Narrative-Driven Bull Market?

“Can I get your bank account info? I’m gonna wire you the money first.”

That’s what a friend said to a lawyer, Mr. Zhang, hoping to funnel a 100,000 RMB consumer loan into shares of Cambricon. The reason for the risky move? Cambricon’s stock had just smashed through the 1,000 RMB barrier, officially earning the title of “King Cambricon.”

Fueling Cambricon’s climb to the thousands was a viral, albeit unverified, message. On August 20th, a headline screaming “Major Portfolio Adjustment in Late August: All-In on Domestic Computing Power” spread like wildfire. Despite subsequent clarifications, the entire computing power sector enjoyed a surge.

“He might hold a grudge against me,” Mr. Zhang said, turning down his friend’s request to route the funds through his account. Still, Cambricon hit the 20% daily limit on August 22nd, propelled by a variety of factors.

And then there was the bizarre case of a tech company, Chunzhong Technology, briefly crowned the “Nvidia Concept Stock Champion” thanks to a completely unfounded rumor about the CEO’s son dating and impregnating Nvidia CEO Jensen Huang’s daughter. The completely unrelated company saw its stock price more than double in a month, only to crash spectacularly after a denial.

Over in Hong Kong, shares of New Oriental Education’s livestreaming arm, Koolearn Technology (formerly known as E-Commerce China Dongfang), experienced a wild ride on August 19th. The stock initially surged over 20%, then plummeted more than 20%, effectively halving the value for those who bought at the peak. The culprit? A rumor that New Oriental’s CEO was under investigation for embezzling company funds.

The phenomenon of “small essays” – essentially market rumors or whispers – circulating online and influencing stock prices is nothing new. While authorities have attempted to curb the spread of misinformation, these narratives have become increasingly prevalent as market sentiment improves.

Some argue that these “small essays” are tools used to exploit retail investors’ thirst for quick riches, while others suggest that savvy retail investors are simply seizing short-term pricing power through a “conspiracy of shared emotion” – a type of “greater fool” game.

But why are these “small essays” so resilient? What’s the anatomy of the industry behind them, and what broader issues do they reflect?

How are they created?

Nearly all stock market participants find themselves caught in the crossfire of “small essays.” These narratives, covering everything from policy shifts to company gossip, come in various forms, often disguised as “insider information.” They are designed to be tantalizing, seeping into the collective consciousness of investors.

At their core, “small essays” are simply gossip: anonymous and difficult to verify. Their power lies in the “information gap” and “perception gap” – those who know first could profit, while those who learn later often bear the brunt. The greatest beneficiaries are often the originators of the rumors themselves, leveraging perceived informational advantages to engineer precise market corrections.

As such, “small essays” prioritize speed and impact over factual accuracy.

In terms of content, these essays roughly fall into five categories:

Policy Rumors: Most common and impactful, e.g., “Rumor: Securities Regulatory Commission to reduce stamp duty,” or “Rumor: National government to launch trillion-yuan photovoltaic support plan.”

Corporate Operations: Specific to listed companies, e.g., “Rumor: Tech Company X lands massive Apple order,” or “Rumor: Liquor Company Y faces disastrous Q3 earnings.”

Capital Flows: Create herd behavior by referencing “top private equity positions” or “foreign capital buying spree.”

Market Sentiment/Conspiracy Theories: Inflame emotions with grand narratives, e.g., “National Team to intervene and rescue the market,” or “International capital shorting A-shares.”

Interpretation and Packaging: Over-interpret publicly available information, e.g., “Company name contains ‘Dragon,’ perfectly aligned with the zodiac trading theme.”

The selection of topics for these “small essays” frequently follows a specific pattern.

Take Koolearn Technology (formerly known as E-Commerce China Dongfang) for example: its rising stock price already made it a hot topic. Investors were keen to see if it could transform from a KOL-driven livestreaming business into an ‘online Sam’s Club.’ Add in the intrigue surrounding key personnel moves, and the rumor-mongers zeroed in on a relatively low-profile executive, striking at the company’s most vulnerable point – a classic case of “kicking you when you’re down.”

In terms of dissemination, these narratives typically originate in social circles – WeChat groups, Weibo, Xueqiu, stock forums and Zhihu are the primary breeding grounds.

The creators of these stories are masters of crafting ‘screenplays,’ knowing how to frame the narrative, select optimal release times, and even manipulate the secondary amplification provided by key opinion leaders (KOLs).

Distributors of the “small essays” play different roles: some seek verification, others share “secrets for wealth”, still others simply like the buzz, yet others purposefully stir the flames. Some media and independent media, driven by traffic concerns, will follow up and report rumors under the guise of “market rumors” or “according to sources”, giving these rumors a certain kind of “legitimacy”.

The impact of these stories is often felt rapidly, within minutes of circulating. Other times, narratives will remain dormant, awaiting the right emotional trigger to detonate.

Chunzhong Technology is a case in point. Rumors of a romantic link first surfaced in 2024, however, it recently evolved into an alleged pregnancy, linking the company with Nvidia via an imagined inter-family partnership, resulting in an explosive run-up.

Regardless of the speed, the lifecycle of “small essays” is largely fixed: anonymous source/interested party → core circle (KOLs) → diffusion circle (financial media) → retail investors (various platforms & WeChat groups) → collective market force (share price fluctuation) → profit-taking.

Why are they so hard to eradicate?

The resilience and disruptive power of “small essays” are clearer when viewed as a business model.

They represent a low-cost, high-return enterprise that exploits asymmetric information in order to generate profit.

On the input side, costs are exceedingly low. Whereas creating content formerly demanded hiring writers, AI generated content can now produce a thousand pieces a day. Some KOLs point to March 24, 2024 as the year of the “small essay”, because Kimi can now create essays on a mass scale.

The distribution process is similarly inexpensive, often relying on small KOLs, independent media, and group administrators to disseminate the content. While well-known, large KOLs have a broader reach, they aren’t always the first choice due to high fees, associated risks, and concerns about their reputation.

Several years ago, Huazhao Pharmaceutical and Yaowen Kangce were found liable for fabricating false information that led to a dramatic fall in Changchun High-Tech’s stock price. But these companies were eventually charged because they were “clumsy” and left breadcrumbs.

However, the operators behind these schemes have become much more sophisticated. In November 2024, a rumor accusing hedge funds of manipulating the market could be traced back to a shell company operating out of a residential building in Nanchang. Others originated from anonymous overseas accounts, a trend known as “exporting for domestic sale.”

The consequences of this activity are considerable. “Small essays” not only sway the emotions of retail investors but can also trigger algorithmic trades.

Some quantitative strategies monitor and analyze online sentiment in real-time. If a “small essay” quickly spreads and generates discussion, whether true or false, it may be picked up and fed into the trading system as a “signal.” And once that price movement triggers a buy or sell order, the resulting volatility only accelerates.

Therefore, many investors proactively “feed” algorithmic systems with “small essays,” which can sometimes result in stocks seeing sudden spikes.

A typical example is Koolearn Technology (formerly known as E-Commerce China Dongfang): on August 19, the stock rose sharply and then cascaded, losing billions of market value in an hour. If one particular short fund was behind these movements, it was able to generate a profit.

China’s highly developed social media and mobile internet landscape makes widespread virality possible. Moreover, the Chinese stock market is highly dependent on macro and industry-specific policy, with a very strong “policy-driven” feel and historically asymmetric information. The presence of huge population of retail investors, who are more emotional and less equipped to gather pertinent information (compared to professional investors), has caused ‘small essays’ to quickly take root and flourish.

There are also hidden risks. Compared to more mature markets, the cost of tracking down and punishing the creation and dissemination of false information remains relatively low in China, making this action not effective. Businesses can pursue liability, but retail investors who impulsively respond favorably to rumors are generally out of luck. Regulation authorities also face many challenges dealing with “small essays”.

Mr. Zhang, the lawyer who was asked to let his friend run funds through his business account, said “In law, there’s a crime for fabricating and spreading false securities trading information,” but in practical terms, it runs into two significant challenges: identifying the original source and then gathering the proper evidence to determine its nature.

These “small essays” are published anonymously and spread across platforms. By the time regulators intervene, the source has often disappeared, and short-term money has already moved on. Furthermore, whether information is “false” or merely “inaccurate,” whether it is “maliciously fabricated” or “over-interpreted,” and where the line is between “discussion” and “manipulation” are all difficult to accurately assess and prove.

Furthermore, governing “small essays” requires collaboration across a range of departments. Related regulations regarding “disturbing the securities marketplace” and “serious consequences” lack quantifiable measures.

Facing a vast ocean of information and a huge marketplace, the regulatory response is understandably limited. Which leads to the “small essay” manufacturers feeling as if there’s a possibility to evade charges.

All-in-all, “small essays” represent an accessible, minimum constraint and maximum reward “business” in China.

This type of culture has grown into a kind of rivalry: whoever is able to create a impactful and widely recognizable rumor can win this game. And the “small essay” has turned into an effective tool to win the pricing power of the stock.

Why are they becoming increasingly more widespread?

Regulatory moves have been aimed at “small essays” in 2024.

On the 315 show, the CCTV made a special investigation into the commercial ecology behind the financial market “small essays”. In May, the Supreme People’s Court and China Securities Regulatory Commission (CSRC) jointly released guidance requiring crackdowns on creating and sharing information that disrupts the order of the market. And this year, over 1200 accounts of unlicensed individuals sharing stock have been blocked.

In reality, the recent wind of the “small essay” has not been suppressed but is growing stronger than ever.

Why is that? Perhaps the reason isn’t so complicated, and the key variable is what state the commercial market is in.

Before the market started on September 24, A share index was falling. In early September the index had reached below 3000 points and the trading volume on the market had reached 500 billion.

In a market where there is less available funds, the normal “small essay” won’t take effect, because investors at the bottom of this kind of food chain don’t want to participate. Investors with a risk awareness know that they will be quickly cut off at any time, so they don’t bother investing.

At the time, however, more packaging kinds of essays were able to find an audience (e.g. stories built around ordinary people, the Chinese zodiac or numbers).

“These kinds of ‘small essays’ have never landed, but are being built off of people, so the stock name will always be accurate. Your false information is used to determine price, and my real information is ignored.” While this type of logic doesn’t hold up, it has ‘real’ support. It’s difficult for companies to refute, for example, the “small essay” written about ordinary people had a chance to reach multiple 6-day highs in 7 days. However, it quickly fell sharply afterwards, back to its original point, and is a typical use case.

Whatever the reality – a bullish market or not – the volume of capital is certainly high.

The daily trading volume has remained stable at over 2 trillion, which suggests capital has a high tolerance for errors. Widespread internet availability has significantly reduced the information gap, which means there are more people creating one. Essentially, finding ways to take advantage of any arbitrage opportunity.

The implication is that retail investors still want to participate despite knowing that the news is probably unreliable, because joining the party usually means fast money. While Chunzhong Technology’s story of doubling in value may be uncommon, there are numerous stories of the stock seeing a 50% increase (or higher).

If these “small essays” don’t produce the desired outcome, there are even tutorials to teach investors how to achieve it.

On August 20, industry sources shared that ByteDance and VeriSilicon were cooperating on the chip, and in the afternoon Verisilicon’s shares reached their max 20% increase.

However, ByteDance quickly denied it, and at 2:55 PM the deal was abandoned. The next day, after some false promises, this share fell by 5 points. And users even said that this company can’t partner with ByteDance.

In a bullish market, however, one can dream more expansively and has a greater room for growth.

Tech has become a main focus, and the potential for expansion is very high. The current value reflects the future potential rather than reality, which offers the “small essay” the perfect chance for success.

Which explains why the “small essay” revolving around tech is everywhere. In fact, many of the rumors are debunked.

There may of course be a “small essay” regarding other industries as well, but generally lack the imaginative room. For example, the current status of the liquor stock shows a dip as it is difficult to expect great improvement and the sales, prices and stock have no clear plan for improvement.

Even so, the market will “create conditions” for it.

An example is Jiugui Liquor: because of investors’ concern about stock decreasing, together with the need for the money from people selling tech stocks shifting to lower-risk stocks, the stock price was given a sales catalyst regarding selling goods at Pandonlai Market, even resulting in several increases and stops. The company has become a forerunner in selling liquor that is currently available.

Therefore, ‘small essays’ didn’t come out of nowhere. They came from the general public, and they reflect the desire of funds to perform well.

The stock has become a complex game of strategy and detecting misinformation with a lot of self-enjoyment. And its popularity highlights the impulse and hunger for narratives in a bullish environment.

The biggest question is the fake information. How to deal with the repercussions will determine the real way the market can succeed?

Insights

It is foreseeable that in this round of market conditions, “small essays” will be severely cracked down on, but the huge profits make it as difficult to eradicate as “weeds.”

However, the harm of stock market “small essays” is not only limited to the short-term irregularities of a few stocks, but also in eroding market trust, distorting price discovery mechanisms, and amplifying irrational fluctuations. It makes the information disclosure system a dead letter, and also makes countless retail investors repeatedly injured in illusions.

Eradicating “small essays” is a comprehensive and complex practice.

For normal investors, the important part to avoid getting hurt is to remember that there has never been a free lunch, no safe inside information. People must always study about investments and make sure to use proper platforms of exchange to search for and obtain support.

Listed companies need to disclose information more proactively and in a timely manner, so that there is no room for rumors to survive. And regulation needs to be improved, emphasizing proper detection and punishment, and depend more on technical skills to find correct information quickly.

It is worth noting that regulation tech is growing, with the use of AI technology to help create a faster turnaround.

“Small essays” may not disappear right away, but with innovation and technology, there will be a decrease in their potential to succeed.