'Shadow banking' expands as Hong Kong brokers lend to Chinese businessmen
Mainland bosses unable to secure loans from banks at home turn to Hong Kong brokers, agree to pay high rates of interest
Many Hong Kong brokerages have a new and profitable business, despite the economic downturn: lending money to mainland entrepreneurs at high interest rate, sometimes more than 30 per cent.
Such private financing activities are a new and fast-growing business for many mid-sized and large local brokerages in the city.
Mainland entrepreneurs have increasingly turned to Hong Kong for this kind of high-interest private financing in the past year as Beijing has tightened the availability of banking credit on the mainland.
In December, Wu Changjiang, founder and former chairman of NVC Lighting, the mainland's largest privately held light manufacturer, borrowed HK$100 million from Kingston Financial, a major brokerage, said two people familiar with the deal. At the time, Wu was in a battle with other shareholders for control of Hong Kong-listed NVC.
The interest rate for the short-term loan Wu agreed to surprised many industry watchers. The sources said Wu borrowed HK$100 million from Kingston for just two months and agreed to pay about HK$30 million, or 30 per cent of the money he borrowed, as interest. When the debt matured in January, Wu and Kingston renewed the loan at a higher rate that had been agreed upon earlier, the people said.
"It is our policy not to comment on market rumours or speculation," a spokesman for NVC said. Kingston Financial also declined to comment.
Wu is not alone. Borrowing from Hong Kong brokerages for business and personal needs has become popular among mainland entrepreneurs encountering difficulties receiving loans from mainland banks.
Last year, a senior executive of a Hong Kong-listed mainland property developer borrowed HK$80 million at a rate of 18 per cent per annum from Emperor Capital, part of the local entertainment-to-property giant Emperor Group controlled by Hong Kong tycoon Albert Yeung Sau Shing, three people familiar with the deal said. The businessman repaid the short-term debt on time. Emperor Capital declined to comment.
"It is no longer a secret that some heads of companies in trouble borrow money from Hong Kong stockbrokers, as no banks on the mainland give them loans. This has become an industry practice," said a person with knowledge of these short-term loan deals.
Industry sources say the businessmen borrow money from Hong Kong brokerages for various purposes: some need to prop up their company's falling stock price, and establish a margin trading account with their broker to do so.
Margin trading involves investors borrowing money from a broker to buy shares. A margin account allows one to buy more shares than would be possible with a simple cash account.
Others may just need money for their own private use, sometimes related to gambling in Macau.
Stockbrokers tend not to ask too many questions, as long as they have a guarantee the loan will be repaid. They offer short-term credit at interest rates of between 18 per cent and 30 per cent. In some desperate cases, the borrower may agree to pay an interest rate of more than 30 per cent.
These loans are often secured by shares in a listed company that the borrower is connected to. The borrower is usually one of the company's senior executives, its chairman or its chief executive officer. The term of the loan is normally no more than six months.
If the borrower fails to repay the loan on time, the broker has the right to sell the shares that were pledged as collateral, unless the two parties agree to renew the loan deal, according to people in the industry.
Recently, many bosses of small mainland property developers have turned to Hong Kong stock brokerages for loans.
As the sum they are trying to borrow is often large, they borrow a smaller amount from several different brokers, said Nelson Chan, chief executive at Bright Smart Securities International in Hong Kong.
"Small- and medium-sized Chinese enterprises really have limited lending channels, as most of the loan quota at mainland banks is taken by state-owned companies," said Liao Qun, China economist at China CITIC Bank International.
"They have to resort to either underground banks or Hong Kong brokers."
Additional reporting by Ray Chan