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    China Business
     Feb 8, 2007
China: Surge in retail stock market investment

BEIJING - Official statistics show that the number of retail investors in the Chinese stock markets reached 80 million in January, reflecting an annual increase of 10%.

That means a growing number of ordinary investors can reap profits from the bullish market. It is a pleasant scenario, but only if one takes a short-term view.

In the long run, a continual rise in the number of retail investors may worsen a structural problem that has haunted the yuan-denominated A-share market for years: an imbalance between the



power of institutional and retail investors.

China's stock markets are dominated by retail investors, who hold 60% of the total trading shares. By comparison, international markets feel the power of large corporate investors, or institutional investors.

In Hong Kong, which also hosts a number of Chinese enterprises, institutional investors make nearly 70% of daily transactions. New York, London and many other places present a similar picture.

Instead of better protecting the interests of small investors, a retail-led stock market is likely to let valuation surge ahead of itself. Unlike institutional investors, which are known to remain cool-headed and calculate a stock's value on its performance, retail investors have a reputation for often making irrational and speculative decisions.

And that has already happened in the Shanghai and Shenzhen bourses. By doubling their market values in just 10 months, the Chinese markets now shows signs of an emerging bubble.

There is a great need to address that problem. To balance the power of the two groups of investors, government should not simply limit retail investors. After all, they have a right to invest.

The government should review market regulations and increase the role of institutional investors, including banks, insurers, fund managers and social security funds.

The regulator could consider raising the proportion that institutional investors could buy in initial public offerings.

(Asia Pulse/XIC)


China stock feeding frenzy: Don't get bitten (Jan 17, '07)

 
 



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