Harness social media to aid market stability

Many people have tried to come up with an explanation for the capricious and near-mystical fluctuations in the Chinese stock market in recent weeks. But most of them seem to have missed the point.

The most convenient explanation is an economic one - about the investors' fear of an imminent tumble in GDP growth or in the financial resources at Beijing's disposal. But hardly does this square with the basic political realities in a large and diverse country under a centralized financial regime, which has ample resources to interfere with market forces. The fear cannot be justified.

Then comes the financial explanation - about the bubbling effect (or the effect of a bubble bursting) from easy money, especially easy credit, in a market where many listed companies might have difficulty delivering the results expected by their shareholders. But that doesn't seem to explain why a panicky sell-off could have happened when the real economy was by and large stable, although far from racing at full speed as in the past or why such sell-offs could have occurred repeatedly between short intervals, even after the central government's strong-handed interference.

This leads to a third explanation, which is a political one - about some troublemakers' attempts to manipulate the sentiments of small investors, such as by spreading rumors or excessively negative information, and shorting on the market index. But in a closely monitored market, it wouldn't be difficult to find out the institutional players involved in this kind of near-sighted and potentially suicidal behavior.

A fourth explanation is a psychological one - that the Chinese stock market is a market dominated by small investors, who make up around 70 percent of all investors or daily transactions, and that small investors tend to behave irrationally and base their investment decisions on tips they get from one another, instead of on openly published data and calculated judgment.

This explanation sheds some light on China's exceptional character, but it still falls short to explain why the index could have kept fluctuating so wildly and so unpredictably on a daily basis. One commentator in the Chinese-language financial media described the phenomenon as being "an astronaut on one day and a professional diver on the other". But why?

In fact, the behavior of Chinese small investors is a remarkable new reality in a time of mobile media and instant self-publishing. Neither the regulatory officials nor the observers have come to fully grasp this reality.

One has only to compare the group of retail investors with the nation's 4G mobile population to find that the former tends to make up the hardcore, the most frequent users who pass on the largest amount of information, mainly on WeChat or Chinese Twitter-like mobile platforms, among all smartphone users.

Unlike the small investors in the pre-mobile age, who tended to behave more passively by following the institutional players, today's small investors compare notes and share information (rumor or not), and then make their picks far more rapidly than perhaps any institution with a fixed internal decision-making procedure.

There is a large number (and there is no way to tell how many) self-generated investment clubs on WeChat, just like clubs of old classmates or lovers of certain art forms. They can easily each include more than 100 individuals in any part of the country, so long as 4G telecommunications are available there. Many of them may have never met each other.

And to call them small investors is somewhat of a misnomer, considering the fact that China is already a nation with more than $3,000 in its per capita GDP, and in its large cities, there wouldn't be a shortage of young professionals making $1,000 in monthly salary. If each member commits 10,000 yuan ($1,600) to the stock market, a WeChat club can easily become a 1 million yuan investment fund.

If, furthermore, one club shares its information with 99 other clubs, usually through its members' free communication with friends (and there's no rule against it), a 100 million yuan ad hoc fund can be set up momentarily. No need for any contract or open statement. If a veteran investor, someone whose opinion is usually highly regarded in the club, says he would pick a certain stock today, his strategy would instantly affect other club members and, through them, the investors in other clubs.

Such elusive group power on social media can be very strong in a market always operating in the shadow of the small investors' mentality. Indeed, as any small gain leads to raptures, and any small loss leads to bitter feelings and speculations of conspiracy, all on a mass basis, how could a market keep a steady and meaningful long-term trend?

What the government can do to deal with such a new normal would inevitably include the following:

-Treat social media as something natural, rather than something bad, for building up China's investment market.

-Collect social media opinions and messages and try to understand what they mean and what market activities they may inspire.

-Be more open and use the more powerful public media to provide instant answers to the investors, especially to counter the potentially most dangerous messages.

-Design more investment instruments to diversify investors' focus.

-Do things, on a macroeconomic level, to buttress public confidence in the general economic environment, especially the government's long-term commitment to economic reform.

The author is editor-at-large of China Daily.