Opinion | Mainland alchemists turn damaged zinc into solid gold
The case of Huludao Nonferrous Metals shows how some financial wizardry can keep a company afloat without changing its base state
China has been telling the world not to worry about the bad debt of its banks. Central bankers reassure us the situation is manageable.
Sceptical foreign investors can, perhaps, take some comfort from the wisdom and calmness of their mainland counterparts. The 3.5 billion yuan (HK$4.3 billion) loan default announced by the Metallurgical Corporation of China (MCC) is most telling.
Its subsidiary defaulted on a one billion yuan loan and had guaranteed 90 per cent of a 2.5 billion yuan overdue loan of an associate, Huludao Zinc Industry (HZI).
The bad news revealed in September pushed MCC's price down by 11.5 per cent. Ironically, Shenzhen-listed HZI rose 6.78 per cent in the same period, outperforming the Shenzhen index. HZI trades at 2.54 yuan while MCC is only HK$1.46.
Mainland investors aren't stupid; their optimism is bred from experience. They have seen how such problems are "managed" on the mainland.
HZI was born in financial distress. With obsolete equipment and a grandiose headcount, the state-owned nonferrous metal industry in Huludao, Liaoning, has always been a money pit for the government. To pay the bills, local authorities managed to list its zinc factory as HZI in 1998 by stripping it of all debt, which was passed on to four loan managers set up by Beijing. In 2002, the debt became stakes in the newly established Huludao Nonferrous Metals Group (HNMG), whose only profitable asset is its controlling interest in HZI.