With the continuous improvement in China’s stock market performance, an increasing number of individual investors are playing the Chinese stock market. In 2002, there were 68 million individual stock trading accounts in China, accounting for 5.36% of China’s 1.28 billion people. By the end of 2003, the number had jumped to 70 million. In February 2007, the number exceeded 80 million. Due to the rapid growth of stock market participants, the investment portfolios of Chinese individuals are drawing more attention from Chinese scholars.


New research from two scholars at Beijing’s University of International Business and Economics analyzes the factors that influence investment decisions by individual Chinese. Weixing Wu and Tianxiang Qi, in a paper titled, “Liquidity, Life Cycle and Portfolio Choice Heterogeneity,published in the February 2007 Economic Research Journal, find that an individual’s wealth, real estate holdings, age, gender and marital status all affect stock market investments. The researchers, who use metric models and regression analysis, also offer advice for policy makers in China on how they can make the stock market more accessible to Chinese citizens.


The data applied in the paper came from a “survey on investors’ behaviors” conducted in 2005 by Aordo Investor Participation Network, a Beijing-based company that provides consulting services to individual Chinese investors. The data derived from the questionnaire targeted 1,526 households in 12 cities in China, including Beijing, shanghai, Nanning, Chengdu, Lanzhou and Haikou.


The two researchers set up a model incorporating dummy variables, such as the degree of involvement in the stock market, age, gender, marital status, number of family members and geographical locations. The degree of involvement in the stock market is measured primarily by two dimensions — the ratio of stocks to liquid assets and the ratio of stocks to financial assets within the citizens’ investment portfolios. “Liquid assets include cash, deposits in banks, foreign currencies, stocks, bonds and futures. Financial assets include collection and real estate in addition to the items listed above,” the scholars note, adding, “We assume that citizens’ investment in real estate properties will influence their stock investment to a large extent.”


The research found that 23% of the citizens surveyed own shares of listed companies, but stocks account for only 3.5% of their total financial assets, as opposed to the 54.8% of their investment in real estate. “This shows that stocks are not a major option in China. [It’s the same] as in the U.S., [where] real estate is still a primary financial asset,” the researchers note.


Stock Investors and Non Stock Investors


The scholars subsequently did a regression analysis to further study the factors influencing Chinese involvement in the stock market. The ratio of real estate to financial assets negatively influences the citizens’ participation in the stock market. On average, one percentage point’s increase in the ratio of real estate to financial assets leads to 0.04 percentage points’ decrease in the stock investment. The researchers suggest that this has a lot to do with the traditional mindset of the Chinese people.


“Generally speaking, real estate properties are illiquid and hard to trade off after being purchased. Therefore, buying houses is riskier than buying stocks,” they say. “However, most Chinese citizens feel a distinctive difference between living in a rented apartment and owning one, so they will spend large sums of money on houses regardless of the risk [due to the fact that] real estate prices are surging in China all the time. BEcause China is still a developing country and individuals possess limited wealth, big investments in real estate” typically reduce the money that might have otherwise been available for stock purchases.


Regarding the influence of age upon stock market investments, the researchers found that for those under 65, stock investments grow as people get older, but for those over 65, the investments diminish. The ratios of stock assets to liquid assets of individuals under 35, 35 to 50, 50 to 65, and over 65, are respectively 7.07%, 8.59%, 9.86% and 9.83%, which, say the scholars, is contrary to the results seen in many research papers from Western countries.


“In Western countries, young people usually tend to invest more in stocks.This is because, as explained by Western researchers, young people are able to compensate with higher future income for the loss” of that money in the present, the two scholars note. “But things are just the opposite in China. Perhaps it is because young Chinese are less independent and often live with their parents. Therefore, they are less capable of handling assets and less likely to make investment decisions. Apart from that, young people in the initial stage of their career usually face more restrictions financially,” which makes the stock market less of an option.


Meanwhile, Chinese aged 50 to 65 are near the end of their career or have already retired. They have accumulated a certain amount of wealth that could be used for investing, and they have more time to spend watching the market. This enables them to be more involved. However, senior citizens  over 65, start to withdraw from the stock market due to increasing health concerns.


With regard to the influence of wealth on participation in the stock market, the researchers show that the average net assets of stock market investors are RMB501,958 (US$62745), notably higher than RMB310,158 (US$38770) of non-stock market investors. In addition, the average monthly income, total cash, bank deposits and real estate property held by the former is higher than the latter. “Stock market investors are generally wealthier ….When investors have gained more financial wealth, they are ready to make more daring investments in the stock market,” the scholars note.


The research also reveals that stock market investors had three family members on average, slightly higher than non-investors. Meanwhile, married investors are more willing to invest than those single, divorced or widowed because “people with more family members feel more secure. The income and assets of other members provide guarantees and thus give them more confidence in their investments.” Apart from that, men are more likely to invest than women. As the paper notes: Male investors tend to take more risks.


Geographically, investors in coastal places in the East, like Shanghai, Haikou and Zhuhai, exhibit higher involvement in the stock market than inland cities such as Nanning, Chengdu & Lanzhou. Compared to Western countries, the researchers say, the stock market in China is still a newly emerging phenomenon, and it is relatively harder for citizens in remoter regions in China to get information. This results in a lower level of participation compared to better-informed coastal residents.


Suggestions for Policy Makers


At the end of the paper, the two scholars make some suggestions to the Chinese government based on their research findings. They believe that due to the somewhat limited assets Chinese citizens overall, the rise and fall of various industries can have a “substitute effect.” For example, the rising real estate prices restrict the opportunities available to some citizens to invest in the stock market. This means policy makers should control the ever-surging real estate prices.

Furthermore, the scholars point out that young Chinese investors are not skilled enough to make stock investment decisions “rationally” by employing their future income. “Unlike those in the West, our young investors are less capable of taking advantage of investment cycles,” the paper notes. “Their financial awareness is at a low level. Therefore, it is very important for policy makers in China to have more institutional investors and financial advisors provide investment education for young investors, to strengthen the regulation of the stock market, to increase information transparency and to lower the threshold for stock market participation.”