Market frenzy leaves investors cautious

Even seasoned market investors are starting to pull away from the frenzy surrounding China's stock market.

Zhao Qiuhai has been a freelance trader for 10 years and lives in Shanghai's Jing'an district. In March, he became so concerned about the A-share market, he decided to sell 80 percent of his stocks even as the bull run continued.

"I always tell myself that the stock market is risky," Zhao, 35, said. "It's certainly more risky for retail investors like me."

One of the biggest problems for small investors is "information asymmetry". This is market parlance for certain relevant information that is known to companies or traders, but not to all parties in a market transaction. In plain language this can result in insider trading.

On Jan 16, the market watchdog announced it was suspending the margin trading business of Citic Securities. Margin trading involves buying and selling currencies, commodities or other trading vehicles using credit. Margin trading allows the trader to leverage their funds to increase returns.

The China Securities Regulatory Commission said Citic Securities had violated trading rules by excessively expanding its margin trading business.

After the market watchdog's announcement, the financial firm's stock price dropped by the 10 percent daily trading limit for two consecutive days, finishing up at 26.69 yuan ($4.3) on Jan 17.

As a Citic Securities shareholder, Zhao said he lost nearly 50,000 yuan as the stock price plunged. "I tried to complain about my losses, but it is difficult to find an easy way," Zhao said. "Staying away from the market when it becomes irrational is the best way to save your money."

Despite this setback, his small stock portfolio is looking healthy. Zhao's "blue chip" stocks on the Shanghai Composite Index have jumped more than 20 percent since March. But then the market has climbed by 60 percent in the past five months.

Despite the rampaging bull run, Zhao was happy to cash out 80 percent of his investments.

"I felt the time was right to sell," Zhao said. "I couldn't wait any longer. I saw more retail investors without any trading experience rushing to open new accounts. The market is heading in a irrational way."

Even so, Zhao was happy to pass on his market knowledge to his 25-year-old niece, Yang Xi, who has just graduated from University of Birmingham in the United Kingdom.

"She consulted me about stock buying tips," Zhao said. "But I tried to persuade her to invest later. Of course, most of her Chinese friends are starting to become interested in stock investments. But I believe there will be a market correction soon."

"I have become more cautious," he said. "I think retail investors are a disadvantaged group compared with institutional investors," said Zhao.

Zhao is not alone in his concerns about the runaway market. The Japanese brokerage Nomura Securities said that "the A-share market now shows signs of bubbliness".

"Beware of short-term trading frenzy", Wendy Liu, an equity market analyst at Nomura Securities, wrote in a research note.

"This year marks the start of an expected three-year bull market in Chinese equities, which we believe will be underpinned by effective structural reform and economic rebalancing, with macro policy cushioning risks to the downside."