China prods more institutional funds into stock market to wean punters from one-way bets

© SCMP A view of the China Securities Regulatory Commission office building located in Beijing’s Financial Street on December 18, 2019. Photo: Simon Song

China’s stock-market regulator is prioritising more institutional participation as one of its major tasks for next year, a move aimed at reducing market volatility associated with excessive speculation among retail investors.

Expanding the size of stock-focused mutual funds and linking pension funds to the capital market have been highlighted on the to-do list for 2021, the China Securities Regulatory Commission (CSRC) said in a statement on its website. It was posted after its chief, Yi Huiman, chaired a work meeting on Tuesday about its targets for the year ahead.

The move follows other measures to improve the quality and depth of the market as authorities struggle to persuade mom-and-pop investors to put their money with professional fund managers 30 years after the birth of the stock markets in Shanghai and Shenzhen. China is home to 176 million retail investors, almost twice the membership in the Communist Party of China.

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“The purpose is still to encourage long-term investment and get retail investors away from the market,” said Wu Kan, an investment manager at Soochow Securities in Shanghai. “We’ve already seen less wild swings these days and that’s very relevant to the increase in the number of institutional investors.”

The Shanghai Composite Index has gained 11 per cent so far this year, and the ChiNext gauge of smaller companies in Shenzhen has jumped 58 per cent. China is the first major economy to rebound from the Covid-19 slump after bringing the pandemic under control.

The recovery in sentiment has not led to increased volatility so far. The 100-day volatility measure for the Shanghai Composite is at its lowest level since January, according to Bloomberg data.

Excessive retail trading was partly blamed for the boom-to-bust cycle that led to the market bubble in 2015 and the ensuing crash that wiped out US$5 trillion in market value within three months. In one recent example, the Shenzhen exchange halted trading of three smaller companies in September whose stocks surged for no fundamental reasons.

Retail investors held 4.6 trillion yuan (US$702.2 billion) worth of stocks in trading accounts at the end of 2019, more than five times the combined holdings of the mutual funds, according to data compiled by Shanghai Stock Exchange.

Investors subscribed for a record 2.4 trillion yuan of mutual funds in the first nine months of this year, taking the total size of the asset-management industry to 18 trillion yuan, according to Citic Securities. Stock funds increased by about 1 trillion yuan in the period, the nation’s biggest listed brokerage said.

New funds due for launch may attract 1.4 trillion yuan in the first half of next year, and probably more than 2 trillion yuan by year end, according to an estimate by Haitong Securities.

China’s regulator makes capital market funding a top priority as it looks to bolster economy

China has 82 trillion yuan of household savings, the world’s largest pool, seeking higher investment returns as ultra-loose central-bank policy compresses yields on bonds and other wealth management products.

Guiding that vast pool of private savings into Chinese stocks will also help policymakers divert capital from the housing market, another speculative hotspot in recent years. Stock valuation is still among the cheapest of major world markets.

The stellar performances of equity funds this year will make the CSRC’s plan to foster long-term investment more viable. Actively-managed stock funds rose by 37 per cent on average in the first nine months of 2020, outperforming other types of mutual funds, Citic Securities said.

The CSRC statement also highlighted other major tasks for 2021, including supporting technology innovation, deepening market access and preventing financial risk.

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This article originally appeared on the South China Morning Post (, the leading news media reporting on China and Asia.

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