The Heiress's Game

Zhou Zhaosen, the vice president of Hang Lung Bank, invited Zheng Zhaoming to dinner several times before they finally agreed.

Galaxy Securities and Hang Lung Bank had a lot of overlap in the Brilliant International project. The securities firm was responsible for the issuance, underwriting, and market value maintenance, while the bank was responsible for loan approvals and equity pledges. Normally, the two sides did their own business and kept to themselves.

But Zhou Zhaosen has been preoccupied with something lately: he can't feel at ease until he sees Zheng Zhaoming.

The dinner was booked at a long-established Cantonese restaurant in Yunjing City. The private room wasn't big, but it was private.

After exchanging a few pleasantries and discussing the recent macroeconomic situation and the trends in the capital market, Zhou Zhaosen put down his chopsticks, picked up his glass, and casually mentioned something.

"Mr. Zheng, have you almost finished processing the tickets for Brilliant International?"

Zheng Zhaoming was putting a piece of crispy roast pork into his mouth when he heard this. He chuckled, swallowed the pork, and wiped his mouth with a napkin.

"They were all rented out, not a single one left, clean and efficient. Those tickets had been sitting in my account gathering dust for more than half a year, but finally they earned the company some high interest."

Zhou Zhaosen's fingers, which were holding the wine glass, paused slightly.

He originally thought Zheng Zhaoming would say "still lying in the tent" or "almost done".

The words "all rented out" sent a jolt through the back of his head.

Who in the market has the appetite to take all of such a large amount of stock in one go?

The rent is also based on market prices with additional charges, and the number of institutions in the industry that can afford this cost can be counted on one hand.

"Who is the lessee?" Zhou Zhaosen asked, his tone still casual and conversational.

Zheng Zhaoming leaned back in his chair, his smile unchanged.

He shook his head. "Old Zhou, that's not very interesting. I really can't say that."

You know about major client privacy.

If I reveal my name to you, my professional qualification certificate will be taken back tomorrow.

He picked up a piece of roast pork and put it in Zhou Zhaosen's bowl.

"Anyway, we've already received the interest, so it doesn't matter to us who rents it."

Zhou Zhaosen looked down at the piece of roasted pork in his bowl, without touching his chopsticks.

"Old Zheng, do you think this is okay?"

He raised his eyes and made his point clear: "All those tickets were rented to one person, and the rent was increased. This shows that the other party is not a small retail investor who is just playing around, but a big short seller who came prepared."

The current stock price of Brilliant International has been driven up to 120 yuan, a price that is out of touch with its fundamentals, something you know better than I do.

"If you rent out these tickets, people might use them for short selling, and the market could crash."

"So what if the market crashes?" Zheng Zhaoming asked with a smile before he could finish speaking.

He picked up his glass and took a sip, his tone calm and frank, as if patiently explaining a very simple principle to a friend who didn't know much about it.

"Old Zhou, the business logic of banks and securities firms is different. I understand your concerns, but to be honest with you, short-term fluctuations in the stock price of Brilliant International have no impact on me."

Zhou Zhaosen frowned but did not reply.

"Think about it," Zheng Zhaoming put down his wine glass and counted on his fingers as he talked to him.

"Where did we get these shares? Part of them were invested by our proprietary trading desk. This part does have a holding cost, but it accounts for a small percentage, you could say it's very small."

What's the bulk of it? It's the holdings on behalf of major clients, and the allocation of several asset management products.

These positions have lock-up periods and holding requirements. Regardless of whether the stock price rises to 120 or falls to 50, we cannot sell them within the specified period.

Stocks that cannot be sold, even if they rise, only look good on paper; if they fall, only look bad on paper. They have no impact on our company's actual profit or loss.

"But renting is different." Zheng Zhaoming held up a finger, his tone shifting from explanation to instruction, clearly very proud of this business.

"The ticket still belongs to the customer; ownership has not been transferred in any way. I am only temporarily transferring the right to use it, and it must be returned to me when the expiration date."

During this period, I collected rent, and the interest rate increased by 30%, so I made a pure profit.

The stock price went up, but when the shares were returned, the number of shares remained the same.

The stock price fell, but when the shares were returned, it was still the same number—anyway, I couldn't sell my shares anyway, so what did the rise and fall have to do with me? I earn rent, not price differences.

Zhou Zhaosen slowly placed the wine glass he was holding on the table.

Securities firms play the role of "stable shareholders" in the shareholder list of listed companies, holding a large number of shares for a long time through various means such as proprietary trading, asset management products, and nominee shareholding by major clients.

For securities firms, these stocks sitting idle in their accounts are dead money; renting them out to collect interest is how they turn dead money into live money.

As for what the lessee does with the money, the brokerage firm has neither the need to know nor the motivation to interfere.

Even if the other party is shorting the stock and drives down the price, the brokerage firm doesn't lose anything—after all, those stocks couldn't be sold anyway. Before the crash, there were the same number of shares, and after the crash, there are still the same number of shares, and the interest can still be collected.

This logic creates a perfect closed loop for securities firms.

But Zhou Zhaosen was never concerned about whether Galaxy Securities had suffered any losses; he was concerned about something else entirely.

"I understand your business logic."

Zhou Zhaosen put the wine glass back on the table. "But Lao Zheng, our Hang Lung Bank is different from yours."

You earn rent and interest; stock price fluctuations have nothing to do with you.

We profit from the interest rate spread; Bai Wenxiong pledged his shares in Brilliant International to us.

Zheng Zhaoming paused for a moment. Bai Wenxiong had poured all the cash he had on hand into the share buyback program to support the stock price, and that wasn't enough. He also pledged a large number of his own shares to borrow a large sum of money from Hang Lung Bank.

At the time, Hang Lung Bank saw that Brilliant International's stock price was holding up well, and since Pak Man-hung's surname was Pak, they approved the application without much thought.

Looking back now, that loan was probably quite large.

"How much did he pledge?" Zheng Zhaoming asked.

Zhou Zhaosen was silent for a few seconds, then announced a number, causing Zheng Zhaoming's chopsticks to freeze in mid-air.

"So many?" His tone was finally no longer as nonchalant as before.

"And the collateralization ratio is maximized."

Zhou Zhaosen's every word seemed to be squeezed out from between his teeth.

"At that time, the stock price was above 100 yuan, and we assessed that the risk was controllable."

But now you've rented out all the tickets, the lessees are unknown, and there are a lot of people borrowing tickets in the market. What does this mean?

This means someone is trying to short the stock. If the short sellers actually do so, the stock price will drop, and the value of the shares they pledged to us will decrease accordingly.

Zhou Zhaosen also knew that Galaxy Securities was renting out stocks and earning interest; the rise and fall of stock prices had nothing to do with them. They were landlords sitting on the shore collecting rent.

Hang Lung Bank was the one who lent money to Pak Man-hung. When the stock price was NT$120, the pledged shares were worth NT$120, and the bank's loan was safe and sound.

However, once the stock price starts to fall and drops below the liquidation line, Pak Man-hung must add margin.

If the funds cannot be replenished, the bank has the right to force liquidation, sell the pledged shares, and prioritize recovering its own loan.

At that point, a massive amount of selling pressure will hit the market, causing stock prices to plummet further and creating a chain reaction.

If the stock price really collapses from 120 yuan, how many buyers in the market will be willing to take over?

If the positions can't be liquidated when the time comes, the bad debts will fall on the bank.

"He has now poured all his cash flow into it," Zhou Zhaosen said.

"I had someone discreetly inquire, and it seems his mother has already used up most of her available cash. If we ask him to pay more security deposit, how will he use it?"

The private room remained quiet for a while. Most of the dishes on the table had gone cold, and the fat from the crispy roast pork had congealed into a layer of white paste. The two people had messy cups and plates in front of them, but neither of them had the appetite to touch their chopsticks.

Zheng Zhaoming put down his wine glass and looked at the cold roast goose on the plate opposite him.

"Old Zhou," he said slowly, "I can't help you with what you're telling me."

The tickets have already been rented out, the contract has been signed, and the interest has been collected. I can't possibly get the tickets back before the expiration date.

Moreover, even if I don't rent them out, I can't sell my tickets and therefore can't help prop up the market.

You work for a bank, you should know better than me that the root of the problem doesn't lie with me.

"I know the roots aren't with you." Zhou Zhaosen picked up the now-cold tea and took a sip.

"I just want to let you know in advance that if Brilliant International's stock price fluctuates wildly in the future, it's not us dumping shares, it's someone else doing it. You should be prepared."

"How big is the risk?" Zheng Zhaoming asked.

"If the short sellers really make a move, this wave will probably not be a small pullback of just a few points."

Bai Wenxiong's current situation is far more precarious than he realizes.

He added, "He thought he had won the battle to defend the stock price."

But every share he bought was acquired with his own hard-earned money, and we still don't know whose shares he bought.

"You should start planning as soon as possible," Zheng Zhaoming said.

Zhou Zhaosen nodded.

This section involves a lot of professional financial knowledge, and I have tried my best to explain it in terms that everyone can understand. If you still can't understand it, it just means that my level is not high enough!