Yinghua Fan, Guanhao Feng and Dashan Huang believe they’ve produced a first in terms of modelling the complete spectrum of investors at work in China’s A-share markets (due to data constraints the study was of just Shanghai from 2007~2023, Shenzhen had to be left out).
Many believe stock markets in China are driven by no-nothing Mom and Pop investors and, whilst true in the past and still to an extent today, things have evolved.
The paper uncovered three useful-to-know phenomena:
- In the market turbulence of 2015 corporations, more than Mom and Pop and the National Team had the greatest effect on prices.
- ‘Connect’ flows observed since 2014 show institutions operating in an increasingly passive manner. This means they’ve affected prices significantly but there’s little information in their flows.
- In the past in China small stocks did better than large ones. It’s suspected (but not proved) this may have been due to weak CG at the behemoths. This has changed and now small and big do roughly as well. The so-called ‘size-premium’ has thus all but evaporated.
Two other findings are of note. Viz., the actions of the ‘National Team’ in 2015 led to reduced volatility and higher aggregate stock prices and these effects were persistent. Second, the increase in institutional interest, especially that evidenced via the connect system has also led to a permanent increase in the aggregate level of stock prices.
The bottom line for practitioners is it’s no longer appropriate to characterize the onshore equity markets in China as an unintelligible mad-house of passionate-one-day, windy-the-next punters. It’s growing up.
You can look through the work yourself via this link Modeling Institutional Investors in China.
Happy Sunday and the Merriest of Christmases to all!
