Chinese households are gradually re-entering the equity market, influenced by a lack of appealing investment alternatives. The CSI 300 Index has experienced a surge of over 25% since April, driven by excitement surrounding artificial intelligence and a perceived easing of tensions from former President Donald Trump regarding China. Meanwhile, other asset classes—such as wealth management products and money-market funds—have languished, perpetuating a well-known investment mantra: stocks are the only viable option.
The notion that small investors in China may redirect a significant portion of their $23 trillion in savings towards the stock market is enticing for global financial firms, which are hinting at a return after years of staying on the sidelines. “The pressure to save is fading,” remarked William Bratton, head of cash equity research for Asia Pacific at BNP Paribas Exane. This vast savings pool is a key reason his firm maintains a positive outlook on China’s stock market.
While retail investors have yet to significantly drive the recent stock market rally—local institutions and foreign inflows are currently the main contributors—small investors hold considerable potential in this scenario. JPMorgan Chase estimates that approximately $350 billion could flow into Chinese stocks by the end of 2026.
In considering alternatives to equities, cash remains a favored option among the nation’s savers, although current returns have diminished. China’s four largest banks offer around 1.3% returns for five-year savings accounts, down from about 2.75% in 2020. Demand deposits yield a meager 0.05% annually. Similarly, money-market fund returns have plummeted, with the Tianhong Yu’E Bao fund, managing around $110 billion, offering returns around 1.1%—less than half of what investors received earlier in the year.
Bonds have shown similarly disappointing performance. Investors in Chinese government debt have encountered more monthly losses than gains this year. While rising yields could ultimately make bonds more attractive, recent tax collection on interest earned from government or financial institutions adds another layer of discontent, pushing investors towards other options. Current yields, hovering around 1.80%, remain beneath the five-year average of 2.58%, rendering them unattractive historically.
Real estate, once the go-to investment for many Chinese investors, has not regained its former allure following a prolonged downturn. Many households already own multiple properties, leading to diminished demand. President Xi Jinping’s assertion that “houses are for living, not speculation” has also served as a deterrent for potential buyers. Confidence has further eroded as property developers struggle to complete previously sold homes. Research from China International Corporation Corp. indicates that approximately 58% of the nation’s household wealth is tied up in real estate, a decline from 74% in 2021, while stocks now account for 15%, up six percentage points in the same period.
Wealth management products (WMPs) have traditionally attracted investors, but average annualized returns for both fixed-income and mixed-strategy WMPs are now below 3%, marking over two years of declines in returns. Similarly, popular life insurance investment products have suffered; the annualized rate of return on some of Ping An Insurance Co.’s universal policies has dropped to 2.5% from 4.3% prior to the COVID-19 pandemic.
When exploring investment opportunities beyond domestic markets, Chinese investors have previously sought exposure to international stocks, including the “Magnificent Seven” technology companies in the U.S. However, capital controls present significant challenges, limiting local investors to converting only up to $50,000 into foreign currencies annually. Additionally, funds that provide foreign market access face strict quotas, and a hefty 20% tax on overseas investment income further weighs on potential returns.
This landscape presents a dilemma: a range of domestic options are largely unappealing, while overseas alternatives are less accessible. Analysts suggest that many investors will likely choose the middle ground, opting to increase their investments in local stocks as they search for better returns.
