Chinese consumers lack adequate “literacy” of basic financial concepts, such as interest and loans, insurance, and diversified investments, according to a new government report.
“Irrational behavior” due to uninformed investors runs the risk of increasing financial market volatility, the People’s Bank of China, the country’s central bank, said in a recent annual survey.
Findings of the report—which surveyed 120,000 people across China—have direct implications for several vital areas of the Chinese economy. The first is the yearslong push by policy makers to shift away from manufacturing and toward a more consumption-based economy—an effort that has underwhelmed.
The second is the volatility of China’s stock markets, despite rules that have helped them mature over recent years. Retail investors still account for about 80% of the trading volume on the Shanghai and Shenzhen exchanges, according to data from investment bank China International Capital Corporation. That compares to roughly 10% of such investors in the U.S., and 5% in Europe, according to a Morgan Stanley report from May.
Chinese markets had performed relatively well in the first half of this year. But things turned sour as Beijing intensified its crackdown on industries including tech and on-demand services, snaring
(3690: Hong Kong), and
(700: Hong Kong), among others. Investors also dumped stocks in other targeted firms, including private education, online gaming, and real estate.
The most visible target of the crackdowns was mobile financial platform Ant Group, whose planned dual initial public offering—which would have been the world’s biggest ever—was suspended by authorities last October.
Various reasons were posited as to why the listings were scuttled, from top leadership’s animosity toward controlling shareholder Jack Ma, to the platform eventually competing with China’s nascent digital Yuan, to the company’s immense power in China’s consumer payments and investment spaces.
China’s opacity makes it hard to know to what degree each of these were contributing factors. But one thing had become clear—Ant had become an enormous handler of consumers’ money.
As of 2019, two-thirds of Chinese consumers used Ant’s financial platform, Alipay, according to listing documents for Ant’s would-be IPO. Ant reported that some 43% of its revenue that year came from digital payments and merchant fees.
But the vast majority of the company’s income came from its financial product offerings, which range from loans, insurance, and the country’s largest mutual fund, which it owns.
“It’s easy to say that the ‘irrational’ performance of stock and asset markets in China is caused by uneducated retail investors,” said Michael Pettis, a professor of finance at Peking University. “But in China, as in other highly speculative markets, it is structural factors that drive speculative behavior.”
With unreliable economic and financial data, insider activity, and an unpredictable regulatory environment, “it is hard for ‘value’ or ‘fundamental’ investors to play their stabilizing roles, and under these conditions only speculative strategies can be successful,” he told Barron’s.
The report wasn’t all damning for consumers. In particular, it found a significant increase in the importance consumers attach to financial education.
Barron’s spoke to multiple Chinese without finance backgrounds who have purchased online financial products. They agreed to provide only their family names, because of the sensitive nature of discussing private finances.
Zhu, a 41-year-old female art designer in Beijing, said she first purchased supplemental private catastrophic health insurance and pension insurance years ago, even though China’s social safety net includes both. “I’m freelance, so I don’t have a company to kick in to supplement government coverage for such things,” she said.
Last month she invested 10,000 yuan ($1,600) in two of Alipay’s long-term mutual funds. After she saw them inching up in value, she agreed to allow 400 yuan a week of funds in her Alipay account to be placed in a third fund. According to a screenshot of her account, all three funds are up, one with a 5% return so far.
Asked how well she understands the intricacies of her various estimates, she laughed.
“At first, literally nothing. Then the idea of investing digitally seemed to get bigger with people I know, and I felt stupid that I couldn’t answer any of their questions. So I read the fine print of my investments, and even talked to an insurance agent, and now I feel knowledgeable, and comfortable with the investments I chose,” she said.