Stocks Turmoil Leaves Chinese Investors in Nowhere-to-Run Bind

Wei Lili is running out of investment options. Apartment prices in her city of Wuhan are beyond her reach even after a recent property slump, and the volatile stock market is too great a risk.

“It takes more than a million yuan to buy a flat, and stocks are like a roller coaster -- they are too soul-wrenching for me,” said Wei, 52, a government worker in the central Chinese city. She’s lost almost half of a 30,000 yuan ($4,800) investment in stocks, she said, declining to elaborate.

The party may be ending for Chinese investors who have seen housing prices boom over most of the past decade and gained from wagers on everything from surging commodity prices to industrial-company loans. With the stock market in a funk, lackluster prospects for an oversupplied housing market and interest rates falling, savers like Wei face a new era of lower investment returns should the recent equities rout persist.

While investors have a few more instruments to turn to than before -- wealth management products and investment trusts have seen assets soar in recent years -- their returns also are under pressure. That could increase the incentive to hunt for better yields overseas or in questionable fads like the bubbles in garlic and fine Pu’er tea in the past decade.

“Chinese investors are in for a tough stretch,” said Andrew Polk, a Beijing-based economist at the Conference Board who previously worked at the U.S. Treasury Department. “We are likely to see an even greater increase in capital outflows going forward and we might see some very random asset bubbles, like the ’great garlic bubble’ in late 2009.”

Stocks Drop

Stocks have plunged, driving the Shanghai Composite Index down 28 percent from a seven-year high on June 12. New-home prices declined in 33 of 70 cities in June from a month earlier as an overhang of inventory continued to drag on the market.

At the same time, four interest-rate cuts since mid-November have curbed returns on bank deposits and fixed-income investments.

The shift to lower yields may be a jarring one for Chinese investors. Prices of second-hand homes more than tripled on average in Beijing, Shanghai, Guangzhou and Shenzhen in the past decade, according to an index compiled by property agency Centaline Group.

Trust products, many of which used to offer double-digit returns and had property as their underlying investments, have seen assets increase six times to 14.4 trillion yuan at the end of March from five years earlier.

American Dilemma

“Chinese households face the same dilemma as American ones: where do you find a return with real estate flat, emerging markets disappointing, and commodities down,” said David Dollar, a senior fellow at the Brookings Institution in Washington who previously worked for the U.S. Treasury in Beijing.

The immediate impact of limited investment options is likely to be a flight to safe-haven alternatives including bank deposits and fixed-income investments, said Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight in Singapore.

With China’s one-year savings deposit rate standing at just 0.6 percent after inflation, wealth management products -- investments sold by banks with yields slightly higher than those available on deposits -- may be the big winners, said James Laurenceson, the deputy director of the Australia-China Relations Institute at the University of Technology in Sydney.

Despite controls on overseas investments by Chinese investors, Laurenceson expects these flows to pick up.

Capital Outflows

“The rules have always been easy to get around and it has gotten easier as time has passed,” he said. “We’ve seen that with China experiencing net capital outflows over the past year.”

When China’s last stock-market bubble burst in 2007, investors were in a much worse predicament. Then they had a choice of bank deposits with negative returns after inflation, or property, said David Loevinger, former China specialist for the U.S. Treasury and now an analyst at fund manager TCW Group Inc. in Los Angeles.

“Chinese investors are no longer penned in,” he said. “Now they can choose from a financial smorgasbord, including bank deposit rates with positive real yields, a wide range of wealth management products, bonds and overseas real estate and financial markets, in addition to local property.”

Market volatility may be a setback for any further diversification of household assets into stocks. Equities account for only about 12 percent of Chinese household assets, compared with about 58 percent in the U.S., according to Brown Brothers Harriman & Co.

Disillusioned with mainstream investment options, Wuhan’s Wei says she’s turned to buying ocean chalcedony quartz from Madagascar, convinced its value will appreciate in coming years.

“For salaried people like me who only have a few thousand yuan to invest every month, is there any better way than this?” she said. “The potential to appreciate is unlimited.”

— With assistance by Kevin Hamlin, and Xiaoqing Pi

Before it's here, it's on the Bloomberg Terminal. LEARN MORE