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The horde of day-traders who ambushed hedge funds short-selling shares of unprofitable U.S. video game retailer GameStop last week has fueled dire predictions that the ‘Reddit Revolution’ will spread next to China.
“The frenzy over GameStop has inspired amateurs everywhere to shake up stock markets,” proclaimed CNN. “Now China’s massive army of retail investors wants to get in on the action.”
“China’s markets are much more vulnerable and rolling the dice on Sino short squeeze can turn into a global disaster unless Beijing steps in quickly,” fretted U.S. investment banker Porter Bibb in an interview with Fox News.
“China would be the obvious place for it to spread further,” Bloomberg said of the retail investor revolt.
Pessimists see myriad reasons to fear China’s stock market, the world’s second-largest, as uniquely susceptible to an amateur uprising. They note that in China’s markets, retail traders already dominate, with individual investors accounting for 99% of China’s 178 million total equity investors, according to December data compiled by the China Securities Depository and Clearing Corporation. Lax disclosure rules have bred a speculative, get-rich-quick trading culture; China’s bourses are often disparaged as the functional equivalent of casinos.
China in recent years has spawned a throng of online brokerages—including Futu Holdings, Webull Financial, Up Fintech Holding, and East Money Information—that have recorded huge increases in new trading accounts and, in some cases, even compete in the U.S. market with trading platforms like Robinhood. And Chinese investors can congregate on a host of Reddit-like stock forums including East Money or Xueqiu.
Should “some bright young Internet celebrities” in China attempt to emulate U.S. cheerleaders in talking up individual stocks, warned Bibb, “they could make our Reddit/GameStop problems look like child’s play.”
But the hand-wringing is overdone.
Small individual investors of the sort that pushed GameStop into the stratosphere are a less powerful force in China’s markets than the official data suggest. And their trading activity is constrained by far more regulatory restrictions than those placed on their American counterparts.
Fraser Howie, an independent financial analyst and co-author of Red Capitalism: The Fragile Financial Foundations of China’s Extraordinary Rise, estimates that at least half of all individual accounts in China are dormant, while most of the remainder are multiple accounts controlled by rich individuals or companies. He reckons the real total of retail investors in China is under 20 million.
Howie also points out that, in Chinese markets, there’s no such thing as day trading: “If you buy a stock in the morning, the first time you can sell that stock is morning the next day.” Moreover, Chinese exchange rules cap daily price movement for nearly all stocks at 10%.
Another key difference between the two markets is that in China short-selling is all but impossible. Regulators imposed strict limits on the practice—which involves selling borrowed shares in the hope of buying them back when prices fall—following the epic collapse of a speculative market bubble in 2015.
Reddit’s army of renegade retail investors decry short-selling, claiming that it enables deep-pocketed Wall Street hedge funds to manipulate stock prices at the expense of small investors. While China relaxed restrictions on short-selling slightly last summer, the practice remains expensive and restricted to large investors. Shares loaned for shorting in Shanghai and Shenzhen totaled only a few billion dollars last year, accounting for a fraction of 1% of the outstanding float of shares on those exchanges, compared to about 3.5% for companies on the S&P 500, according to data from IHS Markit.
Howie notes that, despite the proliferation of online stock trading platforms in China, investors trading stocks on mainland exchanges are required to open a brokerage account and must purchase the underlying shares of companies they invest in. That’s a far cry from U.S. investors using Robinhood, the zero-commission platform where investors can purchase fractional contracts for difference, or CFDs, allowing them to speculate on the movement of a security over a very short term without having to purchase the stock itself.
Similarly, the market chatter on China’s social media platforms bears little resemblance to the anti-establishment vitriol common on WallStreetBets, the Reddit forum that championed the GameStop rally. Chinese authorities, haunted by the specter of social unrest from market meltdown, are quick to pull the plug on online rabble-rousers seeking to mobilize investors to buy or sell a particular stock.
“China would arrest people if they needed to,” said Jeffery Halley, senior Asia Pacific markets analyst for OANDA. The U.S. and Chinese markets “are just fundamentally different,” he says.