China’s Huishan Dairy raised millions of dollars by selling shadow bank products labelled as “low risk” to the public last year, only months before missed loan payments sent creditors scrambling to protect themselves, according to exchange listings in north-east China.
Huishan’s share price plunged 85 per cent in Hong Kong on March 24 amid reports — which the company denies — that chairman and controlling shareholder Yang Kai embezzled Rmb3bn from Huishan. The company has Rmb22bn ($3.2bn) in outstanding liabilities, according to official media.
The company raised at least Rmb31m by selling 11 separate wealth management products to the public through the Dalian Financial Assets Exchange in October and November, according to an FT review of product listings. All carried maturities of 720 days and offered yields between 6.5 and 7.2 per cent. The exchange website labelled them “relatively low risk”.
On Friday, at least three investors sold their products through the Dalian exchange at a loss, according to trading records. In a statement on its website, the exchange said that it had established an “emergency small group” and was “devoting full effort to upholding the interests” of investors.
Last week, following its share price collapse, Huishan confirmed that it had missed interest payments and had met with creditors under the supervision of the government in its home province of Liaoning. It also said it had filed a missing persons report with the Hong Kong police regarding Ge Kun, a key executive who oversaw the company’s treasury operations. The company lost touch with her on March 21, when she told Mr Yang she was under work stress and would take a leave of absence.
Liaoning authorities appear to be seeking a balance between protecting local creditors and ensuring that Huishan does not collapse, which would threaten jobs and tax revenue. Liaoning and other rust-belt northeastern provinces are struggling with severe economic problems caused by the slowdown in mining and heavy industry.
At a meeting this week, the financial affairs offices of Liaoning province and the provincial capital of Shenyang instructed creditors not to sue Huishan and not to withdraw existing credit lines, according to Caixin, a financial news website.
“The government will try to help the company negotiate with creditors and make creditors feel some comfort that the government is providing support,” said Ivan Chung, head of China credit research at Moody’s. “But if the case is really bad and the government don’t provide substantial financial support, the creditors may not listen.”
At least one creditor flouted the government’s instructions. Gopher Asset Management, an investment products platform, last week asked a Hong Kong Court to freeze the assets of Huishan, Mr Yang, and Champ Harvest, the investment vehicle through which Mr Yang owns most of his shares in Huishan. The court denied the request, the company said. Gopher has also filed a related request with a Shanghai court.
Sing Tao Daily, a Hong Kong newspaper, quoted an unnamed source at Gopher saying that the situation is a “game of chess” between multiple parties. The company wanted to co-operate with the government but also needed to preserve its assets, the source added. A man who answered the phone at Gopher confirmed to the FT the veracity of this report but declined to give his name.
The Liaoning financial affairs office and the provincial banking regulator did not answer calls seeking comment.
Creditors have shown increasing willingness to defy the government in their handling of financial stress. During a series of bond defaults last year by Dongbei Special Steel — in which Liaoning province owns a majority stake — creditors at one point petitioned the bond regulators to suspend issuance approvals for all Liaoning-based companies.
Huishan owed Rmb15bn to 23 banks at the end of September, of which Rmb11bn was due to mature within the next 12 months, according to its financial statements.
In addition to products sold through the Dalian exchange, Huishan also borrowed from other non-banks, including Rmb2.3bn from financial leasing companies, of which Rmb1.3bn is still outstanding, according to Xinhua.
Huishan did not answer calls to their Hong Kong and Shenyang offices or an email seeking comment.
Bank of China, the country’s fourth-largest bank by assets, is the largest creditor, with Rmb3.3bn in loans outstanding, according to Xinhua. Industrial and Commercial Bank of China, the largest, is second with Rmb2.1bn.
The potential hit from Huishan losses is tiny compared with the size of these large institutions — Bank of China earned Rmb171bn in profits in 2015 — but the problem is more serious for smaller, regional lenders. Jilin Jiutai Rural Commercial Bank has Rmb1.4bn outstanding to Huishan, according to a filing, compared with profits of Rmb2.3bn in 2016 and net assets of Rmb14bn.
Huishan’s problems appeared to come as a surprise to Jiutai Rural, which on March 7 granted Rmb600m in short-term credit to a Huishan subsidiary, guaranteed by the parent group. Mr Yang owns 3 per cent of Jiutai Rural. The bank said it has not suffered any default yet but is “actively exploring the details of the matter”.
Additional reporting by Tom Hancock and Ma Nan in Shanghai and Hudson Lockett in Hong Kong