China debt fears drag down stocks

PUBLISHED : Thursday, 14 January, 1999, 12:00am
UPDATED : Thursday, 14 January, 1999, 12:00am

Shares plunged yesterday as fears grew of mainland corporate-debt problems and a tighter clamp on bank lending to China companies.

Red-chip shares dived 12.48 per cent, taking the week's losses to 16.33 per cent, while the H-share index shed 11.47 per cent, bringing its fall since Monday to 18.21 per cent.

The fears hit the Hang Seng Index, which dropped 4.08 per cent to 10,273.77 points. Brokers said more losses were likely.

Yesterday's double-digit losses follow the revelation on Tuesday that Guangdong Enterprises (GDE) - a leading investment vehicle for the Guangdong Government - was struggling to meet its debts of US$2.94 billion (HK$22.7 billion).

Fund managers said they were upset the group was holding a lot less cash than previously indicated.

The news further soured sentiment towards mainland stocks after another key investment arm of the Guangdong Government said on Sunday it would file for bankruptcy.

'Obviously the strongest mover [yesterday] was this whole Guangdong thing,' said Nikko Global Asset Management chief investment officer John Lai. 'I don't know how long investors have to wait before the message is put to [mainland] managers: they have to clean up their act.' On Tuesday, GDE told creditors at a special meeting in Hong Kong that Hong Kong-listed food distributor Guangnan Holdings had loans coming due this month worth US$115 million - but its cash balance was US$13.7 million.

Many analysts thought Guangnan was holding more money, particularly since it had raised $291.6 million through a new share offer in November.

'They just did a placement in November and all that cash has already gone away,' Celestial Asia Securities analyst William Li Kin-tung said.

Guangnan's share price plummeted more than 50 per cent to 59 cents yesterday.

GDE's balance-sheet disclosure did not include the finances of its 40.5 per cent owned Guangdong Investment, a leading red chip that is also one of a handful of mainland-related companies in the Hang Seng Index.

Nevertheless, the company fell 24.26 per cent to $1.03 yesterday.

ABN Amro Asia analyst Eddie Lau Kwok-lap said Guangdong Investment which, unlike its parent is not seeking standstill agreements with its creditor banks, should be able to service its debt and need not undergo a debt restructuring.

The Guangdong Investment group and its three listed subsidiaries in Hong Kong did not have to meet major loan repayments before the middle of the year and should be able to meet their debt obligations before then, he said.

Creditors have been on edge since Guangdong International Trust and Investment Corp (Gitic) closed on October 6.

Dim hopes of a bailout by Beijing were dashed last weekend when the company was put into liquidation.

This move left international creditors having to go to mainland courts to recover several billion dollars in outstanding loans.

'When credit dies, equity flies - many months ago we said leveraged red chips would get dragged down,' said Merrill Lynch vice-president John Pinkel.

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