HONG KONG (BLOOMBERG) - Two months into China's stock rout, the dynamics of the declines are becoming clearer: The wealthiest investors have been the quickest to bail out of the market.
The number of traders with more than 10 million yuan (S$2.19 million) of shares in their accounts shrank by 28 per cent in July, even as those with less than 100,000 yuan (S$22,000) rose by 8 per cent, according to the nation's clearing agency.
While some of the drop is explained by falling market values, CLSA Ltd. says China's rich have taken advantage of state buying to cash out after the nation's record-long bull market peaked in June.
Investors with the most at stake are finding fewer reasons to own Chinese shares amid weak corporate earnings and some of the world's highest valuations. With this month's tumble in the yuan adding to outflow pressures, bulls have started to question whether there's enough buying power to prop up prices once the government pares back its unprecedented rescue effort - a concern that contributed to the Shanghai Composite Index's 6 per cent plunge on Tuesday.
The Shanghai Composite has dropped 27 per cent from its June 12 peak, after a 152 per cent surge in the previous 12 months. While state buying has fueled gains over the past two weeks, China's securities regulator said Friday that the government agency tasked with supporting share prices will reduce purchases as volatility falls.
The benchmark index slipped 1.5 per cent at 10:32 a.m. local time on Wednesday.
"The high net worth clients are the ones who moved the market," Francis Cheung, the head of China and Hong Kong strategy at CLSA, wrote in an e-mail. "They tend to be more savvy."
The ranks of investors with at least 10 million yuan in stocks dropped to about 55,000 in July from 76,000 in June. Those with between 1 million yuan and 10 million yuan declined by 22 percent, according to data compiled by China Securities Depository and Clearing Corp.
The median stock on mainland bourses traded at 72 times reported earnings on Monday, more expensive than any of the world's 10 largest markets. The ratio was 68 at the peak of China's equity bubble in 2007, according to data compiled by Bloomberg.
More than 62 per cent of companies in the Shanghai Composite trailed analysts' 2014 earnings estimates as the economy expanded at its weakest pace since 1990. Profits at Chinese industrial firms declined by 0.3 per cent in June, versus a 0.6 per cent gain in the previous month.
"There is not a lot of fundamental support for the A-share market," Mr Cheung said. "Earnings are weak."
For investors with a longer-term horizon, sticking with Chinese shares could prove "very lucrative" because the country's economic growth is still stronger than many of its peers, according to Gerry Alfonso, a sales trader at Shenwan Hongyuan Group Co. in Shanghai.
"This lack of a clear trend in the market causes overreactions by investors," he said. "Eventually the market will turn around."
While they wait for stocks to recover, investors are finding alternatives in Chinese real estate and overseas markets. Data on Tuesday showed home-price gains are spreading in China, with the average value in 70 cities tracked by the government rising 0.17 per cent in July from a month earlier, the third consecutive increase.
A research study by property consultants DTZ showed a jump in the number of private homes in Singapore bought by mainland Chinese buyers in the second quarter of this year, the Straits Times reported on Tuesday.
The yuan's retreat to the weakest level since 2011 is increasing the allure of assets denominated in foreign currencies, according to Steve Wang, the chief China economist at Reorient Financial Markets Ltd. in Hong Kong. Yuan positions at China's central bank and financial institutions fell by the most on record last month, a sign that investors are moving money out of the country.