After more than 30 years of development, the A-share market has become the second-largest market in the world in terms of market value. However, it is often criticized for its strong financing function and weak investment function (or profit effect). A consensus has been reached to focus on enhancing its investment function and downplaying its financing function in the future. In terms of equity financing, the strategy of "strictly controlling the access to listing and accelerating the formation of a normalized pattern of timely exit and clearance" has been proposed. In response to the current situation of large fluctuations and continuous downward valuation levels in the A-share market, the consensus is to "promote medium and long-term capital into the market," increasing the proportion of patient capital to achieve the goal of a stable and improving stock market. In addition, there is a "consensus" that a rising stock market can promote consumption.

This article will delve into the above "consensus" and present different views. I believe that as an emerging market, the various issues that arise in the A-share market are inevitable, and the response is often superficial because the deep-seated causes behind the phenomena are overlooked. To address this, I have begun writing a series of reports, with this being the second one, exploring whether a rising stock market can indeed promote consumption.

A-share individual investors are not large in scale and are severely differentiated

Advertisement

How many individual investors are there in the domestic A-share market? I have not been able to find exact data. Although the number of individual investors can be estimated using the number of A-share accounts, due to the existence of multiple accounts for one person in different exchanges such as the Shanghai Stock Exchange, Shenzhen Stock Exchange, and Beijing Stock Exchange, there is a phenomenon of one person having multiple accounts. In addition, the vacancy rate of A-share market accounts (stock accounts without funds) is relatively high, so the actual number of individual investors cannot be estimated using the number of accounts.

The former chairman of the China Securities Regulatory Commission (CSRC) mentioned in his speech at the Financial Street Forum Annual Conference in November 2022 that "the number of individual investors exceeds 200 million." So, how many individual investors should there be two years later? Since the market transactions have not been very active in the past two years, assuming a cumulative increase of 10% in the number of investors, the current number of individual investors is estimated to be around 220 million, accounting for 15.6% of China's total population. On January 24th of this year, the vice chairman of the CSRC also mentioned in a media interview, "China's stock market has 220 million investors."

In addition to individual investors engaged in trading in the A-share market, there are also many indirect investors who purchase public funds. According to data from the China Securities Investment Fund Industry Association, as of the end of June 2024, the number of fund investors reached 759 million, which is quite large in scale. Data provided at the press conference held by the CSRC on January 12, 2024, shows that by the end of 2023, public funds held a circulating market value of 5.1 trillion yuan in A-shares, accounting for 7.3% of the A-share circulating market value, with an average holding market value of less than 7,000 yuan per person, and the median is even lower.

Let's take a look at the capital structure of investors. By the end of 2023, among individual investors on the Shanghai Stock Exchange, those with accounts of less than 500,000 yuan accounted for 80%, holding only 3.2% of the total market value of stocks, and their holding market value accounted for 13.8% of all individual investors.

At the same time, individual investor accounts with more than 3 million yuan accounted for only 3%, but held 14.5% of the market value of stocks, and their holding market value accounted for more than 60% of all individual investors. Accounts with more than 10 million yuan, which account for only 0.74% of individual investors, hold 11.3% of the total market value of stocks.

The investor stratification structure of the A-share market actually reflects the wealth structure of China's resident sector. The degree of differentiation in this wealth structure is significantly higher than that of the resident sector's disposable income structure. For example, the disposable income of the top 20% of resident families accounts for 46%, while the top 3% of investors with the highest wealth on the Shanghai Stock Exchange account for more than 60% of the total market value held by individual investors.

At the same time, the stock market value held by 80% of individual investors on the Shanghai Stock Exchange accounts for 13.8% of the total market value held by all individual investors, while the disposable income of the bottom 80% of resident families accounts for 54% of the total disposable income of the resident sector.

In summary, it is not difficult to find from the data provided by the Shanghai Stock Exchange that stock market fluctuations have a greater impact on the absolute wealth of the group with stock and cash market value of more than 500,000 yuan in their accounts, which accounts for 20% of the total number of individual investors.

Residents hold a low proportion of equity assets

Assuming that each of the aforementioned 220 million individual investors corresponds to a family of three, then resident families with a population of 660 million have more or less held stock-type assets. If we include the aforementioned 759 million fund investors, the number of direct and indirect participants in the A-share market is very large, and it can be said that the whole people participate in stock investment.

However, from the survey data of multiple departments, the proportion of equity assets in Chinese resident families' assets is still relatively low.

The average total assets of urban resident families in China are 3.179 million yuan, of which physical assets are the main part, with an average of 2.53 million yuan, accounting for 80% of the total family assets. Financial assets only account for 20% of the total family assets. Stocks and funds only account for 10% in financial assets, and considering that there are fewer equity-type funds, the proportion of stocks in the assets of urban resident families in China is less than 2%. The proportion in rural resident families' assets should be even lower.

Although the proportion of stock assets in the composition of urban resident families' financial assets is only 6.4%, there are also more or less equity assets in fund products, insurance products, bank wealth management products, and trust products. However, the specific data is difficult to estimate, and it does not change the aforementioned conclusion that the proportion of equity assets in urban resident families' assets is below 2%.

Nationally, the proportion of equity assets in the assets of urban and rural resident families should be even lower. China's urbanization rate is currently 65%, and the proportion of equity assets held by rural families in the total assets of residents should be even lower. It has been 5 years since 2019, and the proportion of equity assets in resident families' assets should have increased, especially after the real estate market peaked in 2021, when housing prices fell, and the proportion of real estate in resident families' assets may have significantly decreased, so the proportion of financial assets has increased significantly.

Among financial assets, the balance of residents' bank savings has increased significantly, from 82 trillion yuan in 2019 to 150 trillion yuan now. The scale of bond assets has grown significantly, leading to an "asset shortage." By the end of the first half of 2024, the total scale of the bond market reached 165 trillion yuan, indicating that investors' risk preferences have decreased, bonds have risen, and stocks have fallen.

Comparing the asset structure of resident families in major global economies, it is found that stocks account for about 30% of the asset allocation of American resident families, Australia is about 15%, and China's Taiwan is about 18%; however, countries like Japan and the UK are not high, between 7-8%, but still higher than China.

The above two dimensions, the low proportion of equity assets in resident families' asset allocation and the severe wealth structure differentiation of individual investors in the stock market, confirm that the impact of stock market fluctuations on the wealth or income of the vast majority of families among China's 1.41 billion population is minimal.

The correlation between retail sales and stock market fluctuations seems non-existent

People usually associate the level of consumption with the ups and downs of the stock market, which seems easy to explain logically: when the stock market makes money, consumption is more confident, promoting the upgrade of consumption; on the contrary, when the stock market loses money, it has to save on clothing and food. To prove whether there is a correlation between stock market fluctuations and consumption, a scatter plot is formed between the changes in the total retail sales of social consumer goods (hereinafter referred to as retail sales) and the CSI 300.

The data sampling time ranges from February 2011 to October 2024, with the CSI 300 index's changes in the past one month, three months, half a year, and one year, and the环比 growth rate of retail sales in the next month (seasonally adjusted) forming a scatter plot.

So, why do people generally believe that a rising stock market is conducive to promoting consumption? This may be related to the insufficient sample size of observations. There is a common saying among the public about investing in the stock market, "one earns, two break even, and seven lose." Since 70% of people lose money, why has consumption upgrading in China continued before 2021? This is because about 60% of the asset composition of Chinese resident families is real estate, and real estate has experienced a long cycle of more than 20 years from 2000 to 2021.

After the second half of 2021, real estate has entered a long cycle of decline, which is an economic downturn that China has never encountered since 1978, regardless of whether the pandemic will produce a "scarring effect." This can explain why many economic indicators have not returned to pre-pandemic levels at present.

2021 should be the year when many economic indicators in China have a major turning point, and the stock market is no exception. In the first quarter of 2021, the profit growth rate of A-share listed companies reached the highest point, and then it has been declining all the way. By the third quarter of 2024, the revenue growth rate was -0.91%, a decrease of 0.32 percentage points from the second quarter, and the net profit growth rate attributable to the parent company was -0.52%. From this perspective, the A-share market has not experienced a market failure.

Therefore, the failure of consumption growth to return to pre-pandemic levels is more related to the weakening of real estate, after all, real estate accounts for a high proportion of resident families' assets. At the same time, the decline of real estate will have a negative impact on more than 20 industries in the country, and the impact on the debt situation of local governments is even greater.

Of course, for the three first-tier cities of Beijing, Shanghai, and Shenzhen, which have a high proportion of finance and a dense population of the wealthy, stock market fluctuations will indeed cause fluctuations in consumption. From January to October, the total retail sales of social consumer goods in Beijing decreased by 1.3%, Shanghai decreased by 2%, and Shenzhen has not yet released the data for October, with the first three quarters at 0.7%, lower than the national average of 3.3%.

The growth rate of net property income in the disposable income of Chinese residents has been declining since it peaked in March 2021, from 17% to 2.1% in June this year.

Why are the retail data of the first-tier cities so poor? The decline in the growth rate of net property income per capita may provide a partial explanation, as the proportion of high-net-worth individuals in first-tier cities is relatively high, and the proportion of financial assets in family asset allocation is also relatively high. Therefore, in the case of a sluggish real estate market and stock market, the decline in the growth rate of property income has a more significant negative impact on consumption in first-tier cities than in third and fourth-tier cities.

Since the main body of consumption is the middle and low-income groups, which account for 60% of the population, and the main holders of financial assets are the high-income and upper-middle-income groups, which account for 40% of the total population. High-asset, high-education families are more willing to participate in risky financial markets, and vice versa. Therefore, the main holders of risky financial assets (such as stocks) and the main body of consumption do not belong to the same category of people. The impact of the stock market's improvement on the total national consumption is out of the question.

A-share's effect on income redistribution

— or more unfavorable to promoting consumption

According to the data released at the CSRC's press conference on January 12, 2024, the average dividend yield of listed companies in Shanghai and Shenzhen in 2023 reached 3.04%, which is in the middle and upper level compared with the main global capital markets; among them, 243 companies implemented interim dividends, a year-on-year increase of 54.78%.

Looking at the international comparison of dividend yields in 2023, the Hang Seng Index is 4.0%, the CSI 300 is 3.0%, the S&P 500 is 1.2%, and the Nasdaq Index is 0.7%. Against the backdrop of low inflation, the dividend yield level of A-shares is indeed attractive. But why do most individual investors complain about losing money in the stock market? Moreover, the saying "one earns, two break even, and seven lose" in the stock market has taken root in people's hearts.

We have made the following estimates for the transaction costs of individual investors in the A-share market in 2023: assuming that individual investors' transactions account for 60-70% of the total market (data provided by regulatory authorities, the proportion of individual investors' transactions in the A-share market in the first three quarters of 2022 reached a new low of 61.35%), then it is estimated that the total expenditure of individual investors' commissions and stamp duties in 2023 is between 53.6 billion yuan and 100 billion yuan. According to the distribution date, the total cash dividend amount of listed companies in 2023 for the whole year is 2.13 trillion yuan, assuming that the proportion of individual investors' dividends is consistent with that of the Shanghai Stock Exchange, it can be calculated that individual investors received a net dividend income of 262 billion to 327.7 billion yuan after tax (personal income tax applicable according to the holding period is 0-20%, and personal income tax can be exempted if the holding period is more than one year).

It can be seen that from the perspective of dividend distribution, investors in the A-share market can still obtain positive returns. But why are there always more investors who lose money than those who make money? The key lies in the continuous downward movement of the overall valuation level of A-shares and the frequent trading of individual investors. The income from the stock market comes from two aspects, one is dividend income, which has obviously increased in recent years; the other is the difference in income, which most individual investors will be negative.

Taking the annualized turnover rate of CSI 300 stocks from the beginning of 2022 to the end of the third quarter of this year and comparing it with the annualized turnover rate of stocks corresponding to the main global indices during the same period, the annualized turnover rate of CSI 300 is close to 3 times, that of the S&P 500 is 1.78 times, and that of the Nasdaq Index is 1.53 times. In contrast, the Nikkei 225, which has performed well in the past three years, has an annualized turnover rate of only 1 time.

In recent years, the proportion of A-share circulating market value held by individual investors has been about 30% of the total A-share circulating market value, but the proportion of transaction volume has exceeded 60% (more than 80% before 2016). We believe that excessive frequent trading, differences in cognitive levels, and information asymmetry are the fundamental reasons why most individual investors have a negative difference in income. Greed and fear are common weaknesses in human nature, and excessive frequent trading often leads to chasing rises and killing falls.

The difference in investment skills (including stock selection and timing) and information acquisition between individual investors with different wealth levels is an important reason for the intensification of wealth inequality in the field of equity investment.

Although both regulators and ordinary investors hope that a strong stock market can increase property income for everyone, and protect the interests of small and medium investors through legislation, strengthening supervision, and controlling the scale and pace of financing, the A-share market, as an emerging market, has a large difference in the cognitive level and investment level of market participants, and the overall governance level of listed companies also needs to be improved. Therefore, the expectation that a rising stock market can increase the property income of the majority of investors is just a beautiful wish, and the gap between ideal and reality is very large.

A more obvious fact is that the idea of promoting consumption through a bull market in stocks is completely unrealistic.

The stock market is a barometer of the economy; only when the economy is strong can the stock market be strong. It is unrealistic to expect the stock market to promote consumption or to shoulder the responsibility of promoting economic growth. Promoting consumption fundamentally requires long-term measures such as increasing fiscal expenditure in the field of people's livelihood and unswervingly promoting the reform of the tax and financial system to improve the income level of the middle and low-income groups.