Pay Cuts, Salary Caps, Retrenchments: Financial Industry Storm Now Arrives

Summary

The video script discusses the turbulent Chinese stock market, where investors have been reclassified as 'financial consumers' amid significant losses. It highlights the Securities lending scandal, where mutual funds were found lending stocks for short selling, harming investors' interests. The narrative also touches on salary caps in the financial sector and the shift towards bond funds as investors lose confidence in equity funds. The script paints a picture of a system where major players and state-backed institutions profit at the expense of the average investor.

Takeaways

• 📉 The speaker experienced a significant financial loss in the stock market, which was emotionally devastating and unexpected.
• 🌐 The Chinese stock market has seen a continuous decline, leading to widespread losses among shareholders and investors.
• 🏷️ The term 'cutting leagues' or 'shareholders' is being replaced with 'financial consumers', indicating a shift in perspective from investing to consumption.
• 💼 Executives in China's largest state-owned financial companies are facing salary caps and are even being asked to return past earnings, reflecting a broader regulatory change.
• 📉 Mutual funds in China have suffered substantial net losses, yet management fees remain profitable, raising questions about the industry's practices.
• 🤔 The Securities lending incident has caused confusion and anger among investors, as it was revealed that mutual funds were indirectly shorting their own investments.
• 🏦 The China Securities Financial Corp (CSF), a state-backed entity, facilitates securities lending, which is legal but controversial and seen as benefiting major players at the expense of investors.
• 🚫 China's regulatory bodies have halted securities lending, but the impact of the scandal has been profound and difficult to manage.
• 💡 The speaker suggests that the financial system's questionable practices are part of a larger issue of trust and credibility in the Chinese financial market.
• 📊 There is a significant shift in investor behavior, with a preference for bond funds over equity funds, indicating a lack of confidence in the stock market.
• 🏛️ The Chinese Communist Party (CCP) is tightening control over the financial industry, with a focus on anti-corruption and salary caps, affecting high-income financial professionals.

Q & A

What is the main issue the speaker is facing with the stock market?

The speaker is experiencing significant financial loss due to a sudden flash crash in the stock market, which resulted in the loss of 6 months of their salary.

What is the new designation for investors and shareholders in the financial sector as mentioned in the script?

The new designation for investors and shareholders is 'Financial consumers,' reflecting a shift in perspective from investment activity to consumption activity.

What implications does the term 'Financial consumers' have for investors?

The term 'Financial consumers' implies that investors should view losses in the stock market as a normal consumption behavior rather than being upset about it.

What is the 'Securities lending incident' mentioned in the script?

The 'Securities lending incident' refers to a scandal where mutual funds were found to be lending out stocks for short selling, essentially causing investors to short their own investments unknowingly.

How does securities lending work in the context of mutual funds?

Securities lending involves mutual funds using investors' money to buy stocks and then lending those stocks out for short selling. The interest earned from this activity is not included in the fund's net value.

What is the role of the China Securities Financial Corp (CSF) in securities lending?

The CSF is a state-backed entity that provides services to securities firms for margin trading and securities lending, facilitating the lending of stocks for short selling.

What impact has the securities lending scandal had on investor confidence in the Chinese stock market?

The scandal has led to a significant loss of trust among investors, resulting in a shift towards bond funds and a decrease in the scale of actively managed equity funds.

Why are some executives in China's financial sector being asked to return past earnings?

Executives are being asked to return past earnings to comply with new salary caps, which are part of measures to address public concerns about high salaries in the financial sector amidst significant investor losses.

What is the significance of the term 'cutting leaks' and its replacement with 'providing emotional value'?

The term 'cutting leaks' referred to the losses investors faced in the stock market. Its replacement with 'providing emotional value' reflects an attempt to reframe these losses as a form of consumption that provides emotional satisfaction.

How have the recent changes in the financial sector affected the issuance of new mutual funds?

The changes have led to a decrease in the issuance of new mutual funds, particularly in actively managed equity funds, as investors have become more cautious and less trusting of fund management practices.

What is the role of the China Securities Regulatory Commission (CSRC) in the securities lending incident?

The CSRC is involved in the regulation and oversight of the securities lending business. It has halted securities lending in response to the scandal, indicating its role in managing the aftermath of the incident.

Outlines

00:00

📉 Stock Market Turmoil and the Shift to 'Financial Consumers'

The script discusses the emotional distress and financial losses experienced by investors in the stock market, particularly in China's A-share market. It highlights a significant loss incurred by an individual in a single day, which is attributed to a sudden market crash. The narrative then shifts to a broader context, discussing the reclassification of investors as 'financial consumers,' implying that stock trading is now seen more as a consumption activity rather than an investment. This change in terminology is said to have significant implications, potentially reducing the emotional impact of financial losses. The script also touches on regulatory actions, including salary caps for executives in state-owned financial enterprises and the redefinition of the rights and interests of financial consumers by Chinese regulatory bodies.

05:01

🏛️ The Impact of Salary Caps and the Securities Lending Scandal

This paragraph delves into the repercussions of salary caps imposed on executives in China's financial sector, with some even being asked to return past earnings. It also addresses the Securities lending incident, where mutual funds were found to be lending stocks for short selling, effectively working against the interests of their own investors. The paragraph outlines the mechanics of securities lending and the profits made by various entities involved, while the investors themselves suffer losses. It also discusses the public's reaction to these practices and the regulatory measures taken in response, including the halting of securities lending by the China Securities Regulatory Commission (CSRC).

10:04

🌐 The A-Share Market's Complex Dynamics and the Role of State-Backed Institutions

The script explores the complex dynamics of China's A-share market, where state institutions play a significant role in securities lending and short selling. It criticizes the regulatory environment that favors major shareholders and short sellers, leading to an imbalance in the market. The paragraph also discusses the challenges faced by international investors like BlackRock in navigating the A-share market's unique rules and practices. It highlights the continuous cycle of securities lending and the impact on fund values, suggesting that the system may be exploiting investors rather than protecting their interests.

15:06

📉 Investor Disillusionment and the Decline of Active Fund Management

The final paragraph discusses the growing disillusionment among investors due to continuous losses and the perceived exploitation by fund managers and state institutions. It describes the decline in the scale of actively managed equity funds and the shift towards bond funds, reflecting a lack of confidence in the stock market. The script also touches on the broader socio-economic implications, including the impact of the 'common prosperity' movement on high-income financial professionals and the tightening control over the financial industry by the Chinese government. It concludes with a commentary on the erosion of trust in the financial system and the challenges faced by mutual funds in regaining investor confidence.

Keywords

💡Insomnia

Insomnia refers to a sleep disorder characterized by difficulty falling or staying asleep. In the context of the video, it is used metaphorically to describe the emotional distress and anxiety that investors may experience due to the volatility and unpredictability of the stock market, as indicated by the speaker's personal experience of losing a significant amount of money in a single day.

💡Flash Crash

A flash crash is a sudden, dramatic drop in the prices of securities within a short period. The script mentions a 'flash crash in my account,' illustrating the unexpected and sharp decline in the value of the speaker's investments, which is a key aspect of the video's theme about the instability and risks of trading in the stock market.

💡Financial Consumers

The term 'financial consumers' is introduced in the script to redefine investors as consumers of financial products and services. This semantic shift is part of a broader narrative in the video about changing perceptions of stock trading from an investment activity to a consumption behavior, with implications for how losses are viewed and the rights of market participants are protected.

💡Securities Lending

Securities lending is a practice where securities are loaned out, typically to short sellers. The script discusses a scandal involving mutual funds engaging in securities lending, which is a central theme of the video. It highlights the conflict of interest where investors' funds are used to potentially undermine their own investments, leading to a loss of trust in the financial system.

💡Short Selling

Short selling is the practice of selling borrowed securities with the expectation that their price will fall, allowing the short seller to buy them back at a lower price and profit from the difference. The video script uses this term to describe a controversial aspect of securities lending, where mutual funds lend out stocks that are then sold short, harming the interests of the investors who own those funds.

💡Management Fees

Management fees are the charges collected by fund managers for overseeing and managing investment portfolios. The script criticizes the persistence of these fees even in the face of significant losses for investors, highlighting a perceived imbalance in the responsibilities and rewards between fund managers and their clients.

💡China Securities Financial Corp (CSF)

The China Securities Financial Corp (CSF) is a state-backed entity that facilitates margin trading and securities lending among securities firms. The script mentions CSF to emphasize the role of state institutions in the securities lending business, which is a point of contention in the video's critique of the financial system.

💡Actively Managed Equity Funds

Actively managed equity funds are investment funds where a portfolio manager makes buy and sell decisions with the aim of outperforming the market. The script notes a decline in the scale of these funds, suggesting a loss of confidence among investors in the active investment capabilities of mutual funds, which ties into the broader theme of investor disillusionment with the financial market.

💡Common Prosperity

Common prosperity is a policy concept promoted by the Chinese government that aims to reduce wealth disparities and promote equitable development. The video script critiques this policy as hypocritical, arguing that while it is promoted as a means to benefit the lower classes, high-income financial professionals are among those most affected by wealth redistribution measures.

💡Anti-Corruption Campaign

An anti-corruption campaign is a series of measures taken to reduce corruption in various sectors, including the financial industry. The script refers to an ongoing campaign targeting financial officials and executives, indicating a government effort to address corruption and restore trust in the financial system.

💡Investor Confidence

Investor confidence refers to the level of trust and optimism that investors have in the financial markets. The script discusses the collapse of investor confidence due to various issues, including securities lending scandals and the poor performance of actively managed funds, which is central to the video's theme of the challenges facing the financial market.

Highlights

A sudden flash crash in the stock market led to significant losses, causing distress among investors.

The market's stability was disrupted by unexpected volatility, impacting investors' confidence.

The concept of 'financial consumers' emerged, redefining stock trading as a consumption activity rather than an investment.

China's A-share market continues to decline, affecting shareholders and leading to a reevaluation of investment strategies.

The term 'cutting leaks' is replaced with 'providing emotional value', reflecting a shift in the perception of stock trading losses.

Financial regulatory bodies in China announced new measures to protect the rights and interests of financial consumers, including securities investors.

Reports of salary caps and repayments in the financial industry suggest a response to the significant losses incurred by investors.

The mutual fund scandal involving securities lending practices raised questions about the integrity of investment management.

Investors are increasingly skeptical of active investment capabilities of mutual funds due to poor performance and trust issues.

The China Securities Financial Corp (CSF), a state-backed entity, is involved in the securities lending business, raising concerns about market manipulation.

The securities lending incident has led to a profound impact on investor trust and the perception of the financial system's fairness.

BlackRock's experience in the A-share market highlights the challenges faced by foreign investors in understanding local market nuances.

Fund investors are voting with their feet, indicating a shift in sentiment and a potential decline in the mutual fund industry.

The collapse of trust in the financial system has led to a decrease in the scale of actively managed equity funds.

The CCP's push for common prosperity and criticism of high-income financial professionals reflects a tightening control over the financial industry.

An extensive anti-corruption campaign in the financial sector suggests a government response to public concerns about market fairness.

Transcripts

oh my gosh who understands this everyone

what kind of Market is this exactly is

there anyone who can't sleep at night

who suffers from insomnia and feels

extremely distressed because of trading

stocks today on an otherwise ordinary

day I lost 6 months of my salary it's

devastating actually the market had been

quite stable recently with some losses

and gains but overall quite stable

yesterday when everyone was crying and

complaining I only lost a bit over 3,000

yen and felt relieved thinking my skills

were decent but today all of a sudden

there was a flash crash in my account I

have no idea what happened because I

wasn't watching the market in the

afternoon I was busy with other things

when I checked back I literally closed

my eyes you know I was stunned how could

I lose so much it's truly

devastating as we entered July China's a

shares continue to decline and

shareholders continue to face losses

with the stock markets continuous

Decline and investors voting with their

feed recent days have brought several

explosive news stories in the financial

sector from now on we will no longer use

the term cutting leagues nor refer to

ourselves as shareholders leag or

investors we have a new designation

Financial consumers simply put trading

stocks is no longer seen as an

investment activity but as consumption

activity to be blunt trading stocks is

not about about making money it's about

spending money consequently the term

cutting leaks will be replaced with

providing emotional value while this may

seem just like a change in terminology

it has significant implications as

Financial consumers we will no longer be

upset about losing money on stocks

instead we will view it as a normal

consumption Behavior accepting it as

such once we paid significant losses for

shareholders and fund investors are

nothing new in the ashare market

typically buying stocks and funds is

seen as an investment meant to generate

returns and increase asset value

investors know the risks involved and

understand there are no guarantees in

investing however in the ashare market

major players manipulative actions have

made everyone feel like they are just

helpless leaks ready to be

harvested but those wielding the Scythe

see it differently you enter the market

voluntarily buying Financial products

funds and stocks just like shopping in a

mall hence you're a consumer thus the

old derogatory term leaks has been

replaced with a more highend and

fashionable Financial consumers on June

28th

2024 China's national Financial

regulatory Administration The People's

Bank of China and the China Securities

Regulatory Commission csrc jointly

announced the notice clarification of

the relevant work arrangements for

protecting the rights and interest of

financial consumers which includes

Securities investors as Financial

consumers according to a report by the

paper Financial consumers mainly include

individuals or small businesses

purchasing or using Financial products

and services in the financial Market

these include bank depositors loan

borrowers Insurance customers and

investors and securities funds and

Futures small and medium-sized investors

part of financial consumers refer to

individuals or small businesses

investing in the Capital Market the

paper explains that the term Financial

consumers reflects the state's effort to

protect shareholders rights from a

consumer protection perspective it

acknowledges the significant imbalance

between the rights of major shareholders

actual controllers and ordinary small

and medium-sized shareholders this

explanation suggests additional

protection for ordinary investors rather

than implying that investment is now

considered

consumption however such explanations

are meant with skepticism regulatory

bodies have consistently made and played

by their own rules leading 700 million

fund investors and 200 million

shareholders to realize who is truly

profiting while claiming to protect

their

interests in addition to reclassifying

investors as Financial consumers on June

27th reports emerged that several of

China's largest state-owned financial

companies began implementing strict

salary caps with some Executives even

being asked to return past

earnings according to Bloomberg several

of China's largest financial groups have

asked Executives to Forfeit deferred

bonuses with some fund managers being

required to return salaries from

previous years to comply with a 2.9

Million un approximately

$400,000 pre-tax annual salary cap

currently state owned Enterprises such

as China Merchants group China everb

group and cic group have communicated

these directives to their

employees Callan press reports that some

public funds under Central Enterprises

have indeed implemented salary cap

measures since

2022 though the exact cap may not be the

stated 2.9 million yen but requires

partial repayment once a certain

threshold is reached however some legal

professionals argue that demand

repayment of income without any

wrongdoing is illegal reclaiming wages

and bonuses is unjustified unless a

court determines these employees have

engaged in illegal activities yet in

China administrative orders often

override legal Frameworks and once an

order is given compliance is expected

without question since the fermenting of

the Securities lending incident rumors

of salary cuts and caps in the financial

industry have persisted public public

fund managers who have caused

significant losses for investors while

drawing High salaries are the first to

be targeted reportedly there are 700

million fund investors in China so just

how much have these investors lost over

the past two years to promote such

drastic measures according to a report

by China business network based on data

from wind mutual funds in China

experienced a net loss of 1.5 trillion

UN in 2022 and continue to lose 435

billion yen in 2023 in total their

losses over the past 2 years have

amounted to 1.9 trillion un despite

these staggering losses management fees

remain

profitable W's data shows that last year

198 fund managers in the mutual fund

industry collected a total of 136

billion UN in management fees although

this is over 10 billion un less than in

2022 it is still a considerable amount

but what exactly is a mutual fund

Securities lending

incident wait mutual funds are lending

out stocks for short selling so by

buying funds I'm shorting myself I'm

essentially sabotaging my

investments it's understandable if

you're completely confused earlier this

year in February a major Scandal broke

out in the fund industry mutual funds

were found using Securities lending

where they use investors money to buy

stocks and then lend those stocks out

for short selling essentially investors

were shorting themselves and tanking

their Investments this Revelation left

700 million fund investors and 200

million stockholders utterly

bewildered mutual funds lend out stocks

for short selling on a scale reaching 10

trillion un the interest earned from

this isn't even included in the fund's

net value if this is true people should

be arrested many people might not

understand why this is so alarming when

you buy a mutual fund you give your

money to the fund company which then

buys and sells stocks on your behalf you

profit when the stocks rise and lose

when they fall however if the fund holds

many stocks that are now plummeting and

can't be sold it lends these stocks to

Securities Companies for example if you

borrow 10,000 shares of stock a at 10

each you owe a 5% annual interest rate

when you return them the Securities

company in turn lends your stocks to an

institution that wants to short them

charging a 6% annual interest rate and

making a 1% spread or a brokerage fee

the institution sells a 10,000 shares of

stock a in the Market at 10 each

totaling 100,000 un they then push the

stock price down buy back the shares at

8 un each return them to the Securities

company pay minimal interest and pocket

the difference to Sumit up you buy stock

a through a fund company the fund

company lends out your stock to earn

interest Brokers earn fees or spreads

from lending and short sellers profit

from shorting your stock as stock A's

price drops due to short selling the net

value of your fund declines resulting in

your loss the entire process profits

only the institutions using your money

to fuel the

transaction one blogger described this

as akin to robbery suggesting arrest

should be made however he was naive

because Securities lending is legal in

China and the Very entities

participating in this wealth

appropriation are state-backed

one such State entity is the China

Securities Financial Corp CSF founded on

October 28th

2011 approved by the state Council and

regulated by the csrc CSF provides

services to Securities firms for margin

trading and Securities lending its

shareholders include major exchanges and

financial institutions like the Shanghai

stock exchange Shenzhen Stock Exchange

and China Financial Futures

Exchange in essence the Securities

lending business which allows major

players to profit effortlessly is

sanctioned by the authorities Chinese

fund and stock investors face a

well-coordinated harvesting machine made

up of State

institutions some Financial bloggers

argue that securities Landing provides

necessary resources for margin trading

when Securities firms face shortages

while Short Selling carries significant

risks the rules in China are absurdly

skewed for example margin requirements

can be as low as 10% encouraging High

leverage Short Selling which distorts

Market balance two key regulations

protect short sellers in China extension

and cash settlement the extension allows

short sellers more time to return borrow

stocks if prices rise significantly for

instance if stock prices increase from

10 un to 20 un short sellers can apply

for up to a six-month extension to cover

their

positions cash settlement permits short

sellers to settle with cash instead of

returning stocks at the current higher

price this absurd rule allows short

sellers to fail cheaply often just

paying interest costs while having

already sold borrowed stocks on the

Market this effectively AIDS major

shareholders in reducing their Holdings

compounding the

problem although the csrc has since

halted Security's lending the scandal's

impact has been profound and difficult

to manage imagine a fund lending its

stocks to short sellers who then short

their same stocks seemingly just to earn

a bit of Interest this situation

highlights a questionable aspect of the

financial system this financial blogger

concluded that Securities lending is a

business provided by Banks funds and

insurance companies with funds

essentially being issuers and securities

firms acting as

intermediaries are mutual funds lending

their stocks to short sell their shares

it's unbelievable GF fund management

confirmed that its CSI photovoltaic

industry Index Fund lent out stocks

worth

26.69 of the fund's net assets this is

ridiculous if stocks keep falling any

responsible fund manager should adjust

the Holdings reduce positions or even

sell off to protect investors money not

take advantage of them lending stocks

for short selling to make a bit of

Interest treats investor money like play

money it's mindboggling and shows how

strange the a share market can

be in the ashare market the more funds

investors buy the more stocks are used

for Securities Lending the same stock is

repeatedly sold through Securities

lending bought by the fund at a low

price and then lent out again over and

over in a cycle of borrow sell buy repay

this endless loop is what the head of

China at Black Rock referred to when she

said you can never finish buying Black

Rock known as the world's largest asset

manager is led by a team composed of

many Wall Street investment experts and

manages over $8 trillion they have been

Unstoppable able in the global financial

markets confidently entering the ashare

market Black Rock accumulated a

staggering loss of 1.4 billion UN in

Just 2 years some say that black rock

represents Capital while the ashare

market represents Society how can

Capital outplay Society the ashare

market has so many stocks that they are

practically infinite even if black rocks

9 trillion us were all invested it would

be like throwing money into a black hole

and the aare index would remain steady

at around 3,000 points Black Rock and

others like it will never understand the

nuances of Securities lending how

institutions can short stocks the

intricacies of illegal share reduction

or the t+1 trading rule they especially

don't understand why others can break

the rules while they cannot in the end

everyone loses except for the major

players and the state-backed

institutions they control some

frustrated fund investors said said you

take my money charge me management fees

and then use my money to crash my fund I

admit I'm foolish I give up and I sell

but you could just rob me outright yet

you insist on giving me a reason however

after suffering so many losses fun

investors have learned to vote with

their feet Karma has arrived golden

trust copac fund management spent 3

months preparing for issue didn't raise

a single SC unprecedented it seems like

the tide has turned nobody escapes Karma

this indicates that fund investors have

awakened or are simply too scared of

losses a fund's Essence is giving money

to someone else to manage your stock

trading if you lose it's your loss you

still pay management fees profits are a

luxury funds use your money to take on

others losing positions driving down

stock prices anyone buying a fund is the

ultimate sucker Look at Full gold fund

management once held as a top public

fund in Shanghai which lost an

astonishing 103.2 billion went in Just 2

years over 10 years it collected 30.9

billion Y in management fees they eat

your food and then break your pot where

else would such a thing happen now that

trust has collapsed nobody believes him

anymore to succeed one must be kind and

honest in business ensuring longlasting

relationships funds are no longer

issuing successfully and soon neither

will stocks in May as a shares continue

to plunge the scale of equity and mixed

funds also significantly shrank the size

and shares of mixed funds both declined

with a total size at the end of May

standing at 3.7 trillion yen a

month-on-month decrease of 55 billion

yen fund shares decreased by 31 billion

dropping to 3.4 trillion shares

meanwhile the size of Equity Funds at

the end of May was 3.14 trillion yen

down 40.7 7 billion un month on month on

May 30th jmn news reported that the

market entered a volatile adjustment

phase in the second quarter although the

issuance of new mutual funds showed some

recovery the funds were primarily

flowing into bond funds data from Asset

Management Association of China showed

that by the end of May the total scale

of mutual funds reached 31.2 trillion y

increasing by 3.6 trillion yen in the

first 5 months of this year with nearly

12,000 products however these are

predominantly fixed income products

known for their stability namely bond

funds the China Securities Journal

reported that the total scale of mutual

funds exceeding 31 trillion yen has

garnered significant Market attention

Additionally the structural Divergence

between actively and passively managed

funds is equally noteworthy from 20122

to the end of May 2024 despite the

overall scale of mutual funds reaching

new highs the size of actively managed

Equity Funds has dropped by over 30%

analysts interviewed believe that the

decline in the scale of actively managed

Equity Funds is related to market trends

and other factors this persistent

situation also reflects a deeper issue a

lack of complete trust in the active

investment capabilities of mutual funds

this Divergence has rapidly developed in

recent years and is closely linked to

the poor performance of actively

managing Equity Funds in simple terms

the collapse of the nation's credibility

system has led to a collapse in investor

confidence some Financial bloggers argue

that the current state of China's stock

market is not solely due to Securities

lending Securities lending has become a

focal point because the Management's

favoritism is too blatant for the

Chinese Communist Party the stock market

is just one of its cash machines along

with the real estate and bond markets

wherever you think you can make money

countless TR are waiting even those who

have supposedly achieved Financial

Freedom like high ranking white collar

workers cannot Escape being exploited

while the CCP is aggressively harvesting

wealth from the stock Bond and real

estate markets it hypocritically

promotes the so-called common prosperity

to deceive the lower classes one of the

most affected groups by the common

Prosperity movement is high income

Financial professionals these

professionals including investment

bankers and fund managers were

criticized by the CCP for their

luxurious Lifestyles as hedonistic

currently the CCP is tightening control

over the financial industry with 66

trillion US Banks and securities firms

are cutting salaries and other benefits

a new round of anti-corruption

inspections has begun targeting some of

the largest state-owned banks the

central bank and major Regulatory

Agencies this is the first extensive

investigation since the anti-corruption

campaign of 202

according to Bloomberg at least 130

Financial officials and Executives were

investigated or punished in 20123 alone

[Music]