After more than doubling since 2014, China’s stock market has fallen about 30% over the past couple of months. That has investors holding their breath and scratching their heads at the same time. Everyone wants to know what’s behind the selloff — and there are many theories to meet the demand. I don’t know why stocks are plummeting in China, but I do know the Chinese market has distinct characteristics including the following.
- In China red stock quotes mean up and green quotes mean down. Yes, that’s the opposite of how quotes are shown elsewhere (hat tip to my colleague Wei Trieu who shared this trivia with me).
- Individual retail investors account for about 85% of trading volume in China.
- Chinese investors trade more often and use more leverage than their US counterparts.
- On average, investors in China are less experienced and less educated than those in the US.
- The Chinese government imposes capital controls that restrict foreign investment both into and out of China.
- The Chinese government is quite active with its market policy — e.g. it recently began restricting short-selling and even restricted some investors from selling stock altogether.
- A personal observation — Chinese brokerage house lobbies look more like casino floors than investment firms.
The point is markets are significantly different in China. We have a hard enough time trying to make sense of our own markets, so there’s no shame in admitting that we can’t explain every move that happens in some far away place where red is the new green.
What’s more important than trying to explain the cyclical sell-off is to recognize the bigger picture. China was, is, and continues to be a key emerging market, and an important source of future long-term growth. Assuming you have the time horizon and the stomach for intermittent volatility, it makes sense to participate in that long-term growth.
For prudent investors, that means including Chinese stocks as part of a balanced and properly diversified allocation appropriate for your needs and objectives.
Victor K. Lai, CFA
This blog is for informational purposes only. Nothing on this blog represents advice. Investing is inherently risky and involves the potential for loss. Victor Lai does not own any of the securities referenced in this posting. Clients of Bellwether Capital Management LLC may own shares of the securities referenced in this posting.