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Stuck In Market Purgatory: How China's Citizens Lash Out At The Broken Market, In Their Own Words

What a difference a month makes: back in June, Chinese farmers could barely wait long enough to open one (or more) brokerage accounts and leave the pig herd for good, filled with dreams of getting filthy rich and early retirement happy endings; farmers who said on the record that "it's a lot easier to make money from stocks than farmwork."

Alas, like with every rigged market (which in the New Normal is every market), dreams always turn into nightmares for the participants, and as we documented earlier, the same farmers who were giddy with delight a month ago realized that there is no such thing as a guaranteed "get rich quick" scheme, and the full extent of their naive stupidity:

"I have lost everything. I don't know what to do... I trusted the government too much..." he exclaims, adding "I won't touch stocks again, I have ruined everyone in my family."

Even sadder, like the Greeks, these poor (and now even poorer) representative of China's lower/middle class only have themselves to blame. Call it Natural Selection with a margin call...

However, not everyone was stupid enough to gamble (with 5x leverage), and get wiped out. Some are stuck in stock market purgatory, or as Reuters puts it "trapped in the market" and now they are hoping, praying and "plotting their escape with government money."

Some, like Mrs Zhu who is the "type of investor the Chinese government should worry about as it tries to engineer a turnaround in the country's stock markets, whose massive swings have heightened fears for the country's financial health." Mrs. Zhu is one of millions of retail investors who bought at what they thought was a low price with hope of selling to a greater fool higher, however the greater fools ran out and sho is now "trapped by the market crash in June who prefer to hold losing positions rather than take a loss" - in short, Zhu is just waiting for indexes to rise so she can sell.

She could be waiting for a long time. In the meantime, this is how millions of hopeful underwater investors pray their purgatory ends:

"I will sell all my shares tomorrow if there is a chance," said the government clerk, who almost hit the sell button last week after markets had recovered somewhat from June's slump. But because she was still set to take a loss, she held on.

"I am pretty sure that if the government does not come to rescue us, the situation will get much worse," she said.

As Reuters highlights, Zhu's way of thinking is so common there a Chinese phrase for it: "Tao lao" once meant being captured by a lasso, but is now most commonly used to mean "trapped in the stock market", which implies an investor cannot sell out of a losing position.

Which reveals Beijing's paradox: the more funds it deploys to prop up the burst stock bubble, the bigger the selling deluge it faces as "released" investors eagerly cash out breakeven, and move on, having had their fill with the excitement that only China's rigged market can deliver.

This highlights the risk Beijing faces in sustaining a market turnaround. Every time the government succeeds in pushing up share prices, an army of retail investors jump in to sell at their break even point, immediately knocking back market confidence. And "given that retail investors conduct an estimated 80 percent of trades, that means the government could face a long, hard grind before it can stabilize markets."

Which assumes that China will continue its unprecedented market bailout: "Monday's plunge showed the Chinese authorities that even governmental measures have their limits. It's anybody's guess what else they can do to shore up market sentiment," said Bernard Aw, a market strategist at financial spreadbetting company IG.

To be sure not everyone needs rescuing: those who bought and held stocks before mid-March are still in the black as many commentators are quick to point out. The problem is everyone else who is still deeply underwater, which according to Reuters may be as many as 10 million investors.

While investors who bought before mid March are still in the black thanks to previous gains, a Reuters analysis of public data shows that another 10 million investors opened new accounts since April, helping push up China's market capitalization by a net $4.5 trillion - until the bottom fell out in mid June.

This also excludes investors who god greedy:

Those figures do not include existing investors who added to their positions during this period, nor the famously stubborn holdouts who are sticking to loss-making positions that are years old.

 

Mrs Xu is one of them. She said she has been holding shares in China Life Insurance (601628.SS) since 2007, when it traded for around 75 yuan ($12.08) per share.

 

The stock gained a bit during the recent rally, at one point crossing over 42 yuan per share but then fell back to around 28, and Xu is still holding on.

"I thought I might be able to taking the losses back riding on this round of bull market, but it is still losing money so far," she said, adding she is also holding onto loss-making positions she took earlier this year and plans to sell as soon as they break even. "Maybe I am too greedy," she said.

But while China, which already has 300% in total government, financial, corporate and household debt, more than the US, Germany, Canada and Australia...

... can probably afford adding another 50% in debt/GDP to fully bail out the stock market - after all it isn't as if the credit bubble will ever shrink at this point now that all dreams of a "beautiful deleveraging" in China have been crushed - the biggest concern for Beijing is time, and specifically how long before investor patience runs out with carrying deep losses.

One upside for Chinese regulators is the "tao lao" mentality can slow selling in a falling market, explaining why there was so little popular outcry in June when nearly 40 percent of listed companies halted trading in their shares so they could ride out the crash. It could also explain why the government set a semi-official recovery target of 4,500 points for the Shanghai Composite Exchange, which would encourage investors who think this way to wait. The index closed on Tuesday at 3,662.81 points.

For Beijing, the biggest worry is that investors who were once patient are now so rattled by the big market swings that they are ready to accept losses just for peace of mind.

"Yesterday all my stocks hit limit down and I lost 20 percent of my money. Today all my stocks fell limit down again!" said student Liu Fangrui.

"I managed to sell them all at a loss today, and so I lost 320,000 yuan in two days. I don't have confidence on the market any more. I don't want to get into the market again."

But while losing patience in a rigged market and selling is one thing, a worse outcome would be when millions of Chinese lower-middle class citizens, deep in margin debt, suddenly realize they have nothing more to lose and lash out against the system which failed them, and the government which was so quick to promise stock market riches only to admit it has no control over the stock market let alone the economy.

To be sure, China has already announced it may arrested "malicious sellers" - how long before it preemptively arrests anyone who has suffered losses?

Perhaps it is concerns about this final crackdown which explains the following line from the Reuters piece: "Both Mrs Zhu and Mrs Xu declined to provide their full names."