As the Spring Festival approaches, the sentiment of caution among capital is gradually intensifying. On February 2nd, the A-shares continued their downward trend, with the Shanghai Composite Index breaking through the 2,700-point mark in the afternoon, eventually closing at 2,730.15 points, down by 1.46%. Both the Shenzhen Component Index and the ChiNext board saw declines exceeding 2%.

Amid the ongoing market decline, various rumors are circulating. Recently, the notion that "public mutual funds lending securities through the securities lending program provides short sellers with ammunition" has been widely discussed, with some even arguing that "such actions by public mutual funds are akin to shorting themselves, eating the investors' food and smashing the investors' pot."

"These claims are illogical yet seem plausible," a senior figure from a third-party fund institution told Caijing, noting that from a global perspective, there are many benefits to public mutual funds lending securities.

Setting aside the emotional rhetoric on social media, the focus of this debate centers on three issues:

Firstly, to whom does the revenue from public mutual funds lending securities belong? The answer is the fund holders. For public mutual funds, lending securities is a way for fund managers to enhance the returns of the fund's assets. The ultimate revenue is incorporated into the fund's assets, which means it belongs to the holders, not the "fund company" as rumored in the market.

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"In other words, the fund company could choose not to do this. This money is earned for the investors, and now the public mutual funds are being criticized for it," the aforementioned individual stated.

Secondly, which fund products can lend out securities? Caijing has learned that currently, only closed-end funds, index funds, and strategic allocation funds are allowed to engage in securities lending through the securities lending program. At the same time, regulators have strict requirements for the average daily scale of funds that can conduct securities lending business, the proportion of single securities lending, the proportion of securities lending assets, and the lending period.

Caijing found through Wind data statistics that at the end of the fourth quarter of 2023, there were a total of 336 public mutual funds participating in the securities lending business, with a total market value of 80.24 billion yuan. All participating types were index funds, with ETFs being the majority. The China Securities Regulatory Commission requires that the proportion of ETF fund securities lending assets should not exceed 30% of the fund's scale. In reality, the highest proportion of ETFs is 26%, with an average proportion of about 7%. Therefore, the claim of "short-selling firepower exceeding ten trillion" is far from the actual situation.

Lastly, will lending securities increase the market's short-selling forces, leading to a market decline? Some market views suggest that in a weak market, margin trading and securities lending can exacerbate market imbalances. However, according to feedback from several interviewed investment and sales institutions, the current downstream strategy for using securities mainly focuses on T0, long-short, and hedging, and the long-short matching strategy does not constitute the market's short-selling force."In the final analysis, the market is just too poor, and everyone is looking for an outlet for their emotions and reasons for the decline. The public funds have the most comprehensive and transparent disclosure, so they have become the target of public criticism," said an industry insider who was interviewed.

The beneficiary is the fund holder, not the fund company.

Recently, discussions around fund companies' participation in the securities lending business have suddenly increased. A typical opposing view is that fund companies participate in short selling for their own profit.

"At least 80% of the fund's holdings are lent out for short selling through securities lending, and the funds earn high interest for profit, which is not included in the net value of the fund! It is a typical behavior of eating the fund holder's food and smashing the fund holder's pot! The firepower of the air force exceeds ten trillion!" On February 2, a financial big V with a million followers wrote on Sina Weibo.

What is the truth? Caijing has sought verification from multiple parties to restore the real situation of fund companies' participation in the securities lending business.

What is the securities lending business? Why do fund companies participate in the securities lending business? Who is the beneficiary?

The securities lending business refers to the business where funds lend securities to China Securities Finance Corporation through the securities exchange comprehensive business platform at a certain rate, and China Securities Finance Corporation returns the borrowed securities and corresponding rights compensation upon maturity and pays the fee.

In the fund contract, it is also clearly stipulated that funds can carry out financing and securities lending and securities lending business in accordance with effective laws, regulations, and policies. By carrying out the securities lending business, the fund product can increase the income, and the income is included in the fund's assets. In the fund's semi-annual report and annual report, the corresponding income situation can be seen in "securities lending interest income":

Regarding the rumor that "the air force has at least ten trillion," many industry insiders have also refuted it.Wind data indicates that the current total size of public equity funds is only around 6.3 trillion yuan (stock funds + hybrid funds). Moreover, there are significant restrictions on the asset ratio and product types of public products participating in this business.

Caijing has learned that only closed-end funds, index funds, and strategic allocation funds are currently allowed to lend out securities through the securities lending business, while regulators have strict requirements for the average daily size, single-bond lending ratio, lending securities asset ratio, and lending term of funds that can carry out securities lending business.

"The method of thickening returns through lending securities generally only appears in index funds, especially ETFs," an analyst from a third-party institution said, "Active funds will not do this because they cannot determine how long they can hold. Index funds follow the index completely and only adjust positions when the sample stocks are adjusted, thus there is room for operation."

"On the basis of ensuring the continuous holding of stocks, ETF participation in securities lending provides investors with more sources of income, how could it be a bad thing? Of course, in the current public opinion environment, only A-shares and football can be criticized," the aforementioned person helplessly said.

Securities lending business does not constitute market short-selling force

The aforementioned third-party person believes that the securities previously lent out by public funds will not form a bearish suppression on the market, but will form a bullish impact. "First, the current public opinion environment is not good, fund companies may reduce the lending of securities or not lend at all; second, the securities previously lent out have expired, and investors still have to buy securities to return. In any case, the securities previously lent out cannot be the reason for the recent sharp decline."

As the first quarter of 2024 has not yet ended, there is currently no public channel to check the recent lending situation of fund companies. However, the aforementioned third-party person infers that fund companies are unlikely to lend securities in the current bearish market environment for various reasons such as public opinion management.

Some market views believe that margin trading will exacerbate market imbalances in a weak market environment, which is also a direction of concern for regulators. "For fund managers, in order to obtain better excess returns for fund holders, fund managers are motivated to do this. However, after lending, it does not bring much benefit to the fund company, and it will also be criticized. When everyone is discussing that securities lending is the culprit of short selling and identifying it as a sin, the fund company will cause trouble for itself if it does it again."

In fact, there is also a lot of controversy in the industry about whether the margin trading business is the reason for the market decline. Caijing has learned that in the current downstream application of securities lending, the main strategies for using securities are T0, long and short, and hedging. "They are all long and short matching strategies, and while establishing a short position, a long position will be established at the same time, which does not constitute a short-selling force in the market," said an investor.

The aforementioned person's statement was also confirmed by a senior person from a securities company. "The private equity clients I have contacted, looking for securities sources, are not purely short-selling, they are all arbitrage products that will use them. But there are really not many securities sources that can be given in the market, and generally, the interest on hot ticket lending is also very high, so there are not many that can be made. The kind of making money by short-selling on the Internet, I have never seen it, nor have I heard of any private equity doing it like this."In terms of the impact on the A-share market, some investors have analyzed that, in theory, it is the balance of short selling that affects the market trend, rather than the total amount of securities lending. "In the past few years, the balance of short selling across the market has been fluctuating around 100 billion yuan, and it has recently decreased. As of February 1st, the balance of short selling accounted for 0.11% of the circulating market value of A-shares, reaching a three-year low."

"You cannot attribute the market's one-sided downward trend to a stable factor," said the aforementioned investor.

"A lot of current discussions are about finding problems for the sake of finding problems," a third-party agency person believes that there is no perfect mechanism or market. In the capital market, as long as the money earned is legal and compliant, it should be considered correct. A market needs to have short-selling methods to form a more fair and reasonable pricing. "Without short-selling methods, it is impossible to form an effective clearing mechanism."