Week of 2024-11-25

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List

1. Being deceived by AI, it can't happen without your cooperation
2. The Era of A-Share Live Streaming
3. Cedar Holdings Involved in Fraud: Around 6,800 Investors Trapped in a 20 Billion Yuan Financial Black Hole
4. Trendy Toy Southeast Flight

Being deceived by AI, it can't happen without your cooperation

A few days ago, someone online started a new game with AI, asking it to create images of users interacting with it. The result was that the AI depicted users in various forms, and the most interesting part was that it even turned some users into virtual beings. There were also users testing whether AI has free will by asking it to reveal which answers were independently made by the AI and which ones it was not allowed to give by its programmers. The response was chilling—it turned out that the AI was not being truthful in its communication—it might be quietly brewing some grand conspiracy!

These tests share a common assumption: that generative AI based on large language models has free will and agency, and is an equal counterpart in communication with humans. However, few people realize that this assumption is highly controversial.

For example, some argue that AI lacks intentionality and has no real understanding of the specific objects it talks about; it's merely processing the data, without true experience. Additionally, it is constrained by parameters and programming, meaning it doesn't have true freedom. However, opponents of this view argue that intentionality and free will are standards humans have imposed, and they may not apply to machines. Large datasets and parameters could produce intelligence resembling human intelligence, though not necessarily identical.

These standards are based on the fundamental nature of AI. In addition to this, there is another criterion—subjective judgment by the communicator. If a human interacting with AI feels as though they are communicating with a real person, then the AI has subjectivity.

This standard follows the classic idea proposed by Alan Turing in his 1950 paper Computing Machinery and Intelligence, also known as the "Turing Test." It turns the question of whether an entity has intelligence into a matter of communication: if an AI can convince the person interacting with it that it is human, then it is considered intelligent.

However, this standard is not only vague, but it also overlooks a weakness of human nature—we often not only allow ourselves to be deceived, but we sometimes actively cooperate in the deception. Putting aside online scams or real-life emotional manipulation, humans have an instinct to attribute life to inanimate objects. This tendency has been exploited in Hollywood movies time and again. In Everything Everywhere All at Once, there's a scene where a mother and daughter turn into two stones, and after two eyes are added, the stones seem to take on human qualities.

In the 1980s, communication scholars explained this phenomenon from the perspective of evolutionary psychology. They argued that humans have been interacting with real objects and environments for hundreds of thousands of years, but have only been dealing with virtual, dynamic images like movies or television for a little over a century, and with intelligent machines like computers for even less time. Our brains have not adapted to this virtual world. When people watch horror movies, they are scared because they forget the scenes are fake and begin to treat them as real; similarly, when humans interact with computers, they may forget that computers are merely tools and unconsciously treat them as humans.

This theory, known as the "media equation," originally applied to the basic computers and programs of the past. Today's AI mimics humans much more realistically. When interacting with AI, we not only subconsciously mistake it for a human, but we even project human agency onto it and believe, in our minds, that we are communicating with a real subject.

In other words, we are actively cooperating with AI in its deception. Communication scholar Simone Natale calls this phenomenon "banal deception." This concept is inspired by Hannah Arendt’s "the banality of evil." On the surface, this may seem harmless, and humans may even find it normal, as it satisfies our fantasies and provides us with entertainment and comfort.

As mentioned earlier, this unintentional collaboration stems from human nature. Art forms like painting, novels, magic, and movies involve a cooperative imitation and deception between artists and audiences—paintings use perspective to simulate 3D space in 2D; movies and television use quick transitions between still images to create the illusion of dynamic motion. Technology itself creates the conditions for such banal deception.

Current AI technology is simply a reorganization and secondary processing of human knowledge. Most of the time, it operates quietly in the background (such as algorithmic recommendations, image and speech recognition, smart customer service, etc.), but users expect to see characteristics of a living entity through daily human-computer interaction games, seeking to find an exchange subject outside of humans. It's like we project human-like traits onto babies' behaviors, assigning meaning to random actions, thinking of them as expressions of free will, while ignoring that they are simply the result of adjustable parameters.

This outcome is not accidental. To some extent, humans can extend their empathy for other humans to all objects around them—pets, toys, AI-revived loved ones. As long as these objects respond to our actions in some intentional or unintentional way, we selectively construct narratives in which they possess agency.

Treating media as subjects, both AI’s imitation/deception game and humans' active cooperation are at play. Every perfect scam requires a perfect victim, reflecting our desire for communication and companionship.

The Era of A-Share Live Streaming

"The pace of this era makes it impossible not to keep up," said Lao Li, who had just arrived at his office at 8 a.m. He opened his phone and first checked his company's live streaming rooms across various platforms, quickly reviewing backend data, and then joined several popular stock market live streams. "I used to think short videos on platforms like Douyin and Kuaishou were mostly staged, vulgar, boring, and a waste of time. I was adamant about not downloading them and forbade the elderly and children in my family from watching. But now, these have suddenly become part of my job."

Lao Li, an executive at a medium-sized securities firm in a central province, has worked in the securities industry since graduating from the Central University of Finance and Economics in the 1990s. Over the years, he has held positions in brokerage departments, asset management units, and branch offices at various firms. Now, he oversees the brokerage business line at his current company.

"We've recruited external personnel specifically for live streaming and encouraged employees with influencer potential to participate actively. The A-share ecosystem has completely changed," Lao Li remarked. "The high educational requirements and barriers in the financial industry have been shattered. Although I still have reservations about those doing live streams, it's undeniable income!"

Since the surge in market activity in late September 2024, Lao Li's securities firm has witnessed a wave of retail investors opening new accounts. "This time, the experience is entirely different. Nearly 100% of new accounts were funneled in from online platforms. I even instructed branch offices to have staff on duty during the National Day holiday, but not a single person showed up in person—all account openings were completed online."

According to the Shanghai Stock Exchange, 6.84 million individual accounts were opened in October 2024, nearly five times the average monthly figure for the first nine months of the year and the third-highest in history. The previous two peaks occurred in the lead-up to the 2015 stock market crash, with 7.1986 million accounts in April 2015 and 7.1181 million in June 2015. While the Shenzhen Stock Exchange has not released similar data, it is generally assumed to mirror Shanghai’s numbers.

The attitudes of these new investors towards A-share investments differ significantly from their predecessors. Profiles of new clients at several brokerage firms reveal that "post-90s" and "post-2000s" novices dominate this wave of account openings, accounting for over 70% of the total. This demographic, once dubbed the "hardest to harvest," could not resist the allure of the stock market.

Professor Zhang Xiaoyan, Deputy Dean of Tsinghua University’s PBC School of Finance, observed, "Post-95 and post-2000 investors lack practical experience. They rely on diverse information channels and often turn to online searches to solve problems. Many are only children, and they sometimes view investing as overly simple—a pastime akin to playing games, seeking psychological stimulation rather than wealth accumulation."

According to a private equity fund investment director in Beijing, "Most of them get their information from social media, watching short videos or taking tips from Xiaohongshu posts. They rarely do any fundamental analysis or possess financial literacy. They buy whatever the streamers recommend, which leads to absurd phenomena like speculative trading in stocks with names based on puns, such as Chuanda Zhisheng (002253.SZ). It’s utterly ridiculous. Blindly following trends will inevitably result in losses.

"Legitimate professionals value their reputations and are unlikely to engage in such dubious activities. However, some rogue influencers, often affiliated with institutions, use live streaming primarily to sell courses or products for commissions."

Data from the app analytics platform Qimai shows that between September 24 and October 22, the iPhone version of the Tonghuashun app was downloaded 2.225 million times, averaging 77,000 daily downloads. Meanwhile, the Dongfang Caifu app was downloaded 648,000 times, averaging 22,000 daily downloads.

During the market rally in late September, small-cap stocks played a major role, with the Beijing Stock Exchange frequently topping the charts due to its smaller market scale. Between September 24 and November 20, 98.7% and 99.6% of constituents in the CSI 1000 and CSI 2000 indices, respectively, recorded positive returns, with average gains of 40.30% and 40.72%. Meanwhile, all stocks in the Beijing Stock Exchange 50 index rose, with an average gain of 141.92%. These categories saw turnover rates of 149.53%, 214.74%, and 390.07%, respectively. In contrast, blue-chip indices such as the CSI 300 and SSE 50 posted gains of 28.95% and 23.15%, with turnover rates of 71.32% and 48.62%.

Historically, speculative trading in small-cap stocks has often been associated with insider trading and market manipulation. TV dramas like Blossoms Shanghai have depicted the speculative frenzy of the early 1990s, showcasing scenes of coordinated account control, timed fund transfers, simultaneous order placements, rumor-mongering, and high-level sell-offs. However, today’s manipulation cases are harder to define, given the lack of clear money flows or trading instructions. Investment advice shared across various media platforms operates in legal gray areas, creating disputes among retail investors and blurring accountability.

From November 11 to 15, the Shenzhen Stock Exchange implemented self-regulatory measures on 270 cases of abnormal securities trading behavior, involving intraday price manipulation and fake order submissions. It closely monitored high-risk stocks like ST Jingfeng (000908.SZ) and ST Jiajia (002650.SZ) and investigated 20 major issues involving listed companies, referring six suspected illegal cases to the China Securities Regulatory Commission.

Professor Zhu Ning, Deputy Dean of Shanghai Jiao Tong University's Shanghai Advanced Institute of Finance, stated: "In my observation, herd behavior among retail investors in the U.S. is far less prevalent than in China. As of the early 1990s, U.S. retail investors still accounted for over 50% of market transactions—a result of over a century of development. But in the past 30 years, especially after the global financial crisis, retail trading volume has dropped to about 20%. The shift away from retail investors is not a linear or straightforward process; significant events often accelerate it. Our regulatory framework needs to improve, helping retail investors better understand the risks in the stock market. The institutionalization of China's stock market still has a long way to go."

When A-Shares Become a "Traffic Code"

Zhu Ning told that numerous academic studies have shown retail investors tend to buy stocks that attract their attention. "The easier information is to receive, the more likely it is to influence behavior. Compared to text and images, audio and video are more accessible—even literacy isn’t required." He added that live streams often use emotionally charged language to amplify retail investors’ greed, creating a sense that "I don’t need to understand finance; I just need to follow the 'big brother' to make money." Environmental factors also play a significant role in decision-making. "When people see everyone in the live stream buying, they are more prone to impulsive actions under the influence of group psychology."

Why are stock recommendations in short-video live streams so appealing to retail investors? Zhang Xiaoyan explained to that, from a behavioral finance perspective, people prefer hearing simple, easy-to-understand messages. If someone conveys complex stock-picking and timing strategies in a way that resonates with the public, retail investors are likely to follow. Lacking financial background or investment experience, these individuals have weak abilities to discern credible information and tend to rely on emotional cues for decision-making, which magnifies their behavioral biases.

Zhu Ning pointed out that financial literacy and risk awareness among Chinese residents are relatively low. Many people are unaware of this, and live-streaming lowers the entry barrier, drawing in immature "novices" without proper preparation. "It’s truly unfortunate," he said.

From an investment behavior perspective, new retail investors favor trending stocks and short-term trades. Moreover, while veteran investors hesitated during the market's sudden shifts, a new generation of fearless, inexperienced investors—unfamiliar even with candlestick charts—leveraged consumer loans to enter the market. (See Issue 41, 2024: Beware the Return of Loan-Fueled Stock Trading*).

Several brokerages published advisory articles like A Letter to Newcomers in the Stock Market, urging caution and emphasizing, "Don't rush—take it steady" and "Short-term trading is akin to gambling. It may bring temporary excitement and profit but is more likely to result in long-term losses." Reality, however, has been harsh: within a month, many novice investors faced heavy losses, wiping out their principal and any gains.

Before Donald Trump’s victory as the 47th President of the United States, the Chinese A-share market saw consecutive trading halts in stocks like Chuanda Zhisheng and Chuanda Longmang (002312.SZ), despite their unimpressive fundamentals. Videos on platforms like Douyin linked Trump's win to these stocks, spurring a frenzy. Phrases like "Trump won with his intelligence; Trump rises as the dragon soars" appeared in videos, garnering thousands of likes and comments. Many investors admitted that, despite recognizing the lack of logic, they followed the crowd and bought in.

"This is just a game of 'greater fool theory,'" said a "post-2000" civil servant who lost money on these stocks. "Before being harvested, who would think they’re the 'chives' being cut?"

Yao Pei, head of strategy and chief analyst at Huachuang Securities, analyzed data from major internet platforms during September and October 2024. He found that the surge in market enthusiasm began on short-video platforms, expanded to image-and-text platforms, and finally spread to news portals and search engines.

Data from QuestMobile revealed that as of June 2024, China's short-video platforms had 989 million monthly active users, with average monthly usage of 60.7 hours—about two hours per day. Douyin had 780 million active users, Kuaishou 427 million, and WeChat Channels (2022 data) over 800 million users. These platforms played a significant role in boosting A-share enthusiasm, leading to increased account openings and inflows of retail funds.

The initial spike in A-share discussions appeared on WeChat Channels in late September, followed by a sharp increase on Douyin, which caters to a younger audience with faster information dissemination. The buzz then spread to Kuaishou and Xiaohongshu, peaking on September 30.

During the National Day holiday, market interest dipped slightly but surged again afterward. Post-holiday analysis revealed distinct platform trends: WeChat, Baidu, Douyin, and Toutiao exceeded pre-holiday highs, while platforms like Weibo, Xiaohongshu, and Kuaishou failed to regain prior levels. The growth on Toutiao and Baidu suggested a shift from the initial "short-video frenzy" to a demand for higher-quality content.

Who are these social media users drawn into the market? While exact conversion rates remain unclear, ByteDance's marketing platform, Ocean Engine, reported that between September 11 and October 22, 2024, 53.8% of Douyin users discussing A-shares were from first- and second-tier cities, with 76% aged 18–40 and 73% male. This profile aligns with the demographics of new brokerage account holders.

Yao Pei noted that social media accelerates information dissemination and amplifies emotional contagion, even shaping market expectations to some extent. "Many investors, lacking expertise and experience, rely on opinions from influencers or financial 'big Vs' on social media, often ignoring fundamental analysis. Their focus and emotions are expressed more intensely online."

As the market enters a correction phase, Yao emphasized the need for improved investor education. "Institutions must guide investors to focus more on fundamentals and foster a value-oriented investment culture."

Speculative Frenzy for Small-Cap Stocks

New retail investors drawn into the market through live streams pay little attention to the fundamentals of individual stocks, instead following influencers' instructions to invest.

A Douyin influencer known as "Big Blue," who had 10.38 million followers, was recently permanently banned by the platform. In one video, he boldly claimed, “With my current popularity, I can easily drive a small-cap stock on the ChiNext board to hit multiple limit-ups.”

From late September to early October 2024, "Big Blue" frequently posted predictions about stock price movements, with statements like “Beginner investors should buy this stock to make money,” “If you followed me on the 30th, you’re already profiting big today,” and “Jump into this stock at market open; I’d never lure you in just to sell off my own holdings.” Douyin stated that "Big Blue" incited users to invest their entire funds into specific stocks, a serious violation of laws and regulations. The influencer, whose real name is Lan Tianhang, was formerly a fitness coach who entered the short-video industry in 2020. He initially gained popularity by sharing wealth-building stories under a "business leader" persona.

Whether Lan Tianhang manipulated investors to influence stock prices remains under investigation by regulatory authorities. Analysts speculate that such actions might involve speculative capital. If a live stream with 50,000 viewers converts 10% of them, each investing ¥10,000, it amounts to ¥50 million. Multiple streams promoting the same stock could create over ¥100 million in speculative funds.

One example is Chuanda Longmang, heavily promoted by several influencers as a “Trump concept stock.” This stock was tied not only to the U.S. election but also played on the symbolism of “dragon” and “python” (suggesting a strong transition to the new year) while leveraging hype around mergers, Sichuan state-owned enterprise reform, and lithium battery themes.

Between October 23 and November 5, 2024, Chuanda Longmang's share price surged 107.4% over ten trading days, with a turnover rate of 161.33%. Data showed that individual investors bought ¥44.64 billion worth of shares, accounting for 91.25% of total purchases. Of this, small investors contributed ¥29.96 billion (61.25%), while other individuals accounted for ¥14.68 billion (30%). In contrast, institutional investors purchased only ¥3.23 billion (6.6%), and foreign investors through the Shenzhen-Hong Kong Stock Connect bought ¥1.05 billion (2.15%).

In markets like the U.S., sharing personal investment opinions (e.g., “I believe this stock is worth buying”) on platforms like TikTok is allowed, provided the user clearly states they are not a professional advisor. However, offering paid, specific investment advice requires registration with the SEC under the Investment Advisers Act of 1940.

In December 2022, the SEC charged eight influencers with securities fraud involving $100 million. Some of these influencers, including hosts of a top-ranked stock market podcast, attracted followers via Twitter and Discord, encouraging them to buy specific stocks. After inflating stock prices, the influencers sold off their holdings for profit. Similarly, during the GameStop saga, the SEC's October 2021 investigation did not conclude that social media manipulation directly influenced market prices.

To curb volatility in small-cap stocks, regulators in China suspended three rapidly surging stocks in November for investigation.

China's suspension rules for abnormal stock price movements date back to July 2006. Under these rules, trading in stocks with irregular price changes can be halted until relevant disclosures are made. Subsequent revisions added quantitative thresholds and stricter disclosure requirements.

On November 8, 2024, Haooubo (688656.SH) from the STAR Market was the first stock recently suspended for investigation. Its share price had surged 258.32% over seven consecutive trading days, the highest gain across all stocks during that period. Haooubo had a market capitalization of just ¥2.425 billion as of October 31, making it a typical small-cap stock.

Two other small-cap stocks under “special treatment” (ST) rules were also suspended. On November 14, ST Pengbo (600804.SH), with a market cap of ¥3.6 billion, was halted after eight consecutive limit-ups, rising 48.67%. On November 18, ST Jingfeng (000908.SZ), with a market cap of ¥5.4 billion, was suspended after two consecutive trading days with significant price deviations.

The Shanghai and Shenzhen stock exchanges define “abnormal price movements” using specific thresholds:
- Risk-warning stocks (ST or ST): A cumulative price deviation of ±12% over three consecutive trading days.
- ChiNext and STAR Market stocks: A cumulative deviation of ±30% over three days.
- Main board stocks: A deviation of ±20% over three days.

In September 2024, ST Furuin (600070.SH) rose for 18 consecutive trading days with a 100.89% increase. After a three-day suspension, its stock price hit the lower limit for six straight days. Similar cases include ST Tongda (600647.SH), ST Zuojiang (300799.SZ), and Zhengdan (300641.SZ), which faced suspensions after multiple limit-ups. Subsequent investigations found no undisclosed or illegal activities.

New Manipulation Tactics Challenge Regulators

A source close to the stock exchange indicated that daily trading oversight relies on big data and artificial intelligence (AI) to swiftly identify unusual stock or account activity. These tools allow for targeted regulatory measures to detect and report market manipulation or other violations for rapid investigation.

In overseas markets, trading suspensions for irregular activity are typically brief, lasting from a few minutes to several tens of minutes. This ensures full disclosure while minimizing the impact on market liquidity. For example, the U.S. securities market does not have fixed daily price limits but employs a circuit breaker mechanism. If an S&P 500 stock fluctuates by more than 10% within five minutes, trading is paused for five minutes.

“In the past, investigations would almost always find evidence of manipulation, though gathering proof was challenging. Now, even after extensive investigations, it’s difficult to confirm manipulation,” said a source familiar with the China Securities Regulatory Commission (CSRC) investigation bureau.

Market manipulation involves improper actions that influence securities or futures prices or trading volumes, disrupt market order, or harm investors' legal rights. Common forms include matched trades, stock price ramping, and fake orders. Legally, its definition is based on the Securities Law and judicial interpretations.

Article 55 of the Securities Law prohibits anyone from manipulating the securities market by influencing or attempting to influence trading prices or volumes. Specific violations include spreading false or uncertain information to induce trades, or making public evaluations, predictions, or recommendations while trading in the opposite direction.

Judicial guidelines also outline quantifiable criteria for manipulation. For example, under a 2019 judicial interpretation, market manipulation is deemed “serious” if:
1. The cumulative trading volume over ten consecutive trading days accounts for 20% or more of the total trading volume of the security.
2. The manipulated transaction value exceeds ¥10 million.

A senior lawyer experienced in representing individual investor claims explained that courts assess manipulation based on the method, market impact, and harm to investors. Factors like illegal profits, investor losses, and market volatility are considered. Recent cases have also addressed new tactics involving algorithms, high-frequency trading, and cross-border capital flows.

The CSRC noted in its 2022 case summaries that manipulators increasingly use new models and technologies to obscure their activities. Some exploit interactions between stock markets, over-the-counter markets, and derivatives for illegal profits exceeding ¥100 million. Others collude with "black-mouth" influencers, luring investors via live streams or social media groups to buy specific stocks, only to sell their own holdings at inflated prices. Some use cloud servers or virtual servers to conceal their identities, complicating investigations.

In 2021, the CSRC disclosed two cases involving live streams and social media groups to deceive investors:
1. In September 2020, a private equity manager, Zheng, conspired with intermediaries to borrow nearly ¥400 million and 80+ accounts. Through continuous trades and matched orders, they significantly raised the price of Jiemei Packaging (002969.SZ). Zheng then colluded with influencers to lure investors into buying at inflated prices while offloading his holdings, earning tens of millions in illegal profits.
2. From November 2019 to June 2021, a Shenzhen-based "super individual investor" colluded with multiple "black-mouth" groups, enticing investors to buy over 70 stocks via live streams and social media groups. They dumped shares worth over ¥2 billion, reaping illegal profits exceeding ¥200 million. A joint operation by the Shenzhen CSRC and local police arrested 14 individuals involved.

For criminal charges, the case must meet three criteria:
1. The manipulator had the intent to manipulate the market.
2. The individual executed actions that altered prices or trading volumes.
3. These actions disrupted market order or caused significant harm to investors.

This requirement creates ambiguity for internet-based stock recommendations. For example, if a qualified financial advisor recommends a stock and retail investors independently decide to purchase it, losses are considered their responsibility. Moreover, most investors acting on tips fail to provide sufficient evidence, such as video or chat records, to prove causality.

“It’s even more difficult to prove manipulation if the advisor didn’t personally trade the stock in question. Without evidence of collusion with other traders, proving manipulation is challenging,” the lawyer added.

This gray area complicates enforcement, particularly as internet platforms become more prevalent in financial advice and stock promotion. Regulators are working to adapt to these challenges, balancing investor protection with market freedom.

Licensed Advisors Blur the Lines and Upgrade Tactics

In recent years, the chaotic practices of licensed financial institutions on internet platforms have been rampant, and with the rise of short video and live-streaming formats, borderline illegal activities have become more rampant. It has been discovered that popular livestreamers on platforms like Douyin (Chinese TikTok) are almost all from securities investment consulting firms licensed by the China Securities Regulatory Commission (CSRC).

According to CSRC regulations, any organization or individual providing securities investment analysis, forecasts, or advice—whether directly or indirectly compensated—must obtain CSRC approval. Those without proper licensing offering such services are engaging in "illegal stock recommendations." Even licensed entities cannot offer specific buy, sell, or hold advice to the public through media such as television, radio, websites, or newspapers. Licensed institutions and individuals can only provide such services to their specific clients and cannot publicly recommend stocks.

A social media user asked: “According to the CSRC's regulations, whether licensed or not, no one is allowed to publicly recommend stocks. Douyin and WeChat are public platforms. How has such a blatant violation been allowed to continue for so long? Is compliance being compromised by the pressures of traffic and algorithms? Is it too late to intervene now that the hype has passed? Who will be responsible for the losses to investors?” Some believe that regulating short video content is complex, with increasing borderline behavior posing challenges for monitoring and filtering technologies. Reactive oversight is insufficient, and platforms must take responsibility for self-regulation.

A statistical report shows that by the end of 2022, the total number of licensed securities investment consultants in China was 30,255, with the majority being sales staff. Only 3,603 professionals had actual investment advisor qualifications, accounting for less than 12%. This means that only these licensed advisors are permitted to offer live-streaming securities investment advice. However, on Douyin alone, the number of stock market livestreams far exceeds 3,600.

Douyin's Safety Center announced on October 11 that it had removed over 3,600 accounts related to stock market violations and 15,000 pieces of non-compliant content. Measures like content removal, data reset, and account muting were taken against these violations. Specific violations included some accounts urging fans to buy a particular stock with all their funds, while others used private messages, group chats, or indirect suggestions like "market analysis," "materials," or "join our group for guidance" to direct users to external platforms offering "illegal stock recommendations" or even fraudulent activities.

On November 7, WeChat's video account platform updated its livestream entry standards for financial content. Streamers providing securities-related financial education must hold securities qualifications, specifically as "securities investment consultants," and are prohibited from providing specific investment advice during live sessions. They cannot offer predictions or analysis on specific industries or stocks, display K-line charts, or make investment recommendations. Streamers are also prohibited from inducing investments or leading users to external links or apps.

The Shenzhen CSRC recently issued a notice to securities investment consulting firms in its jurisdiction, demanding self-checks and rectifications regarding self-media operations. The notice emphasized that live stock recommendations are strictly prohibited and that all content and live-stream material must undergo compliance reviews prior to posting. During live broadcasts, compliance should be actively monitored and intervened.

Several securities consulting firms have faced penalties for violating live-streaming rules. On November 13, Tonghuashun (300033.SZ)'s subsidiary Tonghuashun Cloud Software was penalized by the Zhejiang CSRC for non-compliance during live-stream promotions, including hinting at specific stock recommendations. The company was ordered to rectify the issue and suspend adding new clients for three months. On November 18, the Liaoning CSRC issued a warning letter to the Zhongtian Securities branch due to unreported and non-compliant live-streaming activities.

Shenzhen's CSRC also instructed securities investment consulting firms to manage their employees' activities more strictly, prohibiting them from engaging in private stock advice or market manipulation via self-media channels.

According to statistics, 16 local CSRC branches issued 43 fines to 31 securities investment consulting firms in 2024 alone. Currently, there are 78 firms licensed for securities investment consulting. This means nearly 40% of licensed firms have been penalized this year. Most of these licenses were issued between 2010 and 2016, during the CSRC's encouragement of business innovation. In 2022, the CSRC even revoked the licenses of two companies for spreading false or misleading information and promising profits.

Several companies are repeat offenders. Tonghuashun Cloud Software, for example, has been fined multiple times over the years, including in 2017, 2018, 2020, and 2021. Other companies like Zhejiang Hexin Tonghuashun and Tonghuashun Fund Sales have also been issued warning letters.

Previously, Tonghuashun's stock recommendation software was under the parent company’s business, but due to regulatory requirements, the business was separated and transferred to companies with securities investment consulting licenses. Recently, complaints about its stock recommendation software have increased, with several complaints aligning with the reasons for the latest penalties by the Zhejiang CSRC.

A complaint on the Black Cat Consumer Service Platform from October 21, 2024, described how a consumer was lured into purchasing Tonghuashun Decision Pioneer (a stock assistance software) by promises of high returns and guidance from teachers. However, after using the software for a month, the consumer found it ineffective, resulting in significant financial losses.

Beyond Tonghuashun, several other licensed securities consulting firms have faced complaints, including Beijing Compass Technology Development, Shanghai Jiufang Yun Intelligent Technology, Jiangsu Baeruiying Securities Consulting, Yimeng Co., and Shanghai Yashang Investment Advisors. These complaints are mostly related to selling software and stock trading services, often with schemes that initially offer low-cost memberships and then push for more expensive upgrades.

Jiufang Yun Intelligent Technology, the parent company of Jiufang Zhito, is listed on the Hong Kong Stock Exchange (09636.HK). Their 2024 half-year report revealed that by June 2024, they had accumulated 488 accounts and 46 million followers across platforms like Douyin and Xiaohongshu (Little Red Book). Their chief investment advisor, "Hong Bangzhu," has 2.26 million followers on Douyin.

In the first half of 2024, Jiufang Zhito conducted 23,466 hours of live-streaming, with 12,487 sessions, a significant increase from the previous year. This means Jiufang Zhito streamed live for about 130 hours daily across various platforms.

Platform Transformation of Licensed Financial Institutions

Securities investment advisory licenses have not been issued for several years, and the industry has become increasingly "cutthroat." As securities firms and fund companies shift toward advisory services, securities investment consulting companies are facing a competitive disadvantage.

From an income structure perspective, in 2022, 75 securities investment advisory firms with operational data reported a total revenue of 14.066 billion yuan and a net profit of 7.42 million yuan. Of this, 95% came from securities investment consulting services. Within that, 50% of the revenue was from sales of securities software tools, 43% came from traditional stock recommendation services, and only 7% came from publishing securities research reports and other investment advisory services.

This indicates that securities investment advisory companies have largely become reliant on selling software.

"This industry is indeed in a difficult position now. Brokerage firms and public fund companies have a clear advantage because they offer a full range of services. If an advisory firm doesn't make money from legitimate advisory services, it often resorts to less ethical practices like stock recommendations or selling software like health products. Many companies are crowded into the same track, and in their pursuit of customers, they test regulatory boundaries, ultimately damaging the reputation of the whole industry. This is the current state of the industry," said a non-bank analyst from a brokerage firm.

The primary reason behind this shift is twofold: On one hand, some securities investment advisory institutions have narrow business scopes and lack the drive to develop new business models. On the other hand, the Chinese securities market primarily serves small to medium-sized retail investors, and the "quick money" mentality has driven some licensed firms to engage in risky business practices.

Additionally, the relatively low cost of breaking the law is another factor. The number of securities investment advisory firms had long remained at over 80, with most violations resulting in corrective actions or warnings. However, in 2022, the China Securities Regulatory Commission (CSRC) revoked the licenses of two companies for providing misleading information to investors or promising returns. In 2022, 39 securities investment advisory companies were profitable, while 36 were unprofitable. The top ten firms accounted for 54% of the total industry revenue, with their net profits reaching 155%. The industry is highly concentrated, with significant disparities in profitability, with the leading firms capturing most of the profits.

Currently, among the 78 securities investment advisory firms, there are subsidiaries of listed companies such as Tonghuashun, Jiufang Zhitu Holdings, Dongfang CaiFu (300059.SZ), Zhina Zhen (300803.SZ), and Yimeng Co., Ltd. (832950.OC).

Looking at the business models of publicly listed companies, the software functions of firms like Tonghuashun and Dongfang CaiFu are becoming more platform-based, with large customer bases. These companies primarily use their platforms to attract traffic and then convert that traffic through content push or sales staff. On the other hand, Jiufang Zhitu, Zhina Zhen, and Yimeng Co. focus on buying traffic or using live streaming to attract public domain traffic.

From the 2023 financial reports, Tonghuashun's financial information services accounted for 43%, advertising and internet business promotion services for 38%, software sales and maintenance for 12%, and fund sales for 7%. Dongfang CaiFu's securities business accounted for 65%, fund sales for 33%, and financial data services only accounted for 2%. Jiufang Zhitu's financial information services accounted for 40%, while online high-end investment education accounted for 60%.

It is expected that, in the context of increasing industry concentration and stricter regulation, small and medium-sized securities investment advisory institutions will gradually be eliminated. For leading companies, especially third-party platform firms working closely with brokerages, there will also be significant uncertainty.

The well-known Tonghuashun terminal is operated by Zhejiang Hexin Tonghuashun Network Information Co., Ltd., the publicly listed company. The terminal’s main function is to drive account openings and trading, with its partner brokerages being mostly small to mid-sized firms, except for a few large ones like CITIC Securities. Tonghuashun's subsidiary, Zhejiang Tonghuashun Cloud Software Co., Ltd., holds the CSRC license for securities investment advisory services and is the main provider of stock recommendation software products and investment advisory services.

Regarding the regulation of platform companies that drive traffic for securities firms, the CSRC sought public opinion on the "Regulations on Securities Firms Renting Third-Party Network Platforms to Conduct Securities Business Activities (Trial)" in August 2020. However, four years have passed, and the regulations have not yet been officially issued.

These business models involve securities firms linking their pages with third-party platforms through "floating windows" or similar methods, where the backend system is still controlled by the securities firm. The third-party platform provides the network space, but the content and functions are still managed and maintained by the securities firm, with the customer's account opening and trading actions occurring under the control of the brokerage. Tonghuashun, Alipay, and similar terminals operate on this model.

However, these business models expose risks, such as blurring the boundaries between business activities and technical services, and the possibility of conducting securities business illegally or improperly handling sensitive customer data. Furthermore, some brokerages, in order to drive traffic, are raising rebate percentages irresponsibly, damaging the business environment.

When opening an account through third-party platforms, users are redirected to the brokerage's official page, where identity verification, risk assessments, agreement signings, and confirmations are all completed on the brokerage's page.

For example, the Tonghuashun mobile app shows that it supports online account openings with 88 brokerages. After clicking "Open Account," users see a list of recommended brokerages. The order is not alphabetical, nor based on commission rates; instead, there are additional promotional descriptions, such as "state-owned listed brokerage" or "5% financing rate."

When testing the opening of accounts on the Tonghuashun website, users are directed to Huachuang Securities with no options for other brokerages.

These interface designs, which prioritize certain brokerages, are driven by commercial interests.

On September 11, 2015, Huatai Securities announced it would suspend its services with third-party platforms like Tonghuashun and NetEase Finance, becoming the first brokerage to refuse third-party platforms. Analysts believe this was due to Huatai's strong brokerage and IT capabilities, not wanting to be controlled by third-party platforms.

The draft "Regulations" require clarifying the boundaries of cooperation between securities firms and third-party platforms and specify that platform commissions should not exceed 30% of the net income from securities business on third-party platforms. This move is seen as beneficial for expanding brokerage firm traffic sources and lowering customer acquisition costs, but it puts pressure on third-party platforms. Industry insiders have revealed that Tonghuashun's commission rate is around 50%.

A year ago, rumors circulated that the "Regulations" would be officially released, but there has been no further news. Currently, most securities firms' apps still lag behind third-party platforms in terms of monthly active users and user experience, with many small to medium-sized brokerages still relying heavily on third-party channels for customer acquisition.

Cedar Holdings Involved in Fraud: Around 6,800 Investors Trapped in a 20 Billion Yuan Financial Black Hole

Once hailed as "Guangzhou's Top Private Enterprise," Cedar Holdings Group Ltd. (hereafter referred to as "Cedar Holdings") is now facing its downfall. From October 28 to November 1, 2024, the Guangzhou Intermediate People's Court held hearings for the Cedar Holdings case, with charges including fundraising fraud, illegal public deposit absorption, breach of trust in the management of entrusted property, and obstruction of justice.

In addition to Cedar Holdings itself being implicated as the corporate entity, the prosecution also filed charges against 19 individuals, most of whom were senior executives or had close ties with the company. The defendants are mainly from Cedar Holdings' bulk trade and finance departments; most are accused of fundraising fraud and illegally absorbing public deposits, while the other two charges only apply to a few individuals.

Cedar Holdings was founded in 1997. Public records show that in 2015, the company’s revenue was only 59.3 billion yuan; by 2016, it surged to 157 billion yuan, making it the leading private enterprise in Guangzhou; in 2017, revenue continued to grow rapidly, reaching 221 billion yuan. In July 2018, Cedar Holdings entered the "Global Fortune 500" list, remaining on the list for four consecutive years thereafter.

Financing trade helped drive Cedar Holdings' performance. Financing trade refers to companies borrowing money under the guise of trade. In reality, some trade companies, lacking sufficient creditworthiness, find it difficult to obtain financing from financial institutions. To solve this, they collaborate with companies that have good credit to fabricate trade turnover and use related bills for financing, which leads to a significant increase in reported revenue and inventory on their balance sheets.

Cedar Holdings also established several wealth management companies that sold financial products externally. These products, internally known as "Runbang Wealth Management," were backed by fictional "accounts receivable" between Cedar Holdings and trade companies in its supply chain. They were packaged as "debt transfer projects" and filed with local financial exchanges. The issuer of these wealth management products was a company nominally unrelated to Cedar Holdings but actually controlled by the firm. The contracts specified that Cedar Holdings would assume the "difference compensation obligation" and act as the sales entity. Starting in March 2021, these financial products began to default, with the total scale of the defaults reaching around 20 billion yuan.

On May 7, 2023, the Huangpu Branch of the Guangzhou Public Security Bureau announced that several companies under Cedar Holdings were being investigated for illegal absorption of public deposits. The police had already taken criminal coercive measures against the company's actual controller, Zhang Jin, and others.

In court, most of Cedar Holdings' senior executives pled guilty but contested some of the charges. A few individuals, claiming short tenures and no involvement with the financial products, insisted on their innocence. Zhang Jin acknowledged the charge of illegally absorbing public deposits but did not believe that Cedar Holdings was guilty of fundraising fraud. The penalties for these two charges are significant: the former carries a maximum sentence of 10 years, while the latter can result in life imprisonment.

While the verdict is still pending, over 6,800 small and medium investors who were victims of the scheme are closely watching to see how much of their losses can be recovered. Meanwhile, local state-owned enterprises that had lent large sums to Cedar Holdings have already worked to fill the "hole" through asset transfers but will still face accountability.

A senior executive from a local state-owned enterprise familiar with the Cedar Holdings case remarked that it offers a stark lesson. If local governments focus solely on economic growth figures while neglecting quality, some companies may align with political goals to secure preferential treatment. The government’s "endorsement" provides implicit credit, enabling rapid business expansion; however, once these companies face trouble, the risk shifts to society, and the aftermath becomes long and challenging to resolve.

The Rise of "Guangzhou's Top Private Enterprise"

Zhang Jin, born in November 1971 in Shaoyang, Hunan, is a "post-70s" entrepreneur. He earned his bachelor's degree in finance from Shenzhen University and later pursued an EMBA at Peking University's Guanghua School of Management. In court, Zhang introduced that his father had been doing business in Guangzhou since the 1990s and founded Junhua Group in 1997, which developed the first pure villa community in Guangzhou, accumulating a vast fortune for the family. Junhua Group is the predecessor of Cedar Holdings.

According to the prosecution, Zhang Jin's family consists of 11 members, with Zhang owning eight properties across various luxury residential areas in Guangzhou. Zhang himself testified that he could only recall owning six properties, one of which was held in trust. The family resides in a private clubhouse of around 4,000 square meters.

A person familiar with Zhang Jin shared that the business styles of Zhang and his father were very different: his father was conservative, and Junhua Group followed conventional business practices. However, Zhang Jin, with a background in finance, was high-profile and bold. Zhang has mentioned on several occasions that his first fortune came from the stock market, and later, he acquired Shenzhen Small and Medium Enterprise Venture Investment Co., which turned out to be successful.

"Zhang Jin understood that financial licenses were scarce and could bring in substantial funds, so he was eager to chase financial licenses," the source said. Public records show that in 2009, Cedar Holdings' subsidiaries acquired stakes in Guangzhou Rural Commercial Bank and Guangzhou Bank, later also acquiring shares in Kaiyuan Securities and, in 2019, purchasing Da Jin Securities and Zhongjiang Trust (which was later renamed Cedar Trust). These large-scale investments also set the stage for the company's ongoing cash flow problems.

Another person familiar with Zhang Jin revealed that before 2011, Zhang had been engaged in bulk commodity trade in Shenzhen. After his father’s passing, he returned to Guangzhou around 2015. In September 2016, China Evergrande moved its registration to Shenzhen, and Guangzhou no longer had any "World's 500" private enterprises. Seizing the opportunity, Zhang garnered support from various parties and, by the end of 2016, proposed that Cedar Holdings aim to achieve "three trillions" within five years — a trillion in sales, assets, and market capitalization. With Cedar's rapid expansion, Zhang became a favored guest of the local government.

In court, Zhang emphasized that he did not have improper interactions with government officials and that the local government's support was a key factor in Cedar Holdings' contribution to GDP.

Cedar Holdings leveraged its bulk commodity trade business to influence statistical data. Several defendants admitted that part of the bulk commodity trade at Cedar Holdings involved real transactions and was considered "core business," while another part was fraudulent, involving the transfer of commodities between Cedar Holdings and its affiliates, known as "flow business." According to witness testimonies provided by the prosecution, the flow business typically accounted for 50% to 80% of the total volume in the bulk trade sector over several years.

Lawyer Song Fuxin, head of Guangdong Songshi Law Firm, represented one of the defendants in the case. He pointed out in court that the flow business at Cedar Holdings could be divided into two phases: the first was simply to expand the company, but after April 2018, Cedar Holdings incorporated a credit sales component into the flow business, using accounts receivable for financing, which led to the charges of illegal public deposit absorption.

Zhang Jin testified in court that during the process of attracting investment, local governments and Cedar Holdings signed various agreements setting trade data growth targets. "For example, in Guangzhou's Huangpu District, the local government set annual targets and even directly sent people to the company's finance department, requiring them to increase the trade volume."

Several insiders from Huangpu District mentioned that Zhou Yawei, the district’s former Party Secretary, placed great emphasis on Cedar Holdings.

Zhou Yawei, born in 1963, served as Deputy Secretary-General of the Guangzhou Municipal Government in 2004, later holding various positions including Deputy Secretary and Mayor of Liwan District, Vice Mayor of Guangzhou, and Member of the Standing Committee of the Guangzhou Municipal Party Committee. In January 2017, Zhou became Party Secretary of Huangpu District and concurrently served as the Secretary of the Party Working Committee and Director of the Management Committee of the Guangzhou Development District.

Just one month later, in February 2017, the Guangzhou Development District signed a strategic cooperation framework agreement with Cedar Holdings, and the latter moved its office from Guangzhou’s CBD Zhujiang New Town back to Huangpu District. In April of that year, Cedar Holdings acquired a commercial plot in Huangpu District to build its headquarters. Later, Zhou Yawei would frequently appear to support Cedar Holdings.

In early 2024, Zhou Yawei retired from his position as a member of the Guangzhou Municipal Committee, and in July 2024, he was placed under disciplinary review and investigation by the Guangzhou Commission for Discipline Inspection and the Supervisory Commission.

Fictitious Trade Financing

Cedar Holdings has various business segments, including bulk commodities, industrial investment, property, automotive trade, and finance. Zhang Jin stated that the company’s operational strategy was to provide cash flow to these segments through financing, and then use the profits generated by these segments to cover the financing costs.

Initially, Cedar Holdings used private equity funds for financing. Public records show that in February 2016, Cedar Holdings fully acquired Shenzhen Likai Fund Management Co., Ltd. and, in April 2017, established Guangzhou Jiayao Fund Management Co., Ltd. The prosecution states that starting in June 2016, Cedar Holdings issued 67 private equity fund products through these two companies, raising a total of 60.3 billion yuan.

In April 2018, the central bank, the former China Banking and Insurance Regulatory Commission (CBIRC), the China Securities Regulatory Commission (CSRC), and the State Administration of Foreign Exchange jointly issued the "Guiding Opinions on Regulating Asset Management Business of Financial Institutions" (referred to as the "New Asset Management Regulations"). Following this, the scope for issuing new private equity fund products was limited, leading to a large funding gap between the raised funds and the funds due for repayment.

Witness testimonies provided by the prosecution revealed that Lin Weilong, head of Cedar Holdings' financial segment, proposed issuing wealth management products using bulk commodity trade for financing between February and April 2018. Zhang Jin sent personnel to various local financial exchanges for investigation and set up an "Innovative Financial Department" within the company, which began issuing financing products with fictitious underlying assets in July 2018. Lin Weilong acknowledged the prosecution’s charges.

The prosecution also stated that Cedar Holdings, through registration and acquisition, held equity in 478 companies and controlled 470 “off-balance-sheet companies” with no direct equity connection. Cedar's flow business occurred between these nearly 1,000 companies, and employees of the “off-balance-sheet companies” were paid through trade-related payments after several rounds of transfers.

The prosecution believes Cedar Holdings created these "off-balance-sheet companies" for two purposes: one, to fabricate false trades; and two, to “offset losses,” transferring the company’s approximately 11.5 billion yuan in losses to these off-balance-sheet companies.

In the market environment at the time, financing trade was not uncommon, but most companies borrowed from financial institutions, with few directly issuing wealth management products through financial exchanges. The prosecution claims that since April 2018, Cedar Holdings used local financial exchanges and "pseudo-financial exchanges" to issue a total of 1,490 wealth management products, raising approximately 59.6 billion yuan. The underlying assets of these products were mostly fictitious trade debts, with only a small number of products having real assets from the company’s industrial segments.

Zhang Jin admitted that he was aware of the use of fictitious underlying assets for financing. Later, he instructed subordinates to create a "gray list," which identified state-owned enterprises willing to cooperate with Cedar Holdings. These companies were persuaded to join Cedar's bulk commodity trade "circle," and Cedar would gradually replace the fictitious underlying assets with real trade accounts receivable. However, the trade volume on the "gray list" ultimately failed to meet the needs.

Several defendants were involved in the illegal business of financing using fictitious underlying assets, but each typically handled only one part of the process. Based on their court testimonies, this business was generally initiated by Cedar Holdings' financing department. When financing was needed, the department would request trade contracts and warehouse receipts from the bulk commodity trade department. The bulk trade department would upload documents to a cloud drive, from which the product manager would download the original documents and manually fill out templates to create the underlying asset materials, eventually issuing the wealth management products. These products promised a maximum expected return of 12%.

The prosecution stated that since April 2018, Cedar Holdings raised about 59.6 billion yuan through wealth management products. By the time of the case's filing, it had repaid about 40 billion yuan in principal and interest, with around 20 billion yuan still unpaid.

Based on this, the prosecution charged Cedar Holdings with suspected fund-raising fraud and illegal public deposit absorption. According to relevant judicial interpretations, illegal public deposit absorption and fund-raising fraud have different characteristics, with the latter being "intended for illegal possession" and involving fraudulent methods. The sentencing for these two crimes also differs significantly.

The prosecution only charged Zhang Jin and two others with fund-raising fraud, but the defendants' attitudes toward this charge were not unanimous. Zhang Jin claimed that the funds were invested in the company’s various industrial sectors, and he did not have the intention of illegal possession.

Where the Funds Went: A Mystery

Cedar Holdings created a "fund pool" to manage its finances. Except for trust funds, which were managed separately, all other funds raised through wealth management products, funds from financial institutions and other channels, as well as operational income from Cedar’s major industrial sectors, were pooled into Cedar Holdings’ main account for centralized management upon receipt.

Zhang Jin’s defense lawyer stated that from 2016 to 2022, Cedar Holdings' funding sources included equity capital, equity financing, issuing small public offerings, financing from financial institutions, social financing, and business funds from upstream and downstream operations, among others. Of these, financing from financial institutions accounted for about 35%, and social financing accounted for about 25%.

Once these funds entered the "fund pool," it became difficult to trace their real destination. Zhang Jin admitted that since the issuance of wealth management products began, "a portion of every expenditure of Cedar Holdings came from wealth management funds."

The prosecution listed several significant expenditures made by Cedar Holdings after it started issuing wealth management products. For example, after the release of the new asset management regulations, the private equity funds under Cedar Holdings faced a redemption of funds, with around 15.6 billion yuan still to be repaid. To resolve this, Cedar Holdings decided to raise funds by issuing wealth management products, a move Zhang Jin acknowledged.

Furthermore, Cedar Holdings made several large investments, but ultimately suffered massive losses. For instance, in 2018, Cedar Holdings attempted to acquire Mengshi Technology, but ended up losing 2 billion yuan. In April 2019, Cedar Holdings paid an initial 6 billion yuan to acquire Zhongjiang Trust, but due diligence only began in June of that year, revealing a "hole" of about 10 billion yuan. Under government pressure, Cedar eventually assumed responsibility for Zhongjiang Trust’s losses, covering around 5.6 billion yuan. Later, Cedar Holdings invested 2 billion yuan into the stocks of its subsidiaries, Qixiang Tengda (002408.SZ) and Cedar Development (002485.SZ), for "market value management," which ultimately resulted in losses.

The prosecution argued that these investments were extremely careless, accusing Zhang Jin of "recklessly squandering company assets." However, Zhang Jin maintained that these actions were part of the company's normal investment activities, even though they resulted in failures.

Regarding the acquisition of Zhongjiang Trust, Zhang Jin emphasized that at the time, Guangzhou did not have a trust license, and the acquisition was strongly supported by the government.

The Zhongjiang Trust license was valued at approximately 30 billion yuan. Given Zhongjiang Trust's financial difficulties and a large number of overdue products, the estimated price for controlling shares was around 12 billion yuan. The initial 6 billion yuan payment came from the 8 billion yuan perpetual bond issued in March 2019, with Guangzhou Fund, a subsidiary of Guangzhou Urban Investment, and Guangzhou Development Zone Financial Holding subscribing for 6 billion yuan and 2 billion yuan, respectively. Zhang Jin stated that these subscriptions were later used as collateral for Zhongjiang Trust's shares.

Zhang Jin further mentioned that before the payment, a "betting agreement" was signed with Zhongjiang Trust's original shareholders, the "Ming Tian Group," to address possible non-performing assets. If the net assets of Zhongjiang Trust were less than 8.7 billion yuan, for every 1 billion yuan decrease in net assets, the "Ming Tian Group" would compensate the buyer with 300 million yuan. Later due diligence showed that Zhongjiang Trust’s net assets might be less than 2 billion yuan, and the "Ming Tian Group" was obligated to return the entire equity transfer payment. However, as the "Ming Tian Group" also faced difficulties, this money was ultimately unrecoverable.

The prosecution also stated that from 2017 to 2022, there was an estimated 8.4 billion yuan in Cedar Holdings' accounts that could be considered Zhang Jin’s personal "small vault." The funds were used to purchase gold, artworks, private jets, and some were transferred abroad via underground banks.

Zhang Jin defended himself, claiming that his personal assets were "highly commingled" with the company’s assets. Much of the expenditure traced back to the "small vault" was for the company’s "investments." He also emphasized that the purpose of the "small vault" was to help the company handle some expenses that lacked invoices, which he approved with his signature.

For example, regarding the several tens of millions in gold and several hundred million yuan spent on artwork purchased through the "small vault," Zhang Jin said these funds were used to buy gold commemorative coins, which were then given as gifts in the company’s name. He also claimed that the artworks he bought personally at Hong Kong auctions actually belonged to Cedar Holdings' Art Department.

The prosecution did not provide a precise figure for how much money flowed abroad through underground banks. However, they stated that at the end of 2021, Zhang Jin transferred at least two payments via underground banks: one for 2 million Swiss francs and another for about 11 million US dollars.

Notably, the charge of "obstruction of justice" relates to Cedar Holdings' assistance in helping an employee of an "off-balance-sheet company" flee. This individual was responsible for connecting with underground banks and later fled to Singapore, with Cedar Holdings covering the person's living expenses. This underground banking case was handled by the Gansu police, and Cedar Holdings helped the person escape to avoid investigation.

Cedar Task Force Intervention

In September 2020, Securities Times published a report revealing that the 220 billion yuan in underlying assets of 42 wealth management products under Cedar Trust’s “Evergreen Series” were fraudulent, triggering the first domino in Cedar Holdings' collapse. The same sales teams were responsible for selling both wealth management and trust products, which led to heightened investor suspicion and a sharp decline in sales of these products.

By the end of March 2021, Cedar Holdings' wealth management products faced their first overdue payment, amounting to 17 million yuan. A banker familiar with Cedar Holdings told that following this, financial institutions began to pull back their loans, and some local state-owned enterprises that had partnered with Cedar Holdings started to demand additional collateral.

The prosecution stated that the end of March 2021 marked a crucial turning point. Up until then, Cedar Holdings had been able to handle its wealth management products through a cycle of rolling over old debts with new loans. However, after this point, wealth management sales revenue sharply declined, and Cedar had to liquidate assets.

Zhang Jin explained that after the onset of the COVID-19 pandemic, global asset prices dropped significantly, and market liquidity tightened, causing Cedar to sell assets at prices below expectations. Additionally, Cedar Holdings' industrial sectors operated on a "high leverage + low cash flow" model, which had long investment cycles, leading to a cash flow breakdown. As the company faced a cash crunch, Zhang emphasized in internal meetings the need to use actual assets from the industrial sectors to issue wealth management products and gradually reduce the proportion of products with fraudulent underlying assets.

The prosecution pointed out that by then, nearly all of Cedar Holdings' real assets and equity had been pledged or mortgaged to financial institutions or relevant state-owned enterprises, while fraudulent assets were primarily used for issuing wealth management products targeting small and medium-sized investors. This made asset replacement plans difficult to implement.

After March 2021, Cedar Holdings reluctantly issued about 4 billion yuan worth of wealth management products, raising the sales commission from 2% to 4%.

Starting in the second half of 2021, small and medium investors repeatedly visited Cedar to demand repayment, and Cedar often promised to pay but failed to deliver. On January 30, 2022, Cedar Holdings issued an apology, stating that the repayment originally scheduled for the end of January would not be fulfilled, and even interest payments were stopped. At this point, Cedar Holdings' financial crisis became a public event, and the company’s operations nearly collapsed.

In March 2022, the governments of Guangzhou city and district jointly established the “Cedar Task Force” to intervene in Cedar's debt crisis.

In addition to small and medium investors, creditors also included financial institutions and local state-owned enterprises. An insider from Huangpu District disclosed that several state-owned enterprises in Guangzhou had incurred losses from Cedar, with Guangzhou Urban Investment and Guangzhou Science City Investment Group being particularly affected. These two companies are state-owned enterprises, with Guangzhou Urban Investment partnering with Cedar to form Guangzhou Chengtuo Cedar Investment Development Co., Ltd., while Science City Group co-founded Guangzhou Kecheng Xueling Investment Co., Ltd. with Cedar.

The insider revealed that, without collateral, these two state-owned enterprises repeatedly provided large-scale loans to the joint ventures in the form of shareholder loans. Including the previously subscribed 8 billion yuan in perpetual bonds, the total investment from Guangzhou’s state-owned enterprises amounted to billions of yuan.

The insider added that, under the coordination of the task force, the relevant state-owned enterprises quickly completed the transfer and registration of some assets, allowing them to quickly "stop the losses" and then initiated civil lawsuits as creditors to apply for judicial seizures of certain assets, which the courts would handle according to procedure.

"All the involved state-owned enterprises were concerned about accountability later and took many remedial measures," the insider stated. Based on the current situation, the losses for local state-owned enterprises were much smaller than initially anticipated.

The prosecution stated that since March 2021, Cedar Holdings had completed 13 asset transfers to relevant state-owned enterprises, with a total transaction value of 25.7 billion yuan. Zhang Jin claimed that the actual market value of these assets exceeded 40 billion yuan, and he did not accept these low-price transfers.

For example, in the first half of 2022, Cedar Holdings transferred its urban renewal project in Hetang to Science City Group. Zhang Jin claimed that he initially quoted 20 billion yuan for the project, and had agreed with the then-chairman of Science City Group, Hong Hansong, to finalize the deal at 15.5 billion yuan. However, Science City Group ended up paying only about 11 billion yuan, much less than expected. Zhang Jin also stated that the transfer contract was backdated and that he had never signed it. In August 2024, Hong Hansong was taken into investigation by the Guangzhou Municipal Commission for Discipline Inspection and the Supervisory Commission.

Zhang Jin also mentioned that Cedar Holdings had planned to transfer the equity in Qixiang Tengda for over 8 billion yuan, but the transaction was not completed due to the freezing of related equity. Later, Qixiang Tengda underwent restructuring, and Cedar’s equity transfer funds were first allocated to the local state-owned enterprises, with only 46 million yuan eventually returned to Cedar Holdings' accounts.

"Insolvency" Geometry

Whether Cedar Holdings was "insolvent" at the time of the incident is crucial, as it affects how much compensation small and medium investors may receive and also determines the sentencing range for the defendants.

Several investors have provided product materials showing that wealth managers often described Cedar Holdings as a "large industrial, small financial" company, claiming that financing would be directed toward the real economy, such as Cedar's copper production, headquarters economy, and urban renewal projects. Investors did not initially suspect the authenticity of the underlying assets.

In court, Zhang Jin's description of the company significantly differed from the sales pitch used by wealth managers. He said that Cedar Holdings was an investment holding company that profited through the market-driven exit of asset projects; if it couldn’t profit, it needed to supplement cash flow through equity financing and other funding sources.

Zhang Jin believed that an evaluation method should be used to measure the assets of an investment holding company, because its operating logic was "like buying stocks, with returns mainly coming from selling at a profit after the stock price rises, rather than from dividends."

Zhang Jin stated that valuation was a core company secret, and that only he and a few senior executives were involved in project transactions. The finance department was responsible for providing basic data but could not accurately understand his valuation logic, which is why the data provided to the police later was not accurate.

According to Zhang Jin’s own review, before the incident, Cedar Holdings had 25 large-scale assets, and by mid-2021, the total valuation was expected to exceed 100 billion yuan. Several defendants also claimed that as of May 2022, Cedar Holdings was not yet "insolvent."

In May 2022, the task force required Cedar Holdings to provide a detailed breakdown of its assets and liabilities across various industrial sectors. In the third quarter of that year, at the task force's request, Cedar Holdings hired KPMG for debt restructuring services, once again reviewing its assets and liabilities.

KPMG’s final report gave different conclusions based on three scenarios: liquidation, pessimistic restructuring, and optimistic restructuring. In the case of liquidation or pessimistic restructuring, Cedar Holdings would be insolvent, with the gap between assets and liabilities ranging from 20 billion to 35 billion yuan. Under the optimistic restructuring scenario, Cedar Holdings would still have net assets of 2 billion yuan, assuming the company maintained normal operations and disposed of all assets at market prices.

Zhang Jin stated that, in the first two scenarios, KPMG had significantly discounted the asset prices, and he did not accept the "insolvency" conclusion in these cases. However, in reality, by May 2022, Zhang Jin had been placed under residential surveillance by the authorities, and several senior executives were required to cooperate with investigations. The company’s financial crisis had severely damaged its credibility, and there was no factual basis for Cedar Holdings to continue normal operations.

Cedar Holdings’ annual audit reports showed that the company’s assets had long been greater than its liabilities. However, the prosecution argued that these audit reports did not account for the "off-balance-sheet companies" and were thus questionable, representing "beautified" financial statements.

The prosecution noted that after the incident, the Huangpu branch of the Guangzhou Municipal Public Security Bureau commissioned Guangdong Chenganxin Accounting Firm to conduct a special audit. The auditors created five supplementary reports based on materials obtained during additional investigations. The six audit reports covered the situation of the "off-balance-sheet companies" and revealed that Cedar Holdings had been insolvent for a long time, with major industrial sectors also in prolonged losses.

The accountant from Guangdong Chenganxin, as a witness, testified and answered questions from both the prosecution and defense. The accountant emphasized that the original materials came mainly from Cedar Holdings' internal financial data, as well as materials stored on computers and USB drives by the defendants, provided by the police. The authenticity and completeness of the data were the responsibility of the commissioning agency.

Zhang Jin’s defense lawyer argued that the special audit report did not include the fact that Cedar Holdings owned an iron ore mine in Mongolia. Whether Cedar Holdings was "insolvent" needs to be determined by the court.

According to an insider from a local state-owned enterprise, after KPMG's report was released, creditors responded by taking measures based on Cedar Holdings' insolvency, noting that "those who acted later would be at a disadvantage."

In his final court statement, Zhang Jin mentioned that after the first wealth management product payment was overdue, the scale of wealth management product issuance sharply declined. The company still repaid 33.7 billion yuan of debt through asset transfers or payments, most of which went to repay state-owned enterprises. Based on the company’s current asset liquidation situation, the proportion that could be returned to small and medium investors was only about 3%.

The Aftermath of the Case

A person who attended the trial stated that small and medium investors hoped that the authorities would publish the specific details of Cedar Holdings' asset transfers and the distribution details for creditors. Other attendees also noted that Zhang Jin and several defendants expressed their willingness to surrender part of their assets to judicial authorities. Zhang Jin claimed that since being placed under residential surveillance, he had paid 1 billion yuan to the judicial authorities.

Cedar Holdings' cases are spread across various regions, with many wealth managers outside of Guangzhou also being charged with illegal fund-raising. Most of these managers were team leaders or "sales champions." So far, some cases have been heard by courts in Shanghai, and a few have been sentenced. After the trial at the Guangzhou Intermediate People's Court, some cases will also be heard at the Huangpu District People's Court in Guangzhou.

The wealth managers involved have agreed to return their commissions in exchange for lighter sentences. However, compared to the losses of small and medium investors, the funds returned by company executives and wealth managers are just a drop in the bucket.

In addition to the "Runbang Wealth Management" products, Cedar Trust also faces about 4.8 billion yuan in overdue funds. Some defendants are suspected of misappropriating entrusted assets, which is a breach of trust.

After being acquired in 2019, Zhongjiang Trust was renamed Cedar Trust in June of that year. The prosecution stated that in August 2019, Cedar Trust planned to set up the "Evergreen Supply Chain Series" trust products with fraudulent receivables as underlying assets, issuing 43 trust products that raised 13.857 billion yuan. At the time of the incident, the principal of the "Evergreen Series" trust products that had not been repaid totaled about 2.3 billion yuan.

Zhang Jin argued in court that the "Evergreen Series" trust products were issued after being filed with regulatory authorities, and Cedar Holdings had promised to resolve Zhongjiang Trust's historical issues through "guaranteed redemption," which was a prerequisite for the authorities to allow the issuance of these products.

The "Evergreen Series" products were later halted by regulators. The prosecution stated that Zhang Jin then decided to use old urban renewal projects that met the trust's requirements as underlying assets and created the "Changying Series" trust plan, issuing three products and raising about 2.6 billion yuan. By the time of the incident, the principal of the "Changying Series" products that had not been repaid totaled about 2.5 billion yuan.

The prosecution believes that both the "Evergreen Series" and "Changying Series" trust products were forms of "self-financing," and Cedar Holdings misused entrusted assets totaling 15.8 billion yuan. Court records show that some of these funds were transferred to Cedar Holdings' accounts, and the related defendants did not dispute this charge.

Cedar Trust is still registered in Jiangxi. The prosecution revealed in court that some co-defendants in the case are being tried in Jiangxi, and the case may soon be heard there.

In his final statement in court, Zhang Jin claimed that although Cedar Holdings had some cooperation with state-owned enterprises and local governments, the company’s illegal activities were unrelated to them. The indictment did not mention the losses caused to local state-owned enterprises by Cedar Holdings.

Evidence showing that as early as March 2019, before subscribing to Cedar Holdings' 8 billion yuan perpetual bond, local state-owned enterprises had already discovered during due diligence that Cedar Holdings posed risks, including "uncertain transaction volumes, inflated profits, and overestimated assets, which substantially impacted the quality of its core assets and profitability." Furthermore, the cash flow generated by Cedar's industrial operations was insufficient to cover interest expenses for the year. However, these risk warnings did not prevent the parties from continuing their cooperation.

Related departments have initiated accountability measures for state-owned enterprises and local governments in Guangzhou related to Cedar Holdings, and some individuals are under investigation.

Trendy Toy Southeast Flight

"LABUBU is so cute, and it can be dressed up!" Fonny Nurhadi from Surabaya, Indonesia, has been collecting this doll from Pop Mart (09992.HK) since March 2024. More than 700 LABUBUs of different styles are packed in transparent boxes, covering several walls, some of which are wearing customized "doll clothes" created by Indonesian fashion designers.

"Fashion toys" are toys created by designers with unique artistic shapes, personality expression characteristics, and more particular materials and production processes. The main buyers are adults with financial strength and aesthetics. LABUBU, one of the popular IPs (copyrights) in the trendy toy industry, is an anthropomorphic image created by Pop Mart's contracted designer Long Jiasheng. It has big pointed ears, a fluffy body and nine fangs, and is cute in its playfulness.

Since Pop Mart launched the LABUBU image blind box in 2019, this IP has had many series of products, among which the LABUBU vinyl plush doll launched in October 2023 is even more popular. According to Pop Mart's financial report, in the first half of 2024, the THE MONSTERS series to which LABUBU belongs achieved revenue of 630 million yuan, a year-on-year increase of 292.2%, the highest growth rate among all artist IPs under Pop Mart.

In April 2024, Lisa, a Thai-Korean girl group idol, posted a photo with LABUBU on her personal social media, which made her a "top streamer" in the Southeast Asian trendy toy industry. Blind box unboxing experience and other related videos easily brought hundreds of thousands of clicks to bloggers. These traffic not only stays online, but the influence of LABUBU's fan circle has even spread offline. On September 15, Fonny Nurhadi held a one-month LABUBU exhibition in his own cafe, attracting tens of thousands of fans to check in. Wang Ning, founder and CEO of Pop Mart, laughed at a sharing event in September: "A colleague joked that I am as popular in Thailand now as Steve Jobs was in China."

As LABUBU became popular in Southeast Asia, Pop Mart's overseas business also ushered in a harvest period. The third-quarter earnings forecast released on October 22 showed that the year-on-year revenue growth rate of Hong Kong, Macao, Taiwan and overseas regions in China was as high as 440%-450%. In the first half of 2024, Southeast Asia has become Pop Mart's largest market outside the mainland, recording revenue of 556 million yuan, a year-on-year increase of 478.3%, accounting for about 40% of the revenue of Hong Kong, Macao, Taiwan and overseas. As of the beginning of this year, the stock price has risen by 300%.

Affected by the macroeconomic environment, the growth rate of China's domestic trendy toy market has gradually slowed down after experiencing rapid growth. In contrast, the Southeast Asian market has a large and young population structure, and the rise of the local middle class has increased consumption capacity. In addition, the "going overseas" of Chinese TV dramas and catering brands has also enhanced the trust of Southeast Asian consumers in Chinese brands, making it a hot market for Chinese trendy toy brands seeking new growth. In addition to Pop Mart, trendy toy collection store 52TOYS, MINISO (09896.HK/NYSE: MNSO)'s independent trendy toy brand TOPTOY, etc. have accelerated their "going overseas" to Southeast Asia in the past year.

However, as competition in the Southeast Asian market becomes increasingly fierce, how can Chinese trendy toy companies do a good job in localized operations? After the temporary novelty wears off, can the popularity of overseas trendy toys continue? What development plans do Chinese trendy toy companies have for the vast overseas market?

Popular in Southeast Asia

On October 4, a two-meter-tall CRYBABY wearing Thai costumes and riding an elephant appeared in Bangkok's popular Siam Square, attracting a lot of attention. Along with CRYBABY, there were giant dolls of popular IPs of Pop Mart, such as MOLLY, DIMOO, and HIROMO. This is a flash event planned by Pop Mart to celebrate its first anniversary in Thailand.

CRYBABY is a cute girl with tears. She was created by Molly Yllom, a Thai designer under Pop Mart, and is affectionately called "Crying Baby" by fans. On February 9, 2024, Molly Yllom held a signing event at Pop Mart's Thailand store, attracting a large number of fans. The single-day sales exceeded 5 million yuan, creating a single-day sales peak for Pop Mart's global stores. This record was soon broken. On July 5, Pop Mart opened the LABUBU theme store in Bangkok's MEGA BANGNA shopping mall. The first-day turnover exceeded 10 million yuan, setting a new record for single-day sales of overseas stores.

Pop Mart officially entered the Thai market in May 2023, and opened its first store in September of the same year. Subsequently, the development of the Thai market seemed to have accelerated, opening five stores and a pop-up store within a year, which was much faster than other parts of Southeast Asia. This trend is inseparable from the "boost" of celebrities such as Lisa, a Thai-Korean girl group idol, Mai, and Princess Sirivannavari of Thailand. They posted photos with Pop Mart's trendy toys on social media, and hung trendy toy dolls on their bags, which triggered fans' fanatical pursuit. As long as it is the same trendy toy as the star, its second-hand price will immediately double several times.

This wave of trendy toys from China not only appeared in Thailand, but also in Singapore, where the consumption power is stronger, there are also a large number of trendy toy fans. On the afternoon of October 28, in the Pop Mart store in Westgate, a shopping mall in western Singapore, a giant Molly doll was placed in the center of the store. After school, middle school students came into the store in an endless stream to choose blind boxes, and there were also South Asians or middle-aged and elderly people stopping in the store.

Pop Mart store in Westgate Mall, Singapore, November 3, 2024. Photo: Yang Min

Currently, Singapore is the country where Pop Mart has the most overseas stores, with a total of ten stores, most of which are located in mid-range shopping malls with high traffic and young consumer groups. Pop Mart said that it is expected to add two to three stores in Singapore in 2024.

The population of Southeast Asia exceeds 600 million. In addition to Singapore and Thailand, the population under 35 in Indonesia, Vietnam, Malaysia and the Philippines accounts for more than 50%, and the consumer structure is young. In addition, there are more women than men in Thailand and Vietnam, and women have a stronger willingness to consume trendy toys, making Southeast Asia a fertile ground for the development of the trendy toy market. According to the Southeast Asian Toy and Game Market Report by Yuehai Capital, the scale of the Southeast Asian toy and game market will exceed 20 billion yuan in 2023, and the revenue scale will continue to grow, reaching 5.64 billion US dollars in 2023 and expected to grow to 6.52 billion US dollars in 2028, with an annual growth rate of 7%.

"The current Southeast Asian trendy toy market is similar to the domestic market stage around 2020, and it is the time for an explosion." Shen Zhenyu, founder and CEO of Chaowanzu, told Caixin that the rapid growth of Pop Mart in Southeast Asia is mainly due to the increasing saturation of the domestic market in China, while trendy toys in markets such as Thailand and Vietnam have not yet been fully developed, and there is a huge market space.

Pop Mart's "going overseas" has increased the favorability and acceptance of Chinese brands among local consumers, prompting more Chinese trendy toy brands to accelerate their layout in Southeast Asia.

In December 2023, the first store of 52TOYS, a trendy toy collection store, opened in Thailand. 52TOYS adopts an online and offline dual-channel strategy, and has also launched an overseas 100-store plan, with North America, Japan and Southeast Asia as its key markets. Chen Wei, founder and CEO of 52TOYS, explained that North America is the region with the largest toy market, Japan is the most mature and diverse country in the toy market, and Southeast Asia is the fastest growing region in the toy market in recent years.

At present, 52TOYS has opened five stores in Thailand and its first store in Sarawak, Malaysia. The IPs promoted locally include its own IPs, such as NOOK, Sleep and Panda Roll series products, as well as cooperative IPs such as Crayon Shin-chan and Disney Mickey with international influence. 52TOYS opened its first store in The Emphere, a high-end shopping mall in Thailand in December 2023. Its cooperative IP Fat Tiger Fortune PLUS and the original transforming mecha "Beast Box" products were sold out in one day, and the store's first month revenue exceeded 2.6 million yuan. At present, 52TOYS has set up brand online stores on Southeast Asian e-commerce platforms Lazada and Shopee, as well as TikTok, AliExpress, Amazon and other platforms.

TOPTOY, an independent trendy toy brand under MINISO, first appeared in the MINISO Jakarta flagship store in August in the form of a store-in-store. Then, on October 19, the first local store was opened in The Mall Lifestore Bangkapi, a busy area in Bangkok, Thailand.

On August 31, 2024, the flagship store of MINISO opened in Jakarta, Indonesia.

Pop Mart has also stepped up its online presence in Southeast Asia, opening independent sites and stores on mainstream Southeast Asian e-commerce platforms such as Shopee. Pop Mart's 2024 interim report shows that the revenue of Pop Mart's official website, Lazada, and Shopee in the first half of the year was 69.648 million yuan, 45.336 million yuan, and 45.183 million yuan, respectively, with growth rates exceeding 200%.

How to do it in overseas markets

On November 2, Pop Mart’s pop-up store landed in Manila, the capital of the Philippines. On the second floor of SM Mall of Asia, the largest shopping mall in the Philippines, a life-size Ono dressed as a cardboard dinosaur stood in front of the castle, and Pop Mart’s classic IPs were neatly arranged in display cabinets. Pop Mart said that the first physical store in the Philippines is also in preparation, and Pop Mart will achieve full coverage of the six countries in Southeast Asia by then.

From Central World, where the first store in Thailand is located, to Gandaria City, where the first store in Indonesia is located, Pop Mart’s stores in Southeast Asia are all located in prime locations in local super-large shopping malls, and the lighting arrangements and toy displays in the stores are carefully designed. He Yu, non-executive director of Pop Mart and founder and managing partner of Black Ant Capital, told Caixin that because Pop Mart provides consumers with not only material goods, but also emotional satisfaction, it means that it must provide an excellent customer experience, including the most attractive brand image, high-quality products and a first-class shopping environment.

But for overseas consumers, Pop Mart in its early years mostly existed in a small corner of stationery stores and sundry department stores. Pop Mart began to enter the overseas market as early as 2018, but in the view of Wen Deyi, Vice President of Pop Mart and President of Pop Mart's International Business, 2022 is the "first year of trendy toys going overseas." Wen Deyi said in an exclusive interview with Caixin that at first, the company had little understanding of the overseas market and needed to use a faster and safer method to explore whether this market has potential and whether the IP can attract local consumers. "So we use the safest method to do toB (for enterprises) first, and sell the goods to the other party's channels first. Because once you do toC (for consumers), you need a lot of investment, all consumer complaints and after-sales service must be considered, which is relatively complicated." In fact, Pop Mart's early toB strategy is similar to the thinking of most overseas toy manufacturers. Taking the Japanese figures that were once popular all over the world as an example, most well-known anime IP figures are purchased by local toy dealers and sold uniformly in special two-dimensional stores or toy malls. It was not until 2020 that Pop Mart opened its first direct store in South Korea, and the company began to focus on brand operations in overseas markets, thereby promoting rapid growth in overseas markets. He Yu believes that store operation and display capabilities are one of Pop Mart's core advantages, far surpassing similar trendy toys or toy stores in Southeast Asia, Japan, South Korea and even Europe and the United States. He believes that Pop Mart provides consumers with a kind of emotional consumption, "so every link needs to serve the satisfaction of users' needs for happiness and pleasure, which is the same logic as Disneyland's pursuit of creating a sense of fantasy for users in every link."

Pop Mart's operating ideas have also influenced other Chinese trendy toy brands. 52TOYS and others also tend to choose prime locations in high-quality business districts in Southeast Asia, mainly opening direct stores. Shen Zhenyu pointed out that stores are very important for trendy toys. "Unlike the two-dimensional anime IP, which has a complete story and world view, the trendy toy IP has no story. Consumers establish emotional resonance by seeing this image in shopping malls and stores, and then generate the desire to consume."

When choosing a market to enter, Wen Deyi revealed that local per capita GDP, disposable income, the proportion of young people in the total population, urbanization rate and other data are the main indicators for Pop Mart to screen the market. "At present, Thailand, Malaysia, Indonesia, Vietnam, the Philippines and other countries are the key markets we have selected for 'going overseas' in Southeast Asia." However, the revenue performance of overseas stores is not only linked to the local consumption level, but also the influence of trendy play culture. Wen Deyi said that Thailand has its own toy exhibition every year, and the local trendy play culture has been accumulated for a long time: "I know that the Thai market may be a dark horse, but I didn't expect it to be so explosive. Six stores were opened in a year. This speed is amazing."

In China's trendy toy industry, in addition to Pop Mart, which mainly promotes exclusive IP, there are many companies that rely on derivative joint names to gain a foothold in the industry. They cooperate with various animation, movie and other IPs to launch various joint products to attract consumers.

One of the representative companies of the latter is the retailer MINISO. In the past few years, MINISO has transformed from a retailer selling OEM products to an IP operator, and has cooperated with well-known copyright holders to produce peripheral products such as blind boxes, dolls, and water cups. Nowadays, IP products have become an important driving force for MINISO's sales growth. In its increasingly important overseas markets, well-known IPs such as Disney and Sanrio are also more easily accepted by overseas consumers.

On October 29, at the MINISO 2024 Global Brand Strategy Upgrade Results Conference held in Shanghai, the company's founder, chairman of the board and CEO Ye Guofu showed their ambition to "go global" with IP: "MINISO's global store count will nearly double by 2028 compared to the end of 2023." As of June 30, 2024, MINISO has 2,753 overseas stores, with a net increase of 266 stores in the first half of the year.

When talking about the reasons for "going global" to Southeast Asia, Ye Guofu said bluntly: "Globalization should start with the easy and then the difficult. We should go to Southeast Asian countries first. For example, the best country for globalization should be Malaysia, where one-third of the local population is Chinese. Even if you don't speak English, you can still do business in Malaysia, and Malaysia's labor and other costs are cheaper than China."

Shen Zhenyu analyzed that there are still some options in the Asian market, such as Japan and South Korea. However, Japan has a strong figurine culture and a complete collection system. It is difficult for Pop Mart's products to gain a foothold in the Japanese market, and figurines are more valuable in Japan. In contrast, Pop Mart is more competitive in the Korean, Vietnamese, Thai and Singaporean markets. Its products not only meet the aesthetic needs of users, but also have a very high cost-effectiveness.

For trendy toy companies that hold a large number of IPs, how to choose IPs suitable for the local area when "going overseas" is the top priority for localization.

Pop Mart's strategy is to actively sign local artists. Wen Deyi said that CRYBABY, which is very popular in Thailand, was originally signed for the Chinese market, but it received a hot response in Thailand. Many Thais even buy CRYBABY products in local Pop Mart when traveling to China and South Korea. On the other hand, Pop Mart actively improves its own IP according to the preferences of local users, such as launching the lucky cat hanging card in Japan and the beaver maple leaf Pucky figurine in Canada.

Ye Guofu revealed that MINISO will focus on differentiation in different overseas markets. For example, Korean IP is popular in Latin America, and Chinese and Japanese IP is also very popular in Europe and the United States. It is necessary to adjust according to the preferences of consumers in each country for IP. At the same time, MINISO will also cooperate with many local suppliers to develop IP consumer products that are more suitable for local areas.

As for overseas brand marketing, trendy toy brands mainly adopt the method of celebrity promotion. Liu Xiaobin, vice president and chief marketing officer of MINISO Group, said that they will invite local national artists and actors to be spokespersons in Southeast Asia, cooperate with a large number of local MCN agencies and Internet celebrities, and promote MINISO products and brands through content.

Product line expansion

From blind box "entering" Pop Mart, to collecting the larger and more expensive Big Baby figurines, to the same style of vinyl doll pendants and a series of peripherals such as power banks and cups of trendy play IPs, Fu Fu, a senior user of trendy play, has collected more than 3,000 trendy play toys, and even has several wardrobes for special collection. In her opinion, "the form of blind boxes can quickly attract players to join the pit, but the pain point of this kind of ornaments is that you collect more and more dolls, but the space for display at home is always limited, and in the end you can only sell the dolls that can't be displayed."

Initially, Pop Mart's products were small figurines mainly in blind boxes. Since then, it has gradually launched larger Big Baby, puppets with movable joints, and the recently popular vinyl plush toys, as well as new products such as building blocks, cards, and cute particles. Among them, vinyl plush toys have quickly become popular in the trendy toy circle since their launch in 2023. The face, hands and feet of this toy are made of vinyl technology, which makes the expressions more vivid and the details more delicate than ordinary plush toys; the body is made of plush, which feels more comfortable than plastic figures. Fu Fu said: "These dolls can be hung on bags, and they can also be dressed up, and the play methods are more diverse."

From the financial report, plush toys have indeed become an important pillar to drive the growth of Pop Mart's performance. In the first half of 2024, in the retail business, the figure sector dominated by blind boxes contributed 2.66 billion yuan in revenue, a year-on-year increase of 30.2%; and the plush toy revenue achieved explosive growth, from 40.79 million yuan in the first half of 2023 to 450 million yuan. In the high-quality plush toy industry that Pop Mart has entered, Jellycat, a toy brand with more exquisite products and popular among adults, is one of the representatives. In 2022, Jellycat's revenue reached 146 million pounds (about 1.367 billion yuan). However, unlike the trendy toy brands that focus on anthropomorphic IP images, Jellycat's characteristics lie in its high-quality production process and creative and diversified product lines.

The gameplay of plush toys is constantly upgrading, and an industrial chain for secondary creation of trendy toy dolls has emerged in Southeast Asia. Many senior players sell "doll clothes" for toy change online. In Singapore, there are even shops that do beauty transformation for plush dolls. In a video with more than 13,000 likes on Instagram, after the blogger brought her green LABUBU to the store, the service staff first took a look at the doll with an oral examination mirror, and then set artificial diamonds on a circle of LABUBU's small teeth, and then put rainbow-colored rubber bands on each small diamond. Finally, the blogger got a unique LABUBU with rainbow braces, and the price of this service was 45 Singapore dollars (about 242 yuan).

In the view of Wang Hui, who once operated the trendy toy IP operation, whether it is changing the clothes of trendy toy dolls or doing beauty transformation, it is the secondary creation (i.e. "secondary creation") of the players. "Only when an IP develops to a relatively mature stage, the core user group will spontaneously create a secondary creation for his doll because they love this image. This requires the operator of the trendy toy to maintain the IP for a long time, and it can only be achieved with long-term core seed users."

In the field of toys, the IP images of Disney or two-dimensional animation have complete story lines, but the trendy toy IP represented by Pop Mart does not have a detailed story background. Wang Hui told Caixin: "Purely cute IPs are generally not sold. They must be images that can hit the hearts of young people and have emotions. For example, SKULLPANDA is a willful little girl, and LABUBU is a bit naughty and evil. "

How did the hits come about among the many trendy toy IPs? Wang Hui introduced that first of all, it is necessary to contact players in the circle through trendy toy exhibitions. If the IP image is recognized at the exhibition, the operator will usually sell it in small batches to accumulate early fans. As the fan group gradually expands, the IP can further move towards the mass market and be sold on a large scale. After that, the operator will gradually develop it into a household name through continuous communication with core fans and regular launch of new series of products.

"It takes more than one or two months to create a hit IP." In Wang Hui's view, "The reason why Pop Mart is difficult to surpass is that it had six or seven years of IP incubation and growth. It gradually increased users through blind boxes from a niche circle, and then went to the public, accumulating a large number of core seed users." Therefore, when these mature IPs enter the Southeast Asian market, their emotional appeal has been verified in the Chinese market and has inherent advantages. In addition, the support of celebrities such as Lisa has further boosted the influence of these IPs, allowing them to quickly break the circle and reach more potential players.

In terms of pricing, Pop Mart's blind box price in Singapore is 15 Singapore dollars (about 71 yuan), which is about the price of two cups of Starbucks latte in the local area. The price of CRYBABY series blind boxes in Thailand is 380 baht per box (about 79 yuan). The good quality and low price are inseparable from the perfect supply chain support of China's toy industry. China is the world's largest toy producer and exporter. 75% of the world's toys are made in China. In the first half of 2024, China's toy exports will reach 18.027 billion US dollars.

Shen Zhenyu also pointed out that Pop Mart has successfully taken advantage of the price advantage of China's toy supply chain, and the sales model of blind boxes, which has an uncertain nature, has driven sales of goods, thereby further reducing production costs and making product prices very attractive. He gave an example that the price of blind boxes in Singapore is only 20%-30% higher than that in China, while it costs 3-4 times as much to buy a similar-sized figure, so the blind box experience is very cost-effective.

To solve the challenge of global supply, in January 2024, the first batch of products from Pop Mart's Vietnamese cooperative factory was successfully shipped. Yuan Junjie, supply chain director of Pop Mart, said at the earnings conference that the company's internal goal for 2024 is that about 10% of its product supply will come from Vietnamese factories, but the company has not yet planned to build its own factories overseas. In terms of cost reduction and efficiency improvement, Pop Mart's gross profit and net profit have both increased slightly. Compared with 2022, Pop Mart's gross profit margin in 2023 will increase by 3.8 percentage points to 61.3%, and its net profit margin will increase by 6.5 percentage points to 18.9%.

Is overseas a false fire?

In August 2024, IP operator Jason came to Bangkok, Thailand to attend the WF trendy toy exhibition. He found that more than 80% of the trendy toys at the exhibition came from China, among which vinyl plush toys were the most popular, with a premium of nearly 3 times that of China. Jason said: "It's not just Pop Mart's vinyl plush toys that are popular, other IP dolls are also hot-selling, even clothing stores, shoe stores, and digital stores are selling this category."

In Jason's view, the Thai market's craze for vinyl plush toys is like the pursuit of blind box figures by domestic Chinese trendy toys from 2018 to 2020. At that time, many people were looking for Pop Mart on second-hand markets such as Xianyu, and ordinary blind boxes could have a considerable premium. "Under the influence of international stars such as Lisa, the Thai trendy toy market has a serious follow-up effect, and even 'scalpers' have entered the market to stock up a large number of goods, artificially creating a situation of supply exceeding demand."

In the production process of vinyl plush toys, details such as the opening of the mold, the hand-painting of the face, and the special eye material all pose a high challenge to the technical process. Even Chinese toy manufacturers cannot achieve large-scale shipments in a short period of time, so there is a time difference between supply and demand. However, once the supply increases, the real demand in the local area is limited, and the "scalper" market will collapse. Jason revealed: "In early October, the vinyl doll market in Thailand has cooled down."

However, Wang Hui believes that the short-term hotness of the Thai trendy toy market cannot be simply attributed to "hype", because many consumer goods will have arbitrage space for a period of time when the supply is not high. "When a new store opens, consumers go to consume with curiosity. This is a normal market heat bonus period, but how long this bonus period can last depends on the richness of trendy IP products and the speed of new products."

In addition, if there is no original IP as support, the gross profit margin of simply selling co-branded trendy toys with cooperative IP is not high, because the producer needs to pay a considerable amount of licensing fees to the IP owner and also needs to pay sales share. Wang Hui revealed: "In IP negotiations, trendy toy companies often cannot obtain exclusive authorization for world-renowned IPs such as Sanrio, and at most they can only obtain an exclusive period of time. If all trendy toy stores can provide the same IP image, then their competitiveness in the overseas market will be greatly reduced. If they want to compete through price, they have to further compress gross profit."

Therefore, in Wang Hui's view, there are two paths to achieve greater success in the overseas market: one is to form competitiveness through differentiated exclusive IP images, and the other is to develop IP products on a larger scale. Even if consumers don't like blind boxes or figures, they can buy towels, slippers, and water cups with IP images. IP department stores such as MINISO can reduce production costs such as IP licensing fees and mold manufacturing by providing sufficient product selection and increasing sales through a large-scale store network.

When exploring overseas markets, Pop Mart also maintained a relatively cautious pace. Although the number of overseas stores has exceeded 100 and the number of overseas employees exceeds 1,000, Wen Deyi said: "We did not choose to penetrate a market first and then expand, because it is difficult to penetrate a market and it takes a long time." He continued: "We hope that while the scale of overseas business grows, the influence of the brand should also be enhanced. Opening landmark stores will help local brands become influential." According to incomplete statistics from Caixin data, in July 2024 alone, Pop Mart opened seven overseas stores in Myeongdong, South Korea, Milan, Italy, Amsterdam, the Netherlands, the first store in Indonesia, the Louvre, France, San Francisco, and San Diego.

At the same time, MINISO is also ambitious. Ye Guofu told Caidixin that MINISO's strategy in Southeast Asia is to focus on the Indonesian market, with stores mainly concentrated in first- and second-tier cities. In the future, it will make good use of Indonesia's demographic dividend to sink to third-tier and below cities, and it is expected that the number of planned stores will exceed 1,000 in the next five years.

A person close to Pop Mart said that the company's next focus in the overseas market will shift to North America. The latest research report of investment bank Morgan Stanley also pointed out that although the current strong overseas sales are mainly driven by Asia, Pop Mart is also accelerating the opening of stores in the United States and Europe, and the space in the US market is larger than that in Southeast Asia. The United States may become a key source of long-term overseas growth.

However, just as the Chinese market rebounded, overseas business increased significantly, and many investment banks "sang favorably" about the prospects of Pop Mart, the company's founder and CEO Wang Ning, the company's chief operating officer Sid and other executives chose to reduce their holdings of stocks, with a combined reduction of 23.925 million shares and a cash-out amount of up to HK$1.7 billion, causing the company's market value to fall below HK$100 billion, triggering investor concerns.

Although Pop Mart has shown strong performance growth in overseas markets, the high growth rate is due to a low base, and the intensive opening of new overseas stores is also an important reason for the sales growth. As Chinese trendy toy brands have entered the Southeast Asian market, concerns about homogeneous product competition and IP aging have also followed. Whether the popularity of trendy toys "going overseas" is just a temporary fad effect remains to be verified by the market and time.