Why Trump’s Rise Sounded Like a Sure Bet For China’s Small-Cap Stock Investors

Donald Trump's victory in the U.S. presidential election caused a peculiar surge in China's stock market, with shares of companies that sounded like his name in Chinese, such as Wise Soft Co. Ltd. and Sichuan Development Lomon Group (SDLomon), skyrocketing. These stocks, dubbed "Trump concept" stocks, became popular due to influencers and livestreamers who promoted them based on the phonetic resemblance to Trump[para. 1][para. 2]. This spike in stock prices wasn't necessarily linked to any logical investment strategy but was driven by how these companies' names mirrored the phrase "Trump wins" in Chinese[para. 3][para. 4].

As an example, SDLomon's shares rose by 107.4% in ten days following October 23, with a turnover rate of over 160%. The primary reason for this surge was the promotion of these stocks by livestreamers, rather than concrete business developments[para. 4][para. 5]. Despite acknowledging the lack of investment rationale, many investors were influenced by the influx of likes and were compelled to invest[para. 5][para. 6].

These "Trump concept" stocks, largely consisting of small-cap shares, saw a dramatic rise during a general stock market rebound in China since late September, driven by both government stimulus and a buying frenzy spurred by social media[para. 7]. Small-cap stocks in China's A-share market typically have a market capitalization under 3 billion yuan and are known for their volatility[para. 8].

During the market rally from late September to late November, indices tracking small and mid-sized companies, such as the CSI 1000 and CSI 2000, experienced average gains around 40%, much higher than the larger-cap CSI 300 index's gains of 28.95%.[para. 9]. This fervor coincided with the influx of young, inexperienced investors who rely heavily on social media for investment decisions, as evidenced by the opening of 6.84 million new trading accounts in October alone[para. 10][para. 11].

The boom in trading activity has been closely linked to the influence of short-video platforms like Douyin, which has millions of users spending significant hours each month consuming content. Influencers on these platforms can drive substantial investment activity by persuading just a small percentage of their audience to invest, leading to significant speculative capital inflows[para. 12][para. 13][para. 14]. Many inexperienced investors are drawn to investments without understanding financial fundamentals, often following the exaggerated claims of influencers[para. 15][para. 16].

Despite warnings from brokerages about the risks, many novice investors rushed to buy stocks using loans, resulting in considerable financial losses. The hastiness shown by these investors highlights a widespread "greater fool" mentality, where they assume others will take on the losing end of the transaction[para. 17][para. 18]. Regulatory authorities have started scrutinizing the market influence of livestream content due to its role in speculative trading and potential market manipulation[para. 19].

For example, an influencer with over 10 million followers was banned from Douyin for urging aggressive investments, causing regulators to step in against numerous instances of unusual trading activity[para. 20][para. 21]. The Shenzhen Stock Exchange and the broader market have seen regulatory actions and suspensions of trading in certain stocks that experienced suspicious surges, indicating potential insider trading or manipulative activities[para. 22]. Moving forward, experts emphasize the need for improved regulatory practices to better inform retail investors of market risks and move China's stock market toward greater institutional participation[para. 23].