CNBC’s The China Connection newsletter: From gamblers to investors?

Hello, this is Evelyn, writing to you from Hengdian, Zhejiang province.

Locals are getting more excited about the stock market again. There’s much debate about what’s driving the gains, but there are signs of a deeper change afoot in what’s long been considered a more speculative market.

Enjoy!

This report is from this week’s CNBC’s The China Connection newsletter, which brings you insights and analysis on what’s driving the world’s second-largest economy. Like what you see? You can subscribe here.

Change doesn’t happen overnight, least of all in the mainland Chinese stock market that’s been compared to a casino due to its wild swings.

It is, after all, a little over 30 years old — a juvenile compared with Western bourses such as the New York Stock Exchange, established in 1792, and the London Stock Exchange, founded in 1801.

But China’s retail investors are getting savvier, thanks in part to hard lessons and a surge of online information.

“I think the real market is the best teacher. Real losses,” said Jin Xin, author of a Chinese investment book that translates as “Wealth Snowball: 10 years, 10-fold, the Essentials of Value Investing.”

About a decade ago, locals sought annual returns of 30% to 50%, dismissing single-digit gains, he said. By contrast, the S&P500 and Dow Jones Industrial Average have delivered less than 15% annualized returns over the past decade.

But mainland Chinese investors have matured since then. The 2015 Chinese stock bubble burst, the 2020 property sector crisis and scandals in financial products such as peer-to-peer lending — which promised double-digit returns — wiped out many portfolios.

Now, investors in China are less likely to chase single-stock stories, while holding shares longer and aiming for steady 5% to 10% returns, Jin said. However, Jin noted that listed companies in China still have a long way to go in prioritizing shareholder returns through incentives such as dividends or share buybacks, unlike the West.

The Shanghai Composite Index hit a 10-year high recently, while the CSI300, which tracks the 300 largest and most liquid shares listed in Shenzhen and Shanghai, is at a three-year high. Part of the increase is attributed to retail investors starting to allocate some of their savings, amid apparent easing in U.S.-China trade tensions and hopes of an economic recovery.

Unlike major markets such as the New York Stock Exchange, where retail investors account for about 20%-25% of trade volumes, China’s retail investors drive 90% of daily trading, according to data provided by HSBC.

However, a push to rebalance the market away from the dominance of retail investors and encourage the growth of long-term institutional investors, such as pension funds, insurance funds, and other long-term institutional investors, has helped reduce volatility, said Aaron Costello, head of Asia at Cambridge Associates.

The mainland stock market, known as A shares, has historically seen price swings of 30%, he said, noting it’s now closer to 20%. But that’s still higher than 15% in the U.S. and Europe, he said.

An annual study by the Shanghai Advanced Institute of Finance and Charles Schwab found that financial literacy among Chinese households improved in 2024. Women scored higher than men in financial planning for the first time, the report showed.

Investors in China are moving beyond simply looking for high returns. They are more concerned with the underlying logic as well as the track record of a fund and its manager, according to Chinese financial services company Noah, which manages assets for high-net-worth clients.

The proliferation of financial apps and social media has also helped to broaden investor education.

Five years ago, former J.P. Morgan associate Lindsay Zou started releasing videos about finance and macroeconomics on YouTube and its Chinese equivalent, Bilibili. She now has more than 2.5 million subscribers on YouTube, over 6 million on Bilibili — and more than 10 million on Douyin.

She became so popular that she was flocked by fans this summer after moderating a panel in Beijing at China AMC’s annual event for promoting its index funds. Another speaker was also a finance influencer with 36,000 followers on Douyin.

And there’s “Red Rocket,” a “mini” app available within the popular Chinese messaging and social media app WeChat, which gained 10 million users since launching last year. The app, which allows users to analyze indexes and stocks, was developed by fund management firm China AMC.

“Access to financial information increases stock investment, enhances portfolio diversification, and improves risk-adjusted returns, even among older, less educated and less affluent users,” according to a study published Monday by a team led by Bernard Yeung, a finance professor at the National University of Singapore Business School.

Their research, which uses data from an anonymous major Chinese online investment platform with 711 million monthly active users, established a causal link between exposure to digital financial knowledge and improved investment behavior. It also found that visual content had a “significantly greater impact” on users than other formats.

“The emergence of professional platforms has filtered out market noise,” Wang Wei, a researcher at Tianjin University of Commerce, said in Mandarin, translated by CNBC. But he warned that speculation still exists in the market, even if it’s now more concentrated in micro themes such as electric vehicles or chips.

It has been debated whether Beijing’s history of intervening in the markets to ensure stability — especially during times of turmoil — has distorted share prices from their fundamentals and dampened long-term returns, while affecting investor sentiment.

The stock market’s recent run higher comes ahead of two key events, Wang pointed out: the multilateral Shanghai Cooperation Organization summit in Tianjin from Aug. 31 to Sept. 1, and China’s military parade in Beijing on Sept. 3.

Stocks saw a similar surge in October last year — after a rare government meeting signaled stimulus plans — and ahead of a weeklong October holiday commemorating the 75th anniversary of the People’s Republic of China. 

Hong Kong Exchanges and Clearing CEO Bonnie Chan discussed why soft fundamentals in the Chinese economy are not weighing on the market.

Marcos Chan, head of research at CBRE Hong Kong, said that the vacancy rate in Hong Kong’s commercial property market is high – but things are slowly improving.

Arthur Chen, CFO of Futu Holdings, discussed how the online brokerage business is affected by current geopolitical and market uncertainty, Hong Kong’s strong IPO pipeline, as well as the integration of AI and crypto trading on the platform.

China and Hong Kong stocks inched higher amid mixed trading in the region on Wednesday as investors assessed China’s industrial profits data, which slipped 1.5% from a year earlier in July, marking a notable recovery following months of steeper declines.

Hong Kong’s Hang Seng index was flat, while the mainland’s CSI 300 added 0.72%. The CSI 300 has been surging recently, with some economists and banks such as Nomura pointing to “irrational exuberance.”

The mainland Chinese index has climbed over 13% so far this year.

Aug. 29: Eric Trump to speak at bitcoin conference in Hong Kong

Aug. 31: Official Manufacturing PMI

Aug. 31-Sept. 1: Shanghai Cooperation Organization meets in Tianjin

Sept. 1: RatingDog China General Manufacturing PMI

Sept. 3: China military parade; RatingDog China General Services PMI