of so many first-time punters has contributed to market volatility. Retail investors produce more than 80% of transactions in Chinese stocks, driving daily price swings. Moreover, Mr Hong says that young investors have been among the most aggressive in borrowing cash to buy stocks. “They have limited understanding of risks, which leads to excessive use of leverage,” he says. Technically, it should be difficult for the young to use borrowed cash because of the high minimum wealth threshold set by the government for margin financing. But online peer-to-peer lending and smartphone apps have allowed investors to obtain loans with much lower amounts of collateral. Belatedly, regulators have cracked down on these.

When the stockmarket plunged by nearly a third from the middle of June to early July, commentators wondered whether it might spark protests. In the past Chinese investors have taken to the streets after losing cash. Anecdotally, though, many of China’s young investors have taken their losses with equanimity. Ms Jin, the video editor, did two things after the initial plunge. She stopped wearing her favourite shirt because it is green (when stock prices fall in China, their ticker colour turns green, not red, the opposite of other countries). And then she decided to sit back and wait for her stocks to rebound. “It will be as if I left the money in my bank account.” Judging by Monday's fall, it might be there for a very long time. But Ms Jin says she is ready to wait for years.

Dig deeper: Our latest daily dispatch on China's stockmarket crash(July 2015)

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