Eliza Wong
The Current Market Paradox: Rising Indexes Without Retail Euphoria
The Shanghai Composite Index’s recent surge to decade-high levels has created an interesting market dynamic. While major indices showed strength through mid-August, the subsequent pullback revealed underlying caution among market participants. The trading session on August 19th saw the Shanghai Composite dip 0.02%, the Shenzhen Component fall 0.12%, and the ChiNext Index decline 0.17%, with trading volume shrinking by over 170 billion yuan from the previous session.
This measured reaction contrasts sharply with historical bull market patterns where retail investors typically rush in during sustained rallies. The current environment displays a more calculated approach, with investors demonstrating what analysts are calling ‘height anxiety’ – a reluctance to chase markets at elevated levels.
Multiple financial influencers and stock market experts have been cautioning against aggressive positioning, a significant departure from the enthusiastic endorsements seen during previous market rallies like the September 2024行情 (September 24th rally). This tempered sentiment appears to be resonating with retail investors who are adopting a wait-and-see approach rather than rushing headlong into the market.
Analyzing the Data: Are Retail Investors Actually Participating?
Despite the impressive market performance since July, evidence suggests retail participation remains subdued compared to previous bull markets. Trading activity data reveals a complex picture that contradicts surface-level assumptions about retail investor behavior.
Trading Volume Patterns Tell a Story
According to First Financial statistics, July saw increased trading activity in Shenzhen markets, with both transaction numbers and values exceeding those during last year’s September rally and the early-year DeepSeek market movement. Shenzhen market stock transactions reached 1.556 billion trades in July, compared to 1.445 billion in October last year and 1.4 billion in March this year.
Transaction values followed a similar pattern, with Shenzhen market stock transaction values reaching 21.43 trillion yuan in July, slightly above the 21.34 trillion yuan recorded in October last year. However, critical analysis reveals that while创业板 (ChiNext) A-share transaction values hit annual highs in July, they still fell short of October 2023 levels, indicating selective rather than broad-based participation.
The Missing Retail Investor Stampede
Multiple securities firm research reports converge on a surprising conclusion: despite index breakthroughs to post-2021 highs, retail investors haven’t begun stampeding into the market. Western Securities analyst Cao Liulong (曹柳龙) observes that retail participation levels significantly trail those seen during last year’s September rally and remain well below the peaks witnessed during the 2015 and 2020 bull markets.
The evidence appears in several key metrics. During typical bull markets, actively managed equity fund issuance expands dramatically, but since last year’s September rally, new fund issuance has remained at historical lows. Some investors are even redeeming previously trapped funds as markets recover, contrary to the pattern of adding positions during rallies.
Additionally, while last year’s September rally saw massive redemptions from货币ETFs (money market ETFs) with funds flooding into stock ETFs, current flows show money remaining in货币ETFs while stock ETFs experience continued outflows. This suggests the current rally is being driven primarily by high-net-worth investors, including private equity, leveraged funds, and hot money, rather than the general public.
The Psychology Behind the Hesitation: Understanding ‘Height Anxiety’
The cautious approach among retail investors stems from multiple psychological and practical factors that have created what analysts term ‘height anxiety’ – a fear of entering markets at perceived peaks.
The Scarring Effect of Previous Market Adjustments
Dongwu Securities analyst Chen Gang (陈刚) identifies the ‘scarring effect’ from years of market adjustments as a significant factor suppressing retail investor enthusiasm through indirect channels. Many investors remain hesitant to fully embrace the current rally’s ‘bull market’ characteristics, having been burned by previous false dawns.
This psychological barrier manifests in practical investment behavior. As indices break through resistance levels and many actively managed equity funds approach or return to their cost bases, a portion of retail investors show a tendency to take profits rather than add positions. This profit-taking mentality contrasts with the ‘buying the dip’ mentality that typically characterizes early bull market phases.
New account opening data supports this assessment. While marginal improvements have occurred since May, absolute numbers remain weak. July saw 1.96 million new A-share accounts opened on the Shanghai Exchange, roughly持平 (flat) with April levels but below February and March figures, indicating no concentrated influx of outside capital.
The Professional vs. Retail Divide
Huafu Securities analyst Zhou Puhan (周浦寒) confirms that while liquidity remains a key driver of the current ‘slow bull’ market, with various capital sources participating actively, retail investors’ small-order weekly net purchase amounts and new account openings show only modest improvement. These metrics remain significantly below levels seen during last year’s September rally and this year’s spring rally, highlighting the divergence between institutional and retail behavior.
This professional-retail divide creates a market dynamic where rallies lack the explosive retail-driven momentum seen in previous cycles. Instead, the market advances through measured institutional accumulation rather than retail frenzy, potentially creating a more sustainable advance but one that lacks the dramatic volume spikes of traditional bull markets.
The Deposit Migration Phenomenon: What the Numbers Really Show
The most compelling evidence for potential retail participation comes from People’s Bank of China financial statistics for July 2025, which revealed intriguing存款 (deposit) migration patterns that some interpret as early signs of capital moving toward equities.
Interpreting the July Deposit Data
The PBOC data showed household deposits increasing by 10.77 trillion yuan in the first half of the year, but only 9.66 trillion yuan in the first seven months, indicating a 1.11 trillion yuan net decrease in household deposits in July alone – 0.8 trillion yuan more than the same period last year. Simultaneously, non-banking financial institution deposits increased by 2.14 trillion yuan in July, 1.3 trillion yuan more than the previous year.
This ‘one decrease, one increase’ pattern has led many observers to interpret the movement as household savings flowing into the stock market. The pattern echoes the 2015 bull market when similar deposit migrations occurred. In May 2015, just before the market peak, household deposits decreased by 441.3 billion yuan while non-banking financial institution deposits increased by 1.94 trillion yuan, with even more dramatic movements the previous month.
Historical Parallels and Differences
China Merchants Securities banking chief analyst Wang Xianshuang (王先爽) notes that all prices are ultimately monetary phenomena, and capital markets are no exception. Every bull market typically features a logical progression of bank deposits migrating to capital markets. However, he cautions against overinterpreting this migration as the primary bull market driver.
If markets become too focused on deposit migration as a牛市 (bull market) rationale, short-term capital market micro-liquidity could enter an unpredictable state that might not benefit long-term market development. Instead, Wang suggests that reduced discussion about liquidity-driven bull markets (often called ‘water bulls’) and increased focus on corporate fundamentals and valuations might allow for synchronous achievement of gradual medium-to-long-term household wealth allocation to capital markets and a sustainable A-share slow bull market.
An institutional source quoted in the original analysis expressed optimism about this gradual approach: ‘We are optimistic about A-shares’ long-term opportunities. This slow bull market should last at least until 2027.’
Investment Strategies for the Current Environment
Given the unique characteristics of the current market environment, investors need tailored strategies that account for both opportunities and risks.
Balancing Caution and Opportunity
The measured approach displayed by experienced investors offers valuable lessons for navigating the current market. As one investor on Tonghuashun noted: ‘From the perspective of current indices, trading volumes, and money-making effects, this is indeed a bull market. Many investors who newly participated at the beginning of this year have made money. But for long-term holders over recent years, some have just broken even, while others probably haven’t recovered their losses yet.’
This perspective highlights the importance of entry timing and the very different experiences of recent versus long-term investors. The same investor offered pragmatic advice: ‘If you believe this is a bull market, you don’t need to rush in quickly, especially chasing hot sectors. Newcomers aren’t suited for this. If you were an expert, you should have entered earlier and wouldn’t wait until now.’
The Wisdom of Contrarian Thinking
Another valuable perspective comes from a financial blogger who invoked the wisdom of legendary investor Bernard Baruch: ‘When people are all cheering for the stock market, you must decisively sell, regardless of whether it will continue to rise. I think this is very suitable for the current situation.’
This contrarian approach aligns with the current environment where euphoria remains notably absent despite index breakthroughs. The lack of retail frenzy might actually represent a healthy foundation for sustained advances rather than the speculative excess that typically marks market tops.
Looking Ahead: Sustainable Growth Versus Speculative Excess
The critical question for investors remains whether the current measured advance can transform into a sustainable bull market or whether it represents another temporary rally that will eventually disappoint.
The Case for Cautious Optimism
Several factors support the potential for continued market advancement. The deposit migration phenomenon, while still in early stages, suggests household assets may be beginning a gradual reallocation toward capital markets. This process typically unfolds over years rather than months, potentially creating a longer-lasting foundation for market advances than sudden speculative inflows.
Additionally, the predominance of institutional rather than retail participation in the current rally suggests more sophisticated capital is driving prices, potentially leading to better capital allocation and more sustainable valuation levels. The absence of margin debt expansion and speculative excess that characterized previous market peaks further supports the case for cautious optimism.
Key Indicators to Monitor
Investors should track several metrics to gauge whether retail participation is accelerating:
– Weekly net purchases by small orders (retail investors)
– New account openings on Shanghai and Shenzhen exchanges
– Money market ETF flows versus equity ETF flows
– New equity fund issuance volumes
– Household deposit migration patterns in PBOC data
Sustained improvement in these metrics would signal broadening participation that could fuel further advances. However, investors should remain alert for signs of speculative excess that typically mark market tops rather than sustainable advances.
Navigating the Evolving Investment Landscape
The current market environment presents both opportunities and challenges for investors of all types. The apparent disconnect between rising indexes and subdued retail participation creates a complex landscape that requires nuanced understanding rather than simplistic bullish or bearish narratives.
The gradual migration of household deposits toward capital markets, while still in early stages, suggests a potential foundation for sustained advances if accompanied by improving corporate fundamentals and reasonable valuations. However, investors should remain mindful of the psychological scars from previous market cycles that continue to influence behavior today.
The most successful approach likely involves balanced exposure to quality companies with strong fundamentals while maintaining adequate diversification and risk management. As markets evolve, maintaining flexibility and responding to changing conditions rather than rigid adherence to bull or bear market narratives will prove most effective.
For investors considering increasing exposure to Chinese equities, gradual position building during periods of market weakness rather than chasing strength appears the most prudent approach given current valuation levels and psychological dynamics. This measured strategy aligns with the gradual deposit migration pattern and may produce superior risk-adjusted returns over the full market cycle.
