The dangers of children with cheque books

Did young adults lead to the fall in China’s stock market? The Economist believes so.

Losing streak

On a losing streak Image: Aaron Goodman

The Shanghai Composite, China’s main stock market index, has fallen from the highs of almost 5,500 to less than 4,000 in a little over a month.

On Monday 27th July alone it tumbled by 8.5%, the biggest fall since 2007. It is estimated that more than $3.6 trillion of value has been wiped off China’s stock markets since the crash.

Many attribute the crash to falling corporate profits, share crackdowns by eager regulators, rising pork prices or all of the above. But The Economist believes that young people with money to burn have caused much of the volatility in the markets.

In China, retail investors - rather than vast pension funds or fund managers - make up around 85% of the market. By comparison, retail investors own less than 30% of equities in the NYSE by some estimates. While some retail investors are seasoned market veterans many buying into Chinese equities are young people in their early 20’s or 30’s.

By The Economist’s estimates 62% of a record 8m new trading accounts in China were opened by people born after 1980, compared to just 5% opened by those born after 1960.

A straw poll survey of young Chinese retail investors found they often had good educations and backgrounds, but not much luck on the exchange.

Around 44% of young investors relied on tips from friends and, since retail investors produce more than 80% of transactions on Chinese stocks, scared investors have hurriedly encouraged each other to pull the bottom out of the market.

A case of the youthful enthusiasm over experience, perhaps?