The next “gamestop”: how China or Russia could attack our financial system
Last week the dramatic rise and fall in Gamestop’s price demonstrated just how vulnerable the stock market is to social media speculation. US regulators should now turn their attention to a bigger risk – that in the near future China, Russia or another adversary could coordinate an unwitting mob to harm the US financial system.
The potential for financial warfare stems from a playbook that China, and especially Russia, have repeatedly drawn upon to meddle in US domestic politics. First, foreign state agents have used social media to spread misinformation or stoke existing grievances. Second, they relied on naïve users to share the original posts, allowing the content to reach a wider audience. Finally, they fan the flames to provoke action.
In 2016 and 2020, Russian propaganda declining US voter confidence in their candidates and the political system. While last year’s events on race and policing, alien robots amplified instances of both racial discrimination and violent demonstrations, further polarizing American society. After Joe Biden’s election victory in November, Russian agents embraced false allegations of fraudproviding justification for an armed mob to storming the Capitol Building. China spends at least $10 billion a year on its own influence operations across the United Front Work Departmentwhich promotes pro-Beijing narratives abroad.
Over the past four years, what started on Facebook and Twitter has ended at the ballot box and in street violence. The next era of foreign social media manipulation could come crashing down on Wall Street.
If Russian officials wish to inflict financial damage on the United States, they could start by spreading rumors about specific companies or sectors on American social media platforms. The main channel of Russia to spread misinformation is the Internet Research Agency (IRA), a St. Petersburg-based company that relies on fake accounts to promote Moscow’s interests abroad. Once rumored, bots could promote the original post and persuade a large audience of real users to buy or sell a particular asset.
While market volatility in the United States will generally hurt Russian interests given the interconnectedness of the global economy, Moscow has certain goals that financial war would advance. Just as Russian leaders have used social media manipulation to weaken the United States from within, they could turn to financial manipulation to achieve the same goal. An inward-looking, financially fragile and divided United States would be less able to contain Russia geopolitical ambitions in Eastern Europe.
Chinese officials have different goals than their Russian counterparts, but they are no less likely to mix social media manipulation with financial warfare. In the case of China, leaders could leverage financial distraction to pressure their drawings in taiwantheir aggressiveness South China Seaor their repression in hong kong.
Besides political goals, China has financial goals that it could pursue through aggressive means. One of Beijing’s goals is to attract larger inflows of capital, a goal that would be well served if the disarray in US markets forces investors to look elsewhere. Another one long-term ambition for China is for the yuan to replace the US dollar as the dominant international currency. Since the dollar comprises approximately 60 percent global foreign exchange reserves, U.S. regulators wield significant power in the international financial system, including the ability to apply US sanctions beyond their borders. The sooner Beijing can undermine the US dollar as the world’s reserve currency, the sooner they will escape US regulatory scrutiny and sanctions enforcement. Uncertainty in the US corporate equity market could, in the long term, challenge the dominant role of the dollar in global finance. Michael Greenwald, a former high-ranking diplomat in the US Treasury Department, explains that “great power entities such as China seek not only to dislodge the United States from its primacy as a global economic leader, but also to overcome this position”.
If Chinese leaders choose to use social media to start a financial war, they could start closer to home. China, unlike Russia, leads only a small part of his manipulation of social media to an English-speaking audience. Rather than targeting US investors via Facebook, Twitter or Reddit, Beijing is more likely to initiate a buying or selling frenzy among amateur Chinese investors who own US stocks. Sina Weibo and WeChat, two social media platforms with more than a billion active users per month them, would be the easiest place to start. Once agents start a rumour, retail investors can turn to Chinese equivalents of Robinhood like Futu Holdings and Tiger Brokers, which provide access to US stock markets and have surged amid the Gamestop frenzy.
To be clear, the financial war is likely to backfire on China and Russia, both damaging the global financial architecture and provoking a response from the United States. And even if leaders in Moscow or Beijing have decided to wage a financial war, social media is far from the only instrument they can use. Currency manipulation is a tried and tested practice in the Chinese financial toolkit, and in recent years China, Russia, India, Iran and Turkey have sought to design a new cross-border payment system outside the jurisdiction of US regulators. Of the $7 trillion in US public debt held by foreign countries, China holds over $1 trillion. These existing direct tools can prove to be effective means for American adversaries to pursue their objectives.
However great the risks of mixing social media with financial warfare, China and Russia may soon judge that the benefits outweigh the costs. In the summer of 2008, Moscow has moved closer to Beijing with a proposal to sell their joint stakes in US housing finance companies Fannie Mae and Freddie Mac. The action would have exacerbated a growing financial crisis just as Russian leaders sought to distract the United States from its 2008 strategy invasion of georgia. Chinese leaders declined the offer, but under Xi Jinping Beijing has increasingly adopted a confrontational style “wolf-warrior” diplomacy. The main economic leaders echoed the change in financial circles. Yu Yongding, an economist at the state-backed Chinese Academy of Social Sciences (CASS), argued in August that “a vast financial war has already begun…the deadliest tactics have yet to be used”. Chen Yuan, former chairman of the China Development Bank, even threatens to use China’s debt as leverage with the United States. Moreover, indirect influence via social media comes with a greater possibility of denial than traditional methods of financial manipulation, making it an attractive instrument for Russia and China to avoid retaliation. Greenwald argues that the US is right to worry: “If China can destabilize US stock markets, diminish international confidence in the US economy, and overtake the dollar as the world’s reserve currency, we could be looking at a real threat to the United States. Short term.”
To respond to this new weapon of financial warfare, US policymakers must fill the gaps in three existing areas of regulation. The first type of regulation, aimed at protecting US-based social media platforms from foreign interference, is largely left to industry. Facebook and Twitter have banned several hundred Russian and Chinese accounts for spreading misinformation, but they failed to remove accounts of “wolf warrior” diplomats like Zhao Lijian, which echoed the conspiracy theory that Covid-19 originated in the United States. In the future, companies and potentially even government regulators should take a more assertive approach to misrepresentation.
The second area of regulation, overseen by the Committee on Foreign Investment in the United States (CFIUS), reviews individual transactions involving foreign investors to ensure that they do not threaten national security. While the Foreign Investment Risk Review Modernization Act 2018 (FIRRMA) has already granted new powers at CFIUSregulators must be proactive in identifying new threats to the US financial sector that emerge from foreign social media platforms.
The third area of regulation, led by the Securities and Exchange Commission (SEC), is designed to maintain efficient markets. The SEC needs to quickly adapt to the relationship between social media chatter and market volatility, not just to “meme stockslike Gamestop, but also in potential cases where the rumors are carried by a foreign power. The FBI can also help identify foreign influence on these platforms.
Gamestop was a wake-up call. In this case, the frenzy appears to have been uncoordinated and the evil contained. Next time we may not be so lucky. However, with careful regulation, policymakers can prevent the dangers of foreign social media manipulation and financial warfare.
Robert Carlson is the Duke program coordinator in American Grand Strategy. He tweets @bocarlson1
Gray Gaertner is an Asia analyst at Inika Terra and a policy research intern at the US-ASEAN Business Council. He tweets @graygaertner