Default Isn't a Bad Word. Recovering $0, That's Scary
(Bloomberg Opinion) -- Before being detained by police in Shanghai, Lo Ching was lauded as the new-age Hua Mulan, the legendary female Chinese warrior. Now the downfall of Lo, chairman of a Hong Kong-listed conglomerate, has become a parable of the dangers of investing in China.
Noah Holdings Ltd., one of China’s largest wealth managers catering to high-net-worth individuals, is among the first to find out. The U.S.-listed asset manager has filed a lawsuit against Camsing International Holding Ltd. related to a 3.4 billion yuan ($490 million) credit product in danger of default, according to a filing this week.
The word default, itself, isn’t so scary. After all, evaluating the risk that an obligation won’t be paid is what credit investors do every day. Nor is Camsing’s credit product all that unusual: The underlying assets are account receivables the company expects from China’s top-tier retailers, JD.com Inc. and Suning.com Co.
Formal financing channels – such as bank loans, corporate bonds or exchange-traded asset-backed securities – aren’t readily available to smaller private enterprises in China. So while the likes of Alibaba Group Holding Ltd. can regularly issue account receivables-backed securities, small businesses often use their working capital as collateral for loans from asset managers. In the case of Camsing, Lo pledged her 62% stake in the company to Noah.
The worrying part about all this is whether any money can be clawed back. JD.com and Suning said they don’t owe Noah the 3.4 billion yuan: “Camsing falsified JD.com’s business contracts,” a JD.com spokeswoman told Bloomberg News. Camsing held 5.7 billion yuan in account receivables, 74.4% from Suning and 23.2% from JD.com at the end of 2018, Caixin reported, citing Camsing financial documents the financial news site said it had seen.
As for those shares Lo pledged, they’re hardly worth anything now. Camsing’s stock crashed 80.4% on Monday after news of Lo’s detainment broke. That 62% stake is worth just HK$340 million ($43.5 million) now.
Noah can file as many lawsuits as it wants; the truth is its path to recovery doesn’t look good. Data on these types of shadow-credit products are slim, but reviewing defaults of exchange-traded corporate bonds, China Inc. has a lousy track record. Among the 128 issuers that have defaulted on their bond obligations since 2014, only 28 have paid back investors in full. Of the total 216 billion yuan in missed bond payments, only 31 billion yuan, or 14.5%, has been repaid, according to HSBC Holdings Plc.
Private enterprises are the worst offenders. Of the 17 state-owned enterprises that have defaulted, 41% have paid investors back, according to HSBC. By comparison, just 19% of the 111 private business that defaulted repaid creditors.
As I argued last week, when it comes to private businesses, no one will come to rescue lenders and minority shareholders if things go sour. While cash-strapped local governments rarely pump their fiscal dollars into failing state enterprises these days, none of them wants to see a local champion fail. Somehow municipalities will wring money from bailout funds, strategic investors or even local banks to save struggling businesses.
I’d love to laud the animal spirits of China’s private enterprises, but recent waves of corporate-governance scandals – from missing cash to potentially falsified business documents – are scaring investors. If you’re into stocks, by all means go with your heart. If you’re a credit investor, use your head instead.
To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
©2019 Bloomberg L.P.