Finally, there's more money than fools in China

Playing it safe.Bloomberg

For years, China's netizens joked that the country was home to millions of fools with a lot of money. They were called "chives," a healthy crop that can flourish soon after harvesting, and keep coming up again and again. 

This characterization was not entirely unjustified. After all, China's fervent day traders did propel the stock market to dare-devil levels in 2015. The equally spectacular crash did not seem to leave long-lasting trauma. A few years later, the optimistic rekindled their spirits, raining down billions of dollars onto whatever was trendy, from star managers' new funds to apple futures. 

That audacity has evaporated, however. Three decades after the opening of the Shanghai Stock Exchange, the Chinese have become hard-nosed investors. They no longer want to be the fools catching the falling knives. 

For evidence of that changing sentiment, look no further than consumers' savings data and the central bank's quarterly urban survey. As of August, household deposits totaled a record 132 trillion yuan ($18 trillion), blowing pastChina's entire gross domestic product last year. People keep on putting money into banks even as the People's Bank of China cuts deposit rates. 

It's well-known the Chinese have been hoarding cash since the pandemic. But this behavior started as early as 2018. By then, households had already gone through a rollercoaster ride of excitements and disappointments. In fact, their preference for buying investment products, such as stocks, bonds and trusts, has been on a steady decline since the 2015 crash, according to the central bank survey. 

This risk-off mentality creates a big headache for the government, in that it inevitably dampens new policies aimed at boosting market sentiment. Last month, a stamp duty cut, the first since 2008, sparked a blink-of-an-eye 5.5% stock rally — it lasted for only one minute at the open before fizzling out. Similarly, a spurt in home sales in China's biggest cities lost momentum less than two weeks after authorities loosened mortgage restrictions. 

Once bitten, twice shy. The Shanghai Composite Index hovers at around 3,100, more than 40% below its record high in 2007. In the property market, existing home prices have fallen by at least 15% from their peak in more than half of China's tier-2 and tier-3 cities.

State media likes to scoff at American exceptionalism, criticizing gun violence or racial tensions whenever they are on the news. But with wealth creation, the US is unquestionably exceptional. Households have about 39% of their money tied in the market and only 13% in cash and bank deposits, according to data from the Federal Reserve. They are willing to tolerate uncertainty, because the stock market, over time, rewards those who buy and hold. 

Not in China. People have realized that taking risks doesn't benefit them, at least not in the current political economy. They have money, but prefer sitting on the sidelines. 

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron's. She is a CFA charterholder.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.