As China's working class flocked to the nation's booming stock market, wealthier investors were cashing out

Photo by ChinaFotoPress/Getty Images

Yesterday we brought you the story that retail investors with little formal education were among those most likely to have suffered from the recent plunge in China’s stock market.

Now, courtesy of a report from Bloomberg, there is further evidence that suggests wealthier, more-sophisticated (and likely well informed) investors profited from the recent collapse in Chinese stocks to the detriment of their smaller, less-sophisticated peers.

Citing data from the China Securities Depository and Clearing Corporation, Bloomberg report that the number of traders with more than 10 million yuan ($1.6 million) of shares in their accounts shrank by 28% in July, even as those with less than 100,000 yuan rose by 8%.

Accounts holding portfolios valued between one to ten million yuan also slipped by 22%.

While weaker share prices partially explain the sharp reduction – the benchmark Shanghai Composite index has fallen over 31% since hitting a multi-year peak on June 12 – according to a research note from CLSA, it also suggests that China’s rich took advantage of government buying to move out of stocks soon after the markets began to shudder.

“The high net worth clients are the ones who moved the market,” said Francis Cheung, head of China and Hong Kong strategy at CLSA, adding, “they tend to be more savvy”.

Cheung believes there is not a lot of fundamental support for mainland A-shares, particularly given elevated price-to-earnings ratios and weak corporate earnings.

Based on analysis compiled by Bloomberg, the median stock on mainland bourses traded at 72 times reported earnings on Monday, more expensive than any of the world’s 10 largest markets.

Essentially that’s a 72-year wait to see an investment returned in full based on the current level of earnings. No wonder more sophisticated investors were quick to jump ship, particularly given those multiples would have been significantly higher back in early June.

Showing that it’s earnings multiples that are growing, not actual earnings, Chinese industrial profits slipped 0.3% in the 12 months to June, a decline on the 0.6% growth seen in May.

Despite that enormous flaw in fundamentals, not everyone is so concerned. Indeed, some remain bullish on the prospect for Chinese stocks.

Speaking to Bloomberg, Gerry Alfonso, a sales trader at Shenwan Hongyuan Group in Shanghai, sticking with Chinese stocks long-term could prove to be “very lucrative” given the levels of Chinese economic growth.

“This lack of a clear trend in the market causes overreactions by investors,” said Alfonso. “Eventually the market will turn around.”

Given doubts over the accuracy of Chinese economic data, leverage in the nation’s private sector and the inability of the stocks to recover despite the government throwing a raft of unorthodox measures to support them, it’s likely that many will disagree with Alfonso’s optimistic view.

You can read more from Bloomberg here.

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