AsianFin -- Chinese retail investors are gradually returning to the stock market after years on the sidelines, but indicators suggest participation remains far from the euphoric levels that have historically foreshadowed overheating.
Individual investor activity has risen since April as the benchmark CSI 300 Index staged a double-digit rebound, but analysts, broker surveys, and trading desk data point to a market that’s still in the early stages of a broader shift in household money away from bank deposits and into equities.
Retail traders currently account for about 31% of market turnover, comparable to levels seen during the 2015 bull run and the September 2024 rally, when participation reached 35%. Net inflows from individuals amount to about 27% of 2015’s peak, or 30% of the 2024 surge.
New investor accounts are rising, with 1.95 million opened in July, up 20% from June. Yet the scale of fresh inflows remains modest relative to market size. Daily net inflows in recent weeks accounted for just 1%–2% of trading assets at some large brokerages. By contrast, at the height of last year’s rally, daily inflows often exceeded 1 billion yuan at individual outlets.
Chinese long-term bond yield is still at decades low, so money will continue to rotate from bonds to stocks, said Hong Hao, Managing Partner and CIO of Lotus Asset Management.
Meanwhile, bank-to-broker transfer balances — a gauge of household funds entering the market — slipped to an estimated 1.8 trillion yuan at the end of June, down from earlier months.
Perhaps the clearest signal that the “deposit-to-stock” shift is far from complete comes from the ratio of household deposits to the total market capitalization of A-shares. The metric stood at 1.7 in July, near historical highs. Historically, the ratio has ranged from 1.1 to 2.0, with lower readings suggesting that the migration of household savings into stocks is nearing exhaustion. The current elevated level implies significant untapped potential.
Institutions remain broadly constructive. Several analysts argue that external factors such as U.S. politics and geopolitics will dictate short-term volatility, but that domestic fundamentals are no longer the decisive driver of sentiment. “Market trend has already formed, and inflows from outside cash pools have just begun,” one strategist said.
Thematic plays remain dominant. Investors are piling into “new economy” and “overseas expansion” narratives, particularly around artificial intelligence and related supply chains. Some strategists suggest a full-fledged bull market would hinge on “de-involution” — a shift in focus away from cutthroat competition that could improve profitability and valuations across industries.
Liquidity remains ample, underpinned by ultra-low interbank rates. Morgan Stanley, in a recent closed-door discussion, highlighted interbank borrowing costs below 1.8% and excess reserve ratios above 2.3% as signs of abundant cash. “Money is plentiful, but leverage is still far below 2015 levels,” the bank said.
Still, Morgan Stanley flagged several risks: weaker-than-expected third-quarter earnings, a surge in margin financing, or policy missteps such as stricter enforcement of social security contributions or new taxes on overseas investment income.
Goldman Sachs’ trading desk noted that China’s A-shares were the single largest net buy across global cash markets in recent sessions, with inflows nearly six times the four-week daily average. Retail investors remain a core driver of this momentum. Financing balances now sit just 10% below record highs, yet Goldman’s sentiment gauge suggests the market is far from overheating.
Grassroots surveys by 18 brokerages indicate retail enthusiasm is lukewarm compared with past episodes. Only around 5% of assets are newly entering the market, well below the intensity of September–October 2024. Participation levels are somewhat higher than June 2020, but markedly weaker than the frenzy of July 2020.
Most retail investors continue to prefer small- and mid-cap stocks, particularly in AI and robotics, while enthusiasm for banks and traditional blue chips has faded. Average holding periods remain short, with many investors inclined to take profits after gains of 10% or more.
Margin financing balances rose about 5% in early August, largely driven by experienced investors with established trading histories. Regulators’ crackdown on illicit over-the-counter derivatives has sharply curtailed leverage channels that were popular last year.
Despite increased trading activity — with average daily turnover across A-shares climbing to 2.2 trillion yuan — brokers stress that retail behavior remains measured. “Compared with last October’s spike, when every street corner buzzed with stock talk, today’s atmosphere is far more subdued,” one brokerage manager said.
Longer term, analysts see structural support from the steady erosion of returns on traditional savings. With 10-year government bonds yielding around 2.8% and bank deposit rates even lower, equities’ dividend yield of 2.6%–2.7% appears attractive. For high-dividend ETFs tied to the CSI 300, yields approach 3%.
That risk-reward calculus is drawing attention to the concept of “deposit migration.” Even a partial reallocation of the more than 100 trillion yuan in household deposits could translate into meaningful equity inflows over the coming years.
Brokerage data suggest wealthier households remain conservative, favoring steadier strategies and holding longer. Smaller retail investors, by contrast, chase momentum, often relying on stock apps and online chatter to identify targets. The newest entrants are younger, but Gen Z participation remains limited; brokers expect this group to surge once social media buzz around record highs becomes more pervasive.
For now, around 60% of retail clients are in profit this year, brokers estimate — a far cry from the more than 90% who made money at the 2015 peak, but still a marked improvement from last year’s doldrums.
Market veterans caution that the bigger risk may not be overheating but acceleration. A “slow bull” could turn into a “fast bull,” putting pressure on regulators to rein in leverage. Small-cap valuations are already lofty, and some are showing signs of fatigue.
Yet with liquidity abundant, structural themes intact, and households still sitting on vast savings, many analysts believe the rally has room to run. “The story of Chinese households shifting deposits into equities is only just beginning,” said one strategist.
