China’s post-pandemic rally is losing steam as small-time investors in the country turn bearish on equities and instead seek safer assets, hampering the nation’s economic recovery.

Hopes were high that billions of yuan in excess savings would flow into the stock market this year, with real estate uncertainty leaving equities as the preferred investment. However, foreign cash and nervous households are shunning stocks and flocking to bonds and deposits, leaving equity markets adrift.

Chinese blue chips, which had rallied 20% from October to January, have now given back their gains and are down 1% year-to-date. The Hang Seng index is at its lowest point in 2023, and sovereign bond yields are falling. The anticipated trade of the year is fizzling, resulting in lost momentum and keeping investors away.

The sentiment among smaller investors in China appears to be widespread. Many are concerned about tech layoffs and youth unemployment, prompting them to divert half of their monthly income into wealth and deposit products, prioritizing safety over potential stock market losses. Interviews with a dozen investors highlighted this cautious approach.

China’s small investors account for approximately 60% of turnover, according to China Securities Regulatory Commission Chairman Yi Huiman, far exceeding the estimated 25% in the United States. Their lack of interest is evident in market data. China’s securities margin trading balance indicates a decrease in risk appetite and turnover in the A-share market, reaching its lowest level since early March.

Factors such as weakening economic indicators, rising political tension, falling growth, and efforts to reduce manufacturing reliance on China by Western countries have contributed to waning investor enthusiasm.

In April, China’s industrial output and retail sales growth fell short of forecasts, while loans unexpectedly declined. Amid these uncertainties, domestic investors are increasingly hesitant to venture beyond deposits, which are growing at a faster pace than during the height of the pandemic.

While some experts anticipate a return on investor interest and the potential allocation of around 800 billion yuan from excessive savings into the asset market, the weight of investment remains on the sidelines for now.

Bright spots in the market, such as the outperforming state-owned sector, mainly reflect bond-like dividends rather than risk appetite. The lack of attractive returns, except in the AI sector, further dampens investor confidence.

While there are positive signs, such as an expansion in non-bank lending, indicating cash is beginning to flow in the economy, the majority of investors remain cautious. Losses in stock portfolios have left many waiting for a turnaround, adding to the overall bearish sentiment in China’s equity markets.