As stocks dive, middle-class Chinese ask, 'Where is the bottom?'

A three-week plunge has wiped out more than $3 trillion in value on the Shanghai and Shenzhen exchanges. Nearly half of all listed Chinese firms have suspended trading, and investors are anxious. 

Zhang Wei has invested in the Chinese stock market long enough to know that it’s not for the faint-hearted. But after a decade of ups and downs, and amid one of its sharpest-ever falls, he’s had enough.

“I will never get into the stock market again,” says Mr. Zhang, an account manager for a Beijing-based asset management company. “It’s not a good place for investments.” Instead, he plans to count his losses – about $16,000 – and hope for an improvement. 

Chinese shares have tumbled more than 30 percent since hitting a peak in mid-June, and dropped another 6 percent Wednesday.

The rout has wiped trillions of dollars in value from China’s equities and led to a series of frantic state measures to stave off a deeper crash in the world's second largest stock market. In the past week, more than 1,300 or nearly half of Chinese listed companies have suspended trading in order to "self-preserve" as state media terms it.

Zhang, having lunch outside with friends near a Beijing office tower, speaks for a growing number in China’s burgeoning middle class who have seen their paper wealth evaporate and now feel a loss of confidence. Along with expensive real estate, the Shanghai and Shenzhen stock exchanges have provided an avenue of investment for young families and retirees alike, according to analysts.  

Irrational exuberance 

Zhang won't quit his job in finance but says he will stop investing his own money. He is critical of what he calls government manipulation of asset markets, and is especially irked by state-media reports this spring that said Chinese stocks were undervalued, and implied the government would prop up prices – and eliminate risk.

“The government’s efforts are useless, at least in the short term,” Zhang says. “The scary part is that people don’t know where the bottom is.”

Since last July millions of ordinary investors piled into the market as the Shanghai Composite Index rose more than 150 percent.

To be sure, stock markets are still up about 80 percent over the last year. But many small investors caught on late and figured that prices would climb indefinitely. They bought shares they couldn’t afford with credit from brokers. The rout has left them not only with shares worth less than they paid, but also with loans they have to pay back.

Zhang is no different. He borrowed $60,000 in March to trade stocks, unaware that he was buying into a bubble.

“The expectation seems to have grown over the years that the government will make sure things don’t fall too far, too fast,” says William Kirby, a Chinese studies professor at Harvard University. “There’s now a palpable sense of not only investor panic but also government panic that doesn’t give people a great deal of confidence.”

Individual Chinese make up more than 99 percent of China's stock investors and account for roughly 10 percent of daily trading volume. For many of them, the market is the best place to gamble outside of Macau, a casino enclave in southern China. 

“The Chinese stock market is a casino,” says Hu Xingdou, an economics professor at the Beijing Institute of Technology. “Whether you make money or not is not dependent on value investing but on speculation and how you handle speculation.”

The Shanghai Composite is down 32 percent from its June 12 peak. The smaller Shenzhen Composite Index has lost 40 percent.

Waiting for rainbows

The ruling Communist Party is scrambling to avoid a deeper crash and the potential social unrest that could come with it. Regaining investors’ confidence is among its top priorities.

The People's Daily, the party’s mouthpiece, struck a reassuring tone in an editorial on Monday. "Rainbows always appear after the rains," it declared.

“It’s clear that the central government is worried,” says Prof. Kirby. “The sense that the government can’t deal with it would probably worry a small investor the most.”

Deng Ge, a spokesman for the China Securities Regulatory Commission, warned of panic and "irrational selloffs" in a statement released Wednesday. State intervention includes cutting interest rates, suspending new stock listings, and enlisting brokerages to buy massive amounts of shares. Yet the latest round of government-backed measures has been unable so far to restore investor confidence or stop the slide.

Investor anxiety was visible Wednesday at a brokerage house in central Beijing. Dozens of somber-faced pensioners watched share prices fall in real time on massive electronic stock boards.

“There used to be a long line of people waiting to open new accounts,” says one investor, who spoke anonymously. “But those who took out loans and are now broke haven’t come back.”

While the recent plunge has scared off investors like Zhang, others are cautiously optimistic about the government’s efforts to shore up the market.

Some are waiting for prices to rebound so they can sell; others remain committed for the long haul. 

“I think I’m being greedy,” says a young stock trader who asked to remain anonymous, “but I want to make more.”