There Are Now More Stock Traders in China Than Communist Party Members

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Stock investors of the world unite! For the first time in modern China, you outnumber the Communists.

The nation’s $8.1 trillion equity market now has more than 90 million individual investors, according to China Securities Depository and Clearing Co. That compares with 87.8 million Communist Party members at the end of last year, the state-run Xinhua News Agency reported June 29, two days before the 94th anniversary of the party’s founding.

It’s safe to assume this is not what Mao Zedong envisioned when he led the Communists to power in 1949, and it presents tricky challenges for President Xi Jinping. A record number of Chinese citizens flocked to the stock market over the past year as the Shanghai Composite Index doubled. Now, that boom is at risk of turning into a bust after the benchmark tumbled more than 20 percent from its June 12 peak through Monday, leaving many retail investors bruised and undercutting the nation’s already sluggish economy.

“As more people get burned, the government feels more pressure,” said Ronald Wan, chief executive officer of Partners Capital International in Hong Kong. “A disorderly decline will affect stability in the Chinese economy.”

The Shanghai Composite has been on a roller coaster, taking the new class of stock novices along for the ride. It jumped 5.5 percent Tuesday after earlier falling as much as 5.1 percent in the most volatile trading since 1992 on speculation the government would take steps to stop the rout. About $1.9 trillion in market valuation evaporated over the last two weeks amid concern that a year-long rally accompanied by record borrowing and surging valuations can’t be sustained.

State Support

The Shanghai measure dropped 0.4 percent at the midday break on Wednesday.

Policy makers have urged investors to react to the fluctuations with calm while at the same time moving to appease them. On Saturday, following the stock plunge, the People’s Bank of China cut the benchmark interest rate to a record low. The Economic Observer reported that the government is considering a reduction in the stamp tax. Meanwhile, the finance ministry said it will allow pension funds to invest in shares.

Xi’s government is counting on a robust stock market to wean companies off borrowing. Individual investors may need some weaning, too. They’ve borrowed 2.08 trillion yuan ($335 billion) from brokerages to buy stocks in Shanghai and Shenzhen.

Systemic Collapse

“The authorities are always sensitive to moves in the market because they fear a systemic collapse,” said Anthony Neoh, a visiting professor at the National University of Singapore and a member of the Chinese securities regulator’s international advisory body. “A healthy stock market has to be a priority question for the administration, if only because it assures social stability.”

China added more than 7 million individual equity traders in June through the 26th, according to the Chinese clearinghouse, which started compiling the number of investors in May, replacing the original data set on stock accounts after regulators allowed investors to open multiple accounts. More than 40 million accounts were added in the 12 months through May.

By comparison, 1.1 million people joined the Communist Party last year, down from an increase of 1.6 million in 2013, according to Xinhua. Membership growth has slowed as Xi presses ahead with the widest crackdown on corruption in the party’s history, snaring about 100,000 officials in the past two years.

Stock Frenzy

Stock ownership in China still has plenty of room to grow. Equities account for 20 percent of financial assets in Chinese households, compared with 45 percent in cash and bank deposits, according to a Charles Schwab Corp. survey released in January.

Still, the past year’s stock frenzy has been extreme, leaving many investors vulnerable to “nasty, nasty reversals,” according to Fraser Howie, the co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.”

“There’s nothing wrong with greater stock market investment and there’s nothing wrong with diversification from simply savings,” Howie, a former managing director at CLSA Asia-Pacific Markets, said in a phone interview from Singapore. “But the difficulty in China is that none of what’s been happening in the past few months can be called investment. It’s all speculation.”