China’s army of small investors wants to get into the GameStop craze

Talks about the video game retailer’s epic rise in stock dominated Chinese social media, and the impressive gains from those stocks and other stocks have become the envy of the country’s young day traders. They are now calling on each other to come together to emulate their American counterparts in rising share prices for struggling companies.

Just as Millennials and Generation Z in the United States deplored the hedge funds and short sellers that are part of the Wall Street elite, many small investors in China have complained about what they see as market exploitation by large institutions.

Mainland China’s financial markets are very different from New York’s. Short selling is highly regulated and incredibly rare, making it difficult for Chinese investors to replicate the American frenzy that increased GameStop’s stock as a way to keep the hedge funds that bet that the company’s shares would break.

Even so, daily investors in China have a major influence on market activity. There are more than 177 million retail investors, or individual traders, in China. This represents 99% of the investor base, according to statistics compiled from December by China Securities Depository and Clearing Corporation. And they also have their complaints.

Small investors often complain that they are being harvested as “leeks” – a common vegetable in the Chinese diet “- by big players robbing them of the money they think they deserve. (The government can sometimes be the target of this anger too , if the broader market is going badly.)

“This is so incredible,” wrote another Weibo user, referring to the GameStop saga. “Leeks from around the world should come together.”

Chinese investors could, in theory, try to collectively raise the price of an individual stock and then discard it before institutional investors do. But this is a difficult task, given the resources and knowledge that large stock pickers have. And institutional companies that focus on long-term deals can ultimately benefit from increases in inventory.

Difficult to replicate

Dictating major market swings is “theoretically” doable for individual Chinese investors, said Kenny Tang, CEO of Royston Securities, a Hong Kong-based brokerage, due to his familiarity with using social media chat rooms to do individual stock bets.

“You can imagine that it is not difficult for some of them to come together and influence individual stocks, especially those of small businesses,” said Tang.

China is no stranger to market volatility driven by hectic trade. When the Nasdaq-style Star Market launched in Shanghai in 2019, local investors helped some of the stocks soar in value. A company’s stock soared 400% on the first day of trading.
The Chinese government and the state media are also aware of how these individual investors can boost stocks. State media, for example, asked local investors to pour money into markets last summer, while the economy was recovering from the coronavirus pandemic. When the rise appeared to be going very fast, some news outlets slowed down a bit and encouraged more conservative negotiations.

Analysts warn, however, that coordinated trade in a country like China, where everything is highly regulated, is fraught with dangers.

“If you get the attention of regulators, it probably won’t end well for you,” said Tang, adding that people trying to organize major market swings are at risk of being arrested if the government suspects them of manipulation of the stock market.

Others, like retail investor Luke Chen, are not really convinced of an amateur revolution in China because of the more professional knowledge established investment firms have.

“Individual investors are much less powerful than big investors in terms of capital size, investing knowledge – even some trading apps are exclusively better optimized for big investors,” said Chen, who lives in Shanghai.

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