Pay Cuts, Salary Caps, Retrenchments: Financial Industry Storm Now Arrives
Summary
TLDRThe 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
📉 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.
🏛️ 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).
🌐 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.
📉 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.
Mindmap
Keywords
💡Insomnia
💡Flash Crash
💡Financial Consumers
💡Securities Lending
💡Short Selling
💡Management Fees
💡China Securities Financial Corp (CSF)
💡Actively Managed Equity Funds
💡Common Prosperity
💡Anti-Corruption Campaign
💡Investor Confidence
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]
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