MS Zhu is just the type of investor the government should worry about as it tries to engineer a turnaround in China’s stock market.

    One of millions of retail investors trapped by the market crash in June who prefer to hold losing positions rather than take a loss, Zhu is just waiting for indices to rise so she can sell.

    “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.

    Zhu’s way of thinking is so common that 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.

    The logic is also the opposite of what fund managers advise: better to take a loss and move the money into something likely to produce stronger returns.

    This highlights the risk the government 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.

    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 the market.

    Chinese stocks more than doubled in the six months to May before crashing in June by more than a third, prompting a flurry of government inspired measures, including share buying, to stabilize prices. That calmed markets for most of July, before a sudden drop of more than 8 percent Monday — the biggest one-day fall since 2007.

    “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 firm IG. (SD-Agencies)