A joint stu

dy between financial advisors Kapronasia and business intelligence supplier Amber  has revealed some interesting insights into the minds of the Shanghai stock exchange A-share investor writes the survey's author, Laura Mitchelson.    
Retail  investors in China make up a much larger percentage on the stock exchange in Shanghai than they do on any other of the world's largest markets and yet there is a surprisingly lack of information about who these investors are. On the New York Stock Exchange for example, 80 percent of investors are institutional. On the Shanghai Stock Exchange, retail  investors make up 57 percent. The impact of this on the behaviour of the market is significant and given that the Shanghai Stock Exchange is such an important and integral part of China's economic story, these individuals are increasingly the focus of much global attention.  

The Study
In November 2007, Kapronasia and Amber conducted a week-long survey primarily to obtain in depth information about the motivations and knowledge levels of Shanghai's A-share investors. These are shares traded in RMB which are typically only open to domestic investors. The report, "Betting on the Dragon", focuses on who the A-share investors are, how they make decisions and how many stocks they hold. 600 investors from  Shanghai, Beijing, Guangzhou, Nanjing, Hangzhou and Chengdu were interviewed by phone and a further 10 face to face interviews were conducted at brokerages.

The study certainly disproved some of the current myths that tend to surround China's biggest stock market. Investors as a whole, are young; the average age being 35 with 90 percent under 50.  They are wealthy; 77 percent earn above the national average annual income and they have a home - 66 percent own their own house. Furthermore, a staggering 40 percent had less than one year's investment experience.

Investors were asked a number of simple questions that people investing on a regular basis would usually be able to answer. We found that just 18 percent of Chinese investors knew what price/earnings referred to, 20 percent understood the concept of market capitalisation of a company, half knew what a company's book value referred to and only a fifth could correctly explain how the US subprime crisis began. However, when asked what the current value of the SSE Composite Index (the index most commonly referred to in discussions on the SSE) was during the period of the survey, 58 percent of investors responded within 10 percent of the actual value. It demonstrates that investors on the SSE are not swayed by the same factors as other investors globally. The perception that Chinese investors are uneducated is simply incorrect. In China, government policy changes were cited as the single biggest thing to watch from a list of factors that influence the stock market.

While lucky numbers was the least important factor when choosing stocks, 14 percent of respondents still cited them as a very important consideration. In this they are looking for auspicious numbers such as ‘8' and ‘6' in the company ticker code or in the share price but perhaps this is not as silly as it might sound. After all, a ‘laoban' (boss) with the political connections to secure an ‘8' or even better a double ‘8' in the ticker code when his company lists is someone with significant and powerful contacts.  
For most investors the primary goal is investment for spending money (75 percent), followed by retirement (19 percent) and the remaining 6 percent are investing for their children's future.

The Hong Kong Effect
Although the Hong Kong Stock Exchange rose sharply following the announcement that mainland investors would soon be allowed to invest there, our survey revealed a very different reality. When asked what amount of investment mainlanders would move to Hong Kong only 2 percent said all and 64 percent said none at all which detracts from the general perception that mainlanders will flood the Hong Kong market. Hong Kong is considered too far away, not as exciting as Shanghai and there is a lack of familiarity with Hong Kong and how the market there works.

Shanghai's Sleeping Accounts
Sleeping accounts are are defined as accounts that hold less than 100 RMB and have not seen any trade in the past three years. There are 52.2 million retail accounts and it is estimated, although this number is extremely hard to confirm, that an estimated 10 million of those are inactive or ‘sleeping'.

The Future
Current consensus estimates on returns on investment are around 27 percent but investors are optimistic with more than a third expecting an 80 percent return. Despite the majority of investors believing that the market is currently experiencing a bubble, over two thirds said they would invest more in 2008 than they did in 2007 showing there is still huge confidence in the market.
One of the interesting things to look out for in the future are the other investment options for wealthy Chinese. Currently financial products are limited and most investors have a choice of either A-shares or property, which has high barriers to entry with minimum deposits being fixed by the government at 30 percent to 40 percent. What we are likely to see as WTO requirements force the deregulation of the financial services industry, is more options becoming available to investors.

Laura Mitchelson is Co-founder and director of Amber, a Shanghai based business intelligence supplier.
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